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Section 240.14a-101 Schedule 14A.
Information required in proxy statement.
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
WHALCO ENVIRONMENTAL SYSTEMS, INC.
.................................................................
(Name of Registrant as Specified In Its Charter)
.................................................................
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction
applies:
............................................................
(2) Aggregate number of securities to which transaction
applies:
.......................................................
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount
on which the filing fee is calculated and state how it was
determined):
.......................................................
(4) Proposed maximum aggregate value of transaction:
.......................................................
(5) Total fee paid:
.......................................................
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
.......................................................
(2) Form, Schedule or Registration Statement No.:
.......................................................
(3) Filing Party:
.......................................................
(4) Date Filed:
.......................................................
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
3600 WEST SEGERSTROM AVENUE
SANTA ANA, CALIFORNIA 92704
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 29, 1998
TO THE STOCKHOLDERS OF WAHLCO ENVIRONMENTAL SYSTEMS, INC.
Notice is hereby given that a special meeting of stockholders of Wahlco
Environmental Systems, Inc., a Delaware corporation (the "Company"), will be
held as follows:
DATE: Tuesday, December 29, 1998
PLACE: The offices of Howard, Smith & Levin LLP
1330 Avenue of the Americas
New York, New York 10010
TIME: 9:00 a.m., local time
PURPOSES: (1) To consider and vote upon a proposal to approve an
Agreement and Plan of Merger, dated as of November 9, 1998
(the "Merger Agreement") by and among the Company, Thermatrix
Inc., a Delaware corporation, and TMX Acquisition Sub I, Inc.,
a Delaware corporation and a wholly-owned subsidiary of
Thermatrix ("Merger Sub"), providing for the merger of Merger
Sub with and into the Company; and
(2) To transact such other business as may properly come
before the special meeting or any postponements or
adjournments thereof.
Please read carefully the accompanying proxy statement. A copy of the Merger
Agreement is attached as Annex A to the proxy statement. The proxy statement and
Annexes to it form a part of this Notice.
Only holders of record of common stock of the Company, par value $0.01 per
share, on the books of the Company at the close of business on November 25, 1998
are entitled to notice of, and to vote at, the special meeting and any
adjournment thereof. A list of such stockholders will be available from December
17, 1998 until prior to the special meeting, as required by law, at the office
of the Company located at 3600 West Segerstrom Avenue, Santa Ana, California
92704. This list will also be available at the special meeting.
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Under Delaware law, appraisal rights will be available to holders of common
stock of the Company. In order to exercise such appraisal rights, stockholders
must follow the procedures prescribed by Delaware law, which are attached as
Annex B to, and summarized in "The Merger--Appraisal Rights" in the accompanying
proxy statement.
You are cordially invited to the special meeting. Whether or not you plan to
attend the special meeting, we ask that you sign and return the enclosed proxy
as promptly as possible. If you attend the special meeting and elect to vote in
person, any proxy previously given will be revoked. The proxy is solicited by
and on behalf of the Board of Directors.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON APPROVAL OF THE
MERGER, YOU WILL BE SENT INSTRUCTIONS REGARDING THE PROCEDURES TO EXCHANGE
YOUR EXISTING CERTIFICATES EVIDENCING COMMON STOCK OF THE COMPANY FOR THE
CONSIDERATION TO BE PAID.
By Order of the Board of Directors,
Roger M. Barzun, Secretary
Santa Ana, California
December 7, 1998
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
3600 WEST SEGERSTROM AVENUE
SANTA ANA, CALIFORNIA 92704
PROXY STATEMENT
FOR A SPECIAL MEETING
TO BE HELD ON
DECEMBER 29, 1998
GENERAL INFORMATION
This proxy statement is furnished to stockholders of Wahlco
Environmental Systems, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at a special meeting of stockholders that will be held on
December 29, 1998 at the offices of Howard, Smith & Levin LLP, 1330 Avenue of
the Americas, New York, New York 10019, at 9:00 a.m. local time, and at any
adjournments or postponements thereof. The Board has fixed the close of business
on November 25, 1998, as the record date for the determination of the holders of
shares of common stock of the Company, par value $0.01 per share (the "Shares")
entitled to notice of, and to vote at, the special meeting and any adjournments
or postponements thereof. This proxy statement and the accompanying notice and
proxy card are first being sent to stockholders of record on or about December
7, 1998.
At the special meeting, holders of Shares will be asked to consider and
vote upon a proposal to approve an Agreement and Plan of Merger, dated as of
November 9, 1998 (the "Merger Agreement") by and among the Company, Thermatrix
Inc., a Delaware corporation and TMX Acquisition Sub I, Inc., a Delaware
corporation and a wholly-owned subsidiary of Thermatrix ("Merger Sub"),
providing for the merger of Merger Sub with and into the Company (the "Merger").
Upon the consummation of the Merger, the Company will be the surviving
corporation and a wholly-owned subsidiary of Thermatrix. For Shares outstanding
immediately prior to the effective time of the Merger, stockholders of the
Company will be entitled to receive the following merger consideration: (1) an
initial payment of approximately $1.35 million divided by the number of
outstanding Shares, or approximately $0.08 per Share, subject to adjustment as
described below (the "Initial Payment"), and (2) contingent payments in an
amount that will depend on the resolution of claims and other contingencies (the
"Contingent Payments" and together with the Initial Payment, the "Merger
Consideration"). The Company believes that the Contingent Payments will not
exceed $2,000,000 in total, or $0.12 per Share, and may be substantially less
than that amount. See "The Merger Consideration" and "The Merger
Agreement--Merger Consideration" for a more detailed description of the Merger
Consideration. In connection with the Merger, Thermatrix has agreed to repay
debt owed to and certain debt guaranteed by Wexford and to replace other debt
guarantees provided to the Company by certain of the Funds managed by Wexford
Management LLC ("Wexford").
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As used in this proxy statement, the "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,
Wexford-Euris Special Situations 1996, L.P., a Delaware limited partnership,
Wexford Overseas Partners I, L.P., a Cayman Islands limited partnership and
Wexford Capital Partners II, L.P., a Delaware limited partnership. Wexford acts
as investment adviser to the Funds and is the beneficial owner of the Shares
held by the Funds. Through the Funds, Wexford beneficially owns 13,310,875
Shares, or approximately 81.5% of the Shares. Throughout this proxy statement
"Wexford" and the "Funds" are sometimes used interchangeably.
The Board of Directors of the Company has carefully considered the terms
and conditions of the proposed Merger. After such consideration, the Board (with
the Wexford-affiliated director abstaining) unanimously approved the Merger
(subject to stockholder approval) and has determined that the Merger is fair and
in the best interests of the Company and its stockholders. Consequently, the
Board recommends that stockholders vote for the Merger.
Pursuant to the Delaware General Corporation Law, the affirmative vote
of holders of at least a majority of the outstanding Shares is required to
approve and adopt the Merger Agreement. However, the Funds and Mr. Beal have
entered into a Voting and Option Agreement with Thermatrix pursuant to which
they have agreed to vote their Shares in favor of the Merger Agreement and have
granted Thermatrix an irrevocable proxy to vote in favor of the Merger
Agreement. Mr. Beal owns 266,860 Shares, and together, he and the Funds hold
approximately 83% of the Shares. Accordingly, the adoption of the Merger
Agreement by the Company's stockholders is expected to occur irrespective of
whether or the manner in which the Company's other stockholders vote their
Shares.
All Shares which are represented at the special meeting by properly
executed proxies received and not duly and timely revoked will be voted at the
special meeting in accordance with the instructions contained therein. In the
absence of contrary instructions, such Shares will be voted "FOR" the approval
and adoption of the Merger Agreement.
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, WHICH GOVERNS THE
RIGHTS OF DISSENTING STOCKHOLDERS, IS SUMMARIZED UNDER THE HEADING "THE
MERGER --APPRAISAL RIGHTS" BELOW, AND IS ATTACHED AS ANNEX B HERETO.
THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
All information contained in this proxy statement concerning Thermatrix
and Merger Sub has been supplied by Thermatrix and has not been independently
verified by the Company. Except as otherwise indicated, all other information
contained in this proxy statement (or, as permitted by applicable rules and
regulations of the Securities and Exchange Commission, incorporated by reference
herein) has been supplied or prepared by the Company.
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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 periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and also are available for inspection at the Commission's Regional
Offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also may be obtained, at prescribed rates, from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Company is required to file electronic versions of certain
material with the Commission through the Commission's Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system. The Commission maintains a site on the
Internet's World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Shares are listed and traded on the
Nasdaq over-the-counter (OTC) Bulletin Board.
You should not rely on any information other than that contained in this
proxy statement or other documents to which the Company has referred you. The
Company has not authorized anyone to provide you with information that is
different.
The delivery of this proxy statement shall not, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained in this proxy
statement or in the documents incorporated by reference herein is correct as of
any time subsequent to the date hereof or thereof, as the case may be.
FORWARD-LOOKING STATEMENTS
Certain information contained or incorporated by reference in this proxy
statement may constitute "forward-looking statements." The Private Securities
Litigation Reform Act of 1995 provides certain "safe harbor" protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. Forward-looking statements contained
or incorporated by reference in this proxy statement were not prepared in
compliance with the published guidelines of the American Institute of Certified
Public Accountants regarding projections or financial forecasts.
The forward-looking statements set forth or incorporated by reference in
this proxy statement are based upon various assumptions, many of which are
based, in turn, upon further assumptions, including without limitation,
management's examination of historical operating trends, data contained in the
Company's records and other data available from third parties.
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Although the Company believes that such assumptions were reasonable when made,
because such assumptions are inherently subject to significant uncertainties and
contingencies which are difficult or impossible to predict and are beyond the
Company's control, there can be no assurance, and no representation or warranty
is made, that management's expectations, beliefs or projections will result or
be achieved or accomplished.
THE SPECIAL MEETING
Record Date, Voting
The Board of Directors has fixed the close of business on November 25,
1998, as the record date for the determination of the holders of Shares entitled
to notice of, and to vote at, the special meeting and any adjournments or
postponements thereof.
Stockholders of record on the record date are eligible to receive notice
of, and to vote at, the special meeting in person or by proxy. As of the record
date, 16,323,074 Shares were issued and outstanding. Each Share entitles the
holder to one vote. The holders of a majority of the outstanding Shares, present
in person or represented by proxy, will constitute a quorum for the special
meeting. Abstentions are counted for purposes of determining whether the quorum
requirement is satisfied, but are not considered voted for purposes of
determining the approval of any matter submitted to the stockholders for a vote.
Shares represented by "broker non-votes" will also be treated as present for
purposes of determining a quorum, but will not be treated as a negative vote. A
broker non-vote relates to Shares 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 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.
Required Vote
Approval of the Merger requires the affirmative vote of the holders of a
majority of those entitled to vote in person or by proxy at the meeting.
Consequently, abstentions and broker non-votes will have the effect of a no
vote. The Funds and Mr. Beal have entered into a Voting and Option Agreement
with Thermatrix pursuant to which they have agreed to vote their Shares in favor
of the Merger Agreement and have granted Thermatrix an irrevocable proxy to vote
in favor of the Merger Agreement. Mr. Beal owns 266,860 Shares, and together, he
and the Funds hold approximately 83% of the Shares. Accordingly, the adoption of
the Merger Agreement by the Company's stockholders is expected to occur
irrespective of whether or the manner in which the Company's other stockholders
vote their Shares. See "The Merger Agreement--Voting and Option Agreement."
Voting of Proxies; Revocation of Proxies
All Shares which are represented at the special meeting by properly
executed proxies received and not duly and timely revoked will be voted at the
special meeting in accordance with
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the instructions contained therein. In the absence of contrary instructions,
such Shares will be voted "FOR" the approval and adoption of the Merger
Agreement.
A proxy may be revoked prior to its being voted by: (i) delivering to
the Secretary of the Company, at or before the special meeting, a written
instrument bearing a later date than the proxy which instrument, by its terms,
revokes the proxy, (ii) duly executing a subsequent proxy relating to the same
Shares and delivering it to the Secretary of the Company at or before the
special meeting or (iii) attending the special meeting and giving notice of
revocation to the Secretary of the Company or in open meeting prior to the proxy
being voted (although attendance at the special meeting without taking other
affirmative action as aforementioned will not constitute a revocation of a
proxy). Any written instrument revoking a proxy should be sent to: Wahlco
Environmental Systems, Inc., 3600 West Segerstrom Avenue, Santa Ana, California
92704; Attention: Secretary.
Solicitation of Proxies
The expenses of this solicitation, together with all other expenses of
the Company in connection with the Merger, up to $100,000, will be borne by the
Company. Expenses of the Company in excess of $100,000, exclusive of the fee
owed to Hera, LLC, will reduce the Initial Payment. Expenses of the Company are
expected to be at least $300,000, and, accordingly, the Initial Payment is
expected to be reduced by at least $200,000. See "The Merger Consideration." In
addition to use of the mails, proxies may be solicited by officers, directors
and regular employees of the Company personally, by telephone or by mail. The
Company will reimburse persons holding Shares in their own names or in the names
of nominees for expenses they incur in obtaining instructions from beneficial
owners of such Shares.
THE MERGER CONSIDERATION
For each Share outstanding immediately prior to the effective time of
the Merger, stockholders of the Company will be entitled to receive (1) an
Initial Payment of approximately $1.35 million divided by the number of
outstanding Shares, or approximately $0.08 per Share, subject to adjustment as
described more fully below, and (2) Contingent Payments in an amount that will
depend on the resolution of claims and other contingencies (the Contingent
Payments together with the Initial Payment, the "Merger Consideration"). The
Company believes that the Contingent Payments will not exceed $2,000,000 in
total, or $0.12 per Share, and may be substantially less than that amount.
The Initial Payment
The Initial Payment is preliminarily fixed at $1,581,768.50 subject to
the following adjustments:
The Initial Payment will be reduced by the amount of any expenses
incurred by the Company in connection with this transaction in excess of
$100,000, exclusive of the fee owing to Hera, LLC. The Company's expenses to
date are approximately $260,000 (including $50,000 set aside to cover expenses
associated with the maintenance of the Exchange Fund). The Company
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expects that its total expenses in connection with the Merger and this
solicitation will be at least $300,000 and that the Initial Payment will
therefore be reduced by at least $200,000.
The Initial Payment will be increased by the amount of any Net
Proceeds that would otherwise be part of the Contingent Payments that are
collected by the Company from the date of the Merger Agreement to the Closing
Date. As of the date hereof, the Company has not collected any Net Proceeds.
The Initial Payment is also subject to adjustment by any amounts
advanced to the Company by Wexford with the approval of the Executive Committee
from the date of the Merger Agreement to the Closing Date in excess of the
Interim Funding Cap. The Interim Funding Cap is an amount equal to the product
of $200,000 and the number of months from the date of the Merger Agreement to
the Closing Date (prorated for partial months), with a maximum of $500,000 in
the aggregate. The Company does not presently expect that it will require
funding in excess of the Interim Funding Cap between the date of the Merger
Agreement and the Closing Date. As of the date hereof, Wexford has advanced
$150,000 to the Company since the date of the Merger Agreement.
Based on these factors, the Company expects that the Initial Payment
will not be more than $1,380,000 or $0.085 per Share.
The Contingent Payments
Stockholders will also be entitled to receive certain Contingent
Payments. The Contingent Payments are dependent upon the resolution of certain
contingencies not relating to operating results of the surviving corporation in
the Merger. The amount of the Contingent Payments depends on the resolution of
the following contingencies:
The Mannesmann Receivable. The Company believes that Mannesmann
Demag, a German company ("Mannesmann"), for which Pentney Engineering, Ltd., a
wholly-owned subsidiary of the Company ("Pentney"), performed services, owes the
Company approximately 'L'640,000 or $1 million (based on an exchange rate of
$1.65 per British pound). Mannesmann has made a payment to the Company in
respect of the services performed which Mannesmann purports to be payment in
full. The Company disputes this assertion. Any amounts recovered from Mannesmann
together with any fees or interest on such amount (the "Mannesmann Receivable")
(less expenses of recovery and collection fees, each described in more detail
below) will be included in the Contingent Payments, unless such amounts are
recovered before the Closing Date in which case they will increase the Initial
Payment. There can be no assurance that such amounts will be recovered from
Mannesmann.
The LIM Funds. The Company has approximately 'L'690,000 or $1.1
million of cash collateral on deposit with London International and Mercantile
("LIM") to secure performance and warranty obligations of Wahlco Engineered
Products, Ltd., an indirectly wholly-owned subsidiary of the Company ("WEP"), to
WEP's customers. Any amounts recovered from LIM together with any fees or
interest on such amounts (the "LIM Funds") (less expenses of recovery and
collection fees, each described in more detail below) will be included in the
Contingent
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Payments unless such amounts are recovered before the Closing Date in which case
they will increase the Initial Payment.
Thermatrix has agreed that unless the LIM Funds have been repaid in
full, it shall not, and shall cause the Surviving Corporation and WEP not to,
use LIM as the guarantor of any warranty obligations of WEP, the Surviving
Corporation or any other affiliate of Thermatrix under contracts entered into
after the Closing Date, and shall not amend the terms of any LIM guarantee of
WEP's warranty obligations without the prior written approval of Wexford, which
will act as the shareholder representative (the "Shareholder Representative").
Thermatrix has also agreed that in the event that the LIM Funds are
reduced because any portion of such funds have been paid by LIM from and after
the effective time of the Merger to the holder of a LIM guarantee of an
obligation of the Surviving Corporation or WEP in satisfaction of a claim by
such holder, Thermatrix shall, or shall cause the Surviving Corporation or WEP
to, deposit an amount equal to the amount by which the LIM Funds were reduced as
a result of such payment, with the Exchange Agent in accordance with Section 2.2
of the Merger Agreement, as if such amount were a portion of the Net Proceeds
recovered from the LIM Funds.
The Puerto Rico Tax Liability. The Commonwealth of Puerto Rico is
expected to make claims against the Company for taxes, penalties and interest,
with respect to operations conducted by the Company and its Subsidiaries in
Puerto Rico prior to the date of the Merger Agreement (together with all other
expenses incurred in connection with the investigation, defense and settlement
of such tax liabilities, the "Puerto Rico Tax Liability"). The amount by which
the Puerto Rico Tax Liability is less than $1.5 million (the "PR Surplus") (less
a collection fee described in more detail below) will be included in the
Contingent Payments unless the amount of the Puerto Rico Tax Liability is
finally determined before the Closing Date in which case the Initial Payment
will be increased by the amount, if any, of the PR Surplus. The Contingent
Payments, or the Initial Payment, as the case may be, will be reduced by the
amount by which the Puerto Rico Tax Liability exceeds $1.8 million. There can be
no assurance that there will be a PR Surplus.
The Contingent Payments will equal the Net Proceeds (amounts recovered
from Mannesmann, LIM and the amount of the PR Surplus after expenses) after the
payment of collection fees (described below) divided by the number of
outstanding Shares as of the effective time of the Merger. The Company believes
that the Contingent Payments will not equal more than $0.12 per Share and that
they may be substantially less than that amount.
Collection of the Net Proceeds and Collection Fees. Thermatrix has
agreed to use commercially reasonable efforts to maximize the recovery of the
LIM Funds and the Mannesmann Receivable as quickly as possible and to cause the
Surviving Corporation and any of its Subsidiaries, as appropriate, to use
commercially reasonable efforts to maximize the PR Surplus and to determine the
final amount of the Puerto Rico Tax Liability as quickly as possible. In return,
Thermatrix will be entitled to collection fees of 20% of any Designated Amounts
(as defined in the Merger Agreement) recovered from the Mannesmann Receivable,
20% of the PR Surplus and 10% of the Designated Amounts recovered from the LIM
Funds. All collection fees
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will be calculated and are payable after the deduction of expenses of collection
from the amounts recovered.
Thermatrix has also agreed not to undertake any litigation, or incur any
material collection costs related thereto, in connection with the Net Proceeds
without the prior written consent of the Shareholder Representative. At anytime,
the Shareholder Representative may elect to assume responsibility, at its cost,
subject to reimbursement out of Designated Amounts collected, for collection of
the Designated Amounts.
Security Interest. The Company, Pentney, WEP, Wexford, in its
capacity as principal stockholder of the Company and in its capacity as the
Shareholder Representative, and Thermatrix, will execute on or before the
Closing Date, a Security Agreement designed to create a valid and enforceable
security interest, or comparable interest under the laws of the relevant
jurisdiction, in each of the Mannesmann Receivable and all of WEP's right, title
and interest in the LIM Funds in favor of the stockholders. Prior to the
effective time of the Merger, the Company and Thermatrix will cooperate with the
Shareholder Representative to take all actions necessary to allow the
Shareholder Representative, on behalf of the stockholders, to perfect the
Security Interest, or take such other actions under the laws of the relevant
jurisdiction as are necessary to give the stockholders the same protections they
would receive from the perfection of the Security Interest in the United States.
From and after the effective time of the Merger, Thermatrix will, and will cause
the Surviving Corporation to, take any action which may be necessary to allow
the stockholders to maintain such perfection of the Security Interest. It is
uncertain whether the Shareholder Representative will be successful in achieving
a security interest either because of preexisting claims of other creditors of
the Company or because of differences between the laws of the jurisdictions in
which receivables are located and the laws of the United States.
The Exchange Fund; Shareholder Representative
Wahlco has established an account with ChaseMellon Shareholder Services,
the Company's transfer agent and registrar, which will serve as the Exchange
Agent and maintain the Exchange Fund. The Initial Payment will be deposited in
the Exchange Fund on the Closing Date. The amount of $50,000 has been set aside
to cover expenses relating to the maintenance of the Exchange Fund. The Company
is entering into an agreement with Wexford whereby Wexford will agree to serve
as the Shareholder Representative in connection with the administration of the
Exchange Fund. The agreement provides that Wexford will be indemnified and held
harmless against any expense, loss, liability or damage arising out of any claim
asserted by any third party in connection with Wexford's agreement to serve or
having served as the Shareholder Representative to the full extent of the
Exchange Fund; provided that Wexford shall not be entitled to such
indemnification if such expense, loss, liability or damage is caused by
Wexford's willful misconduct.
As soon as reasonably practicable after the effective time of the
Merger, the Exchange Agent will mail to each holder of record of a certificate
or certificates which immediately prior to the effective time of the Merger
represented outstanding Shares (i) a letter of transmittal, (ii) instructions
for use in effecting the surrender of the Certificates in exchange for the
Merger
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Consideration, and (iii) the notice of approval of the Merger and accompanying
statutory materials, information and instruction as required by Section 262 of
the DGCL. The Initial Payment will be distributed to the stockholders of the
Company promptly thereafter.
The Net Proceeds will be deposited with the Exchange Agent promptly as
they are recovered by Thermatrix or the Surviving Corporation and will be
distributed from time to time in accordance with the instructions of the
Shareholder Representative and the following conditions:
No amounts other than the Initial Payment will be distributed from
the Exchange Fund prior to the earlier of the first anniversary of the Closing
Date or the date on which the Puerto Rico Tax Liability is finally determined
(the "Initial Distribution Date").
From the Initial Distribution Date until the expiration of the
Exchange Fund, amounts may be distributed from the Exchange Fund as and when
determined by the Shareholder Representative but until the earlier of the final
determination of the Puerto Rico Tax Liability and the third anniversary of the
Closing Date, a Reserve equal to 125% of the excess, if any, of the estimated
Puerto Rico Tax Liability (as estimated in good faith by Thermatrix) over
$1,800,000 will be maintained in the Exchange Fund to cover litigation and other
costs of collection.
On the Initial Distribution Date, unless the Shareholder
Representative has instructed Thermatrix not to proceed with litigation to
recover any funds that may constitute Net Proceeds, the Reserve will be
increased by $50,000 for future litigation expenses relating to each of the LIM
Funds and the Mannesmann Receivable (if such matter is then unresolved).
On the third anniversary of the Closing Date, Thermatrix and the
Shareholder Representative are required to reasonably determine whether LIM is
current on payments on the principal amount of the LIM Funds no longer required
to be held as collateral by LIM as of such date. If Thermatrix and the
Shareholder Representative determine that LIM is current on such payments,
Thermatrix will deposit in the Exchange Fund an amount equal to the remaining
LIM Funds then held by LIM. If Thermatrix and the Shareholder Representative
determine that LIM is not current on such payments, then, notwithstanding
anything to the contrary in Section 2.2 of the Merger Agreement, the Exchange
Fund will not terminate and Thermatrix will continue to be bound by its post
closing covenants regarding recovery and deposit of any Net Proceeds recovered
from the LIM Funds.
SPECIAL FACTORS
Plan of Financial Restructuring
Starting as early as August 1995, the Company had considered a sale of
the Company or a sale of selected divisions or operating assets in order to
concentrate the Company's focus and to provide working capital. The Company and
the Board examined a number of possible transactions, none of which resulted in
a proposal on acceptable terms, and by the late summer of 1996, the Board
determined that continuing the Company as an independent going concern was the
only alternative available to the Company. In August 1997, directors first
discussed in detail
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the financial restructuring plan described in the Company's Prospectus dated
February 4, 1998 and the Prospectus Supplement dated March 24, 1998.
The restructuring plan, which included a rights offering, a one-for-ten
reverse stock split, and the conversion to equity of approximately $11.8 million
of debt owed by the Company to Wes Acquisition Corp., a Wexford-affiliated
entity ("WESAC"), at the rate of one share of post-split common stock for each
$1.00 of debt, was intended to strengthen the Company's balance sheet, reduce
interest expense and allow the non-Wexford stockholders to acquire Shares at a
discount to market and at the same price at which Wexford was acquiring Shares
through its debt conversion. The Company expected these improvements, together
with a cost reduction program, to enable the Company to take advantage of the
anticipated growth in the North American market for air pollution control
equipment associated with approaching deadlines for compliance by North American
utilities with Phase II of the Federal Clean Air Act amendments of 1990 and to
counter efforts by competitors to portray the Company as financially unstable
and therefore unable to support its customers in the long term.
The stockholders of the Company approved the restructuring plan on March
2, 1998, and on May 15, 1998, the Company completed the restructuring plan.
Public stockholders exercised 20.8 million rights, raising approximately $2.1
million. The remaining 6.4 million rights were exercised for approximately
$634,000 by certain of the Funds which had agreed to serve as stand-by
underwriters. In addition to converting approximately $11.8 million of WESAC
debt to equity, the rights offering raised a total of $2.7 million, of which
approximately $500,000 was used to pay associated expenses and approximately
$1.8 million was used to repay amounts owed to Silicon Valley Bank ("SVB") and
to terminate the debt portion of a loan and security agreement originally
entered into with SVB in October 1995. The Company retained the remaining
$400,000 of proceeds of the rights offering as working capital.
As part of the restructuring plan, Wexford, as agent for certain of the
Funds, agreed, pursuant to an Amended and Restated Credit Agreement dated
January 30, 1998 (the "1998 Credit Agreement"), to make available to the
Company, until the closing of the rights offering a credit line under which the
Company borrowed $1.5 million (the "Tranche A Line"). The maturity date of the
Tranche A loans was subsequently extended to December 31, 2000. Wexford, as
agent, also made available to the Company a new line of credit of up to $2.5
million (the "Tranche B Line"), which also expires on December 31, 2000.
Wexford's obligation to advance funds to the Company under the 1998
Credit Agreement is conditioned on the Company's ability to meet certain
conditions, including, without limitation, that notice of borrowings must be
made to Wexford three days prior to the requested advance and must be
accompanied by proposed use of proceeds of the borrowings which must be
reasonably acceptable to Wexford; that the representations and warranties of the
Company set forth in the 1998 Credit Agreement be true and correct in all
material respects as of the date of each borrowing; that the Company be in
compliance with a series of positive and negative covenants; and that no event
of default, including no material adverse change in the business, financial or
other condition, or prospects of the Company, has occurred. The failure of the
Company to comply with any of these conditions would be an event of default
under the 1998 Credit Agreement, and, in addition to relieving Wexford from the
obligation to advance additional
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funds made under the 1998 Credit Agreement, such an event of default would cause
all outstanding loans to become immediately due and payable. An event of default
under the 1998 Credit Agreement would also trigger an event of default under the
guaranteed and collateralized credit facility (the "Chase Facility") at The
Chase Manhattan Bank, established by Wexford in February 1997, causing all
outstanding loans thereunder to also be immediately due and payable.
As of the date of this proxy statement, the Chase Facility borrowings of
approximately $3.3 million, there is approximately $1.7 million of remaining
available credit under the Tranche B Line and the outstanding principal amount
of Tranche A loans is approximately $1.5 million. The Company has no available
credit under the Chase Facility or the Tranche A Line.
Recent Events
RISK THAT THE COMPANY WILL BE UNABLE TO CONTINUE AS AN INDEPENDENT GOING
CONCERN. Since completion of the restructuring plan, the risk that the Company
will be unable to continue as an independent going concern has increased
substantially. The failure to generate substantial new orders for pollution
control equipment in North America, coupled with the negative economic situation
in Southeast Asia, has adversely affected the Company's business operations and
resulted in a negative variance from the Company's 1998 business plan. The
Company has not received the anticipated level of orders for the production of
air pollution control equipment associated with approaching year 2000 deadlines
for compliance by North American utilities with Phase II of the Federal Clean
Air Act amendments of 1990. Moreover, the Company's level of business has
continued to decline along with the continuing decline in international markets,
delays in scheduled projects and the failure of the Company to collect certain
outstanding receivables. In addition, the moratorium on New Power (combined
cycle gas power generation) in the U.K. resulted in a six-month delay in orders
being placed with the Company's U.K. divisions and significantly affected the
Company's projected earnings. As a result, despite the reduction of debt on the
Company's balance sheet achieved by the restructuring plan, the Company has
continued to experience significant losses and has been dependent on borrowings
under the 1998 Credit Agreement and an overdraft facility in the U.K. with
Midland Bank Plc.
On August 14, 1998, in its Quarterly Report on Form 10-Q for the period
ending June 30, 1998, the Company reported that significant changes in the
Company's anticipated level of business and other events, such as the continuing
decline in international markets and delays in scheduled projects, could
substantially increase the Company's cash requirements above those now
anticipated, and that as a result, there could be no assurance that (i) Wexford
would make loans available under the 1998 Credit Agreement or the Chase
Facility, (ii) if the loans were made, that they would not be called for
repayment or (iii) the capacity of the 1998 Credit Facility would be sufficient
to satisfy the Company's borrowing requirements.
The Company also reported that the Company was continuing to seek
additional sources of financing, as well as exploring unrelated sources of new
equity capital and the sale of assets, and seeking potential business partners,
but that there could be no assurance that the Company would be successful in
doing so or that any such financing or equity capital would be available on
acceptable terms.
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NYSE DELISTING. At a meeting of the Board held on June 23, 1998,
directors were informed that the New York Stock Exchange had declined to
continue the Company's listing because of its inability to meet the Exchange's
continued listing standards. On June 30, 1998, the NYSE announced that the
Company's common stock would be delisted no later than the market opening on
Wednesday, July 15, 1998. The action by the NYSE was taken because the Company's
net tangible assets, average after-tax income over three years and aggregate
market value had remained below the Exchange's continued listing criteria. On
July 15, 1998, the Company's common stock commenced trading on the OTC Bulletin
Board market under the symbol "WALO".
INTEREST PAYMENT. On June 30, 1998, the Company failed to make a
regularly scheduled interest payment on the Tranche A loans of approximately
$80,000. Pursuant to an agreement between the Company and Wexford, the interest
was added to the outstanding principal amount of the Tranche B loans.
INVESTIGATION OF SALE OR LIQUIDATION ALTERNATIVES. Following the closing
of the rights offering, as the risk of being unable to continue as a going
concern increased, the Board placed increasing emphasis on exploring
opportunities to sell or liquidate the Company.
At a June 10, 1998 meeting the Board ratified the retention by the
Company of Hera, LLC, a consulting group consisting of certain former employees
of the Company familiar with the pollution control industry, to explore the sale
of the Company's pollution control businesses.
On June 17, 1998, Mr. Beal contacted Thermatrix through its Chairman and
Chief Executive Officer, John Schofield, who indicated his interest in reopening
discussions begun in 1997. The Company had originally contacted Thermatrix in
November of 1997 at the suggestion of a venture capital firm with which the
Company had been working, but the discussions had not progressed beyond the
initial stages. Mr. Beal also contacted two other companies in June of 1998 with
a view to determining their interest in a transaction with the Company.
At a meeting of the Board on July 17, 1998, the directors were informed
that there had been a decline in the Company's expected results of operations
for 1998. In late July 1998, in a series of conference calls between
representatives of Wexford and the Company, Wexford's efforts to find a buyer
for the Company and the viability of selling selected divisions or operating
assets of the Company were discussed in detail. During one of these conferences,
Mr. Beal advised the conferees that based on his estimates of the prices that
could be obtained for selected divisions or operating assets, the Company could
end up without any excess cash to distribute to stockholders. During this period
Wexford also advised the Board that it believed that continuing as an
independent going concern was no longer a viable strategy for the Company.
Accordingly, Wexford did not intend to provide financing in excess of its
existing commitments except to assist the Company in carrying out a sale or
liquidation of the Company. Based on the deteriorating prospects for the
Company's business, and the growing risk that financing would not be available
to continue the Company's business operations, the Board decided to adopt an
alternative program of seeking a transaction that would result in the payment in
full of the Company's creditors and produce maximum value for stockholders.
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THE MERGER
Background of the Merger
During August, September and October 1998, Wexford and the Company
continued the discussions with Thermatrix that Mr. Beal had re-initiated in
June, and the Board continued to meet to receive briefings on the progress of
the discussions. At a meeting on October 15, 1998, Mr. Plaumann gave an
extensive briefing on the status of all on-going negotiations.
At the same time, Hera, LLC was conducting discussions and negotiations
with a company that had expressed interest in acquiring the Company's flue gas
conditioning business. It was the Board's belief at this time that while a sale
of the entire Company appeared to be the preferred course of action, it was
important to keep open the possibility of raising funds through the sale of
selected divisions or operating assets. Hera, LLC also contacted several other
companies that might have an interest in one or more of the Company's divisions
or operating assets.
During this period, discussions between Thermatrix, Wexford and the
Company also continued and as a result, Thermatrix commenced a due diligence
review of the Company during August 1998. The Thermatrix transaction was
originally structured as a purchase by Thermatrix of Wexford's equity interest,
but on October 6, 1998, the parties agreed to structure the transaction as a
cash merger. On October 13, 1998, Wexford and Company representatives met with
Thermatrix at the Company's offices to resolve pricing issues and reached a
tentative outline of an agreement with the result that Thermatrix agreed to
undertake the drafting of a term sheet. On October 29, 1998, negotiations had
reached a final stage and drafting of a merger agreement by Thermatrix's counsel
commenced shortly thereafter. The Initial Payment to shareholders was originally
set at approximately $1.6 million, subject to adjustments for expenses incurred
by the Company in connection with the Merger, and is currently estimated to be
approximately $1.35 million.
On November 2, 1998, the Board and the Company's General Counsel met to
discuss the progress of negotiations and to interview special counsel to assist
the Company with respect to the proposed merger with Thermatrix. During this
meeting, management reported an increase in the negative variance from the 1998
business plan.
The Board met again on November 4, 1998. Directors reviewed and
discussed the major issues concerning the proposed merger that had not yet been
resolved including:
the status of negotiations with respect to the sale of the
Company's flue gas conditioning business;
the relative merits of pursuing individual sales of selected
divisions or operating assets as opposed to a single sale in the form of a
merger with Thermatrix; and
the consequences to the stockholders of the Company of a
liquidation of the Company.
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The Board concluded at this time that both a sale of selected divisions
or operating assets, or a liquidation of the Company would likely result in
significant unsatisfied liabilities of the Company, and therefore, no
distribution to stockholders. In addition, the Board noted the growing
uncertainty regarding the Company's ability to continue to borrow funds under
the 1998 Credit Agreement and the sufficiency of such credit to meet the
Company's continued cash needs.
The Board determined that, of the alternatives available to the Company,
the Merger would produce the most value for stockholders of the Company. The
Board also approved the retention of special counsel to the Company in
connection with the Merger.
Because a number of important business issues remained to be resolved
with respect to the Merger, Mr. Beal, Mr. Plaumann and the Company's special
counsel met on November 5 and 6, 1998 with Thermatrix management and counsel at
the offices of Thermatrix's counsel in Palo Alto, California.
On Saturday, November 7, 1998, Mr. Beal individually updated each of the
directors who had not attended the negotiations on the resolution of the
outstanding issues, and on Sunday, November 8, 1998, all of the directors, with
the exception of Mr. Plaumann, participated in a conference telephone call with
the Company's General Counsel to discuss the terms of the Merger, the Company's
future prospects and most particularly, the uncertainty regarding the Company's
ability to continue to borrow funds under the 1998 Credit Agreement were the
Merger not consummated.
On Monday, November 9, 1998, the full Board met to review the near final
draft of the Merger Agreement which had been distributed to directors over the
weekend. The Company's special counsel briefed the Board members on their duties
and responsibilities as directors of a Delaware corporation in approving a
merger of the Company and reviewed the key terms of the Merger Agreement.
At the directors' request, Mr. Schofield joined the meeting to explain
the benefits of the Merger to Thermatrix and to describe the sources of funding
available to Thermatrix to pay the Merger Consideration, to repay outstanding
loans under the 1998 Credit Agreement and the Chase Facility, to provide funding
to the Company until the Closing of the Merger, and to finance the working
capital needs of the Company after the Closing. At the conclusion of the
meeting, directors, Mr. Plaumann abstaining, unanimously approved the Merger and
the Board recommended its approval by the stockholders.
Subsequent to this vote, Mr. Schofield was elected a director of the
Company by the existing directors and appointed a member of its executive
committee as provided in the Merger Agreement.
The Company's Reasons For the Merger; Recommendation of the Board of Directors
The Board, in the course of reaching its decision to approve the Merger
Agreement and the transactions it provides for, consulted with the Company's
legal advisors as well as with the Company's management and considered a number
of factors, including the following material
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factors (the order of which does not necessarily reflect the relative
significance of the various factors considered):
(i) The Board's evaluation of the available alternatives to the Merger,
including a liquidation of the Company or a sale of selected divisions or
operating assets of the Company, and the Board's conclusion that such
alternatives would be difficult, expensive, time consuming and uncertain as to
outcome and that, when completed, were unlikely to yield any funds for
distribution to the stockholders of the Company;
(ii) The fact that the Company has received no other offers to buy the
Company as a going concern, notwithstanding the efforts of the Board, management
and Wexford;
(iii) The Board's conclusion that the Merger is the most favorable
strategic alternative in terms of value to be received by the stockholders of
the Company, based on its own judgment and the advice of senior management;
(iv) The fact that the Company has become increasingly uncertain of its
ability to obtain funding for 1999 and beyond, primarily under the 1998 Credit
Agreement, the Company's principal source of institutional financing because
Wexford could be expected to be unwilling to finance the Company unless it had a
reasonable basis to believe that existing indebtedness and future loans, would
be repaid;
(v) The Board's assessment of the Company's prospects based on the
directors' knowledge of the Company's business, operations, properties, assets,
financial condition and operating results;
(vi) The current and prospective economic environment in the industrial
markets in which the Company sells its products and services;
(vii) The opportunity to align the Company with Thermatrix, which,
through its president, has briefed the Board on its financial resources to
develop the Company's technical and manufacturing capabilities;
(viii) The fact that the Merger Consideration is all cash and that the
Merger is not subject to any financing contingencies;
(ix) The terms of the Merger Agreement, including those that provide
that, under certain circumstances and subject to certain conditions, the Company
can provide information to and conduct negotiations with a third party and could
terminate the Merger Agreement in the event of a Preferred Proposal (as such
term is defined in the Merger Agreement); and
(x) The fact that the stockholders of the Company will not have a
continuing equity interest in the Surviving Corporation and, thus, will not
participate in any future growth of the Surviving Corporation absent an
independent investment in the stock of Thermatrix.
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The foregoing discussion of the information and factors considered by
the Board is not meant to be exhaustive, but is believed to include the material
factors considered by the Board. The Board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Merger Agreement and the transactions contemplated by it,
including the Merger, are fair to and in the best interests of the stockholders.
In reaching its determination, the Board took the various factors into account
collectively and did not perform a factor-by-factor analysis In addition,
individual directors may have given different weights to different factors.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD HAS (WITH THE ABSTENTION OF THE
WEXFORD-AFFILIATED DIRECTOR) UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND THE STOCKHOLDERS. ACCORDINGLY, THE BOARD
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION
OF THE MERGER PROPOSAL.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board with respect to the
Merger, stockholders of the Company should be aware that the indebtedness of the
Company owed to Wexford (and the Chase Facility that is guaranteed by Wexford),
the beneficial owner of approximately 81.5% of the Shares and the principal
creditor of the Company, will be repaid in full by Thermatrix, including any
additional funds advanced by Wexford to the Company under the Tranche B Line
before the Closing date. See "The Merger Agreement--Wexford Debts and Wexford
Guarantees."
Financing the Merger
The total amount required to pay the Merger Consideration to the
Company's stockholders, refinance certain debt of the Company, and pay estimated
fees, expenses and other transaction costs of Thermatrix, the Company, and
Merger Sub in connection with the Merger is approximately $7 million. The
Initial Payment of approximately $1.35 million to the Company's stockholders
will be paid from available Thermatrix cash. Thermatrix anticipates that the
balance that is required will be provided by a combination of borrowings under
an existing credit facility and borrowings under new credit facilities that
Thermatrix expects to establish. Thermatrix is currently engaged in substantive
discussions with several financing sources to obtain the total amount required
to complete the transaction.
As of September 30, 1998, Thermatrix had cash and cash equivalents
equaling $4.3 million. Thermatrix currently has a $4.0 million accounts
receivable line of credit with a $2.0 million letter of credit sub-limit. As of
September 30, 1998, there were no interest-bearing borrowings outstanding under
the line of credit, but there is a stand-by letter of credit issued under the
sub-facility in the amount of $354,000. Borrowings may be made up to 80% of
eligible U.S. accounts receivable. Thermatrix is currently seeking to obtain
amendments to allow
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borrowings to be based on the combined Thermatrix/Wahlco accounts receivable
which would allow the maximum amount of the line of credit to be made available.
Accounting Treatment
The Merger will be accounted for by Thermatrix as a "purchase" in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by Thermatrix in connection with the Merger will be
allocated to the Company's assets and liabilities based upon their fair values,
with any excess being treated as goodwill. The assets and liabilities and
results of operations of the Company will be consolidated into the assets and
liabilities and results of operations of Thermatrix subsequent to the
consummation of the Merger.
Certain Consequences of the Merger
As a result of the Merger, Merger Sub will be merged with and into the
Company and the Company will become a wholly-owned subsidiary of Thermatrix.
Following consummation of the Merger, the Common Stock will no longer be quoted
on the OTC Bulletin Board, will be deregistered under the Exchange Act and will
no longer be publicly traded.
Appraisal Rights
Under the Delaware General Corporation Law (the "DGCL"), any stockholder
who does not wish to accept the Merger Consideration for his or her Shares as
provided in the Merger Agreement has the right to dissent from the Merger and to
seek an appraisal of, and to be paid the fair value (exclusive of any element of
value arising from the accomplishment or expectation of the Merger) for his or
her Shares, provided that the stockholder complies with the provisions of
Section 262 of the DGCL.
Holders of record of Shares who do not vote in favor of the Merger
Agreement and who otherwise comply with the applicable statutory procedures
summarized herein will be entitled to appraisal rights under Section 262 of the
DGCL. A person having a beneficial interest in Shares held of record in the name
of another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY
BY THE FULL TEXT OF SECTION 262 OF THE DGCL WHICH IS REPRINTED IN ITS ENTIRETY
AS ANNEX B. ALL REFERENCES IN SECTION 262 OF THE DGCL AND IN THIS SUMMARY TO A
"STOCKHOLDER" OR "HOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF COMMON STOCK
AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED.
Under Section 262 of the DGCL, holders of Shares ("Appraisal Shares")
who follow the procedures set forth in Section 262 of the DGCL will be entitled
to have their Appraisal Shares appraised by the Delaware Chancery Court and to
receive payment in cash of the "fair value" of
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such Appraisal Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such court.
Under Section 262 of the DGCL, where a proposed merger is to be
submitted for approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, must notify each of its stockholders who was
a stockholder on the record date for such meeting with respect to shares for
which appraisal rights are available, that appraisal rights are so available,
and must include in such notice a copy of Section 262 of the DGCL.
This proxy statement constitutes such notice to the holders of Appraisal
Shares and the applicable statutory provisions of the DGCL are attached to this
proxy statement as Annex B. Any stockholder who wishes to exercise such
appraisal rights or who wishes to preserve his or her right to do so should
review the following discussion and Annex B carefully, because failure timely
and properly to comply with the procedures therein specified will result in the
loss of appraisal rights under the DGCL.
A holder of Appraisal Shares wishing to exercise such holder's appraisal
rights (a) must not vote in favor of the Merger Agreement and (b) must deliver
to the Company prior to the vote on the Merger Agreement at the special meeting,
a written demand for appraisal of such holder's Appraisal Shares. This written
demand for appraisal must be in addition to and separate from any proxy or vote
abstaining from or against the Merger. This demand must reasonably inform the
Company of the identity of the stockholder and of the stockholder's intent
thereby to demand appraisal of his or her Shares. A holder of Appraisal Shares
wishing to exercise such holder's appraisal rights must be the record holder of
such Appraisal Shares on the date the written demand for appraisal is made and
must continue to hold such Appraisal Shares until the consummation of the
Merger. Accordingly, a holder of Appraisal Shares who is the record holder of
Appraisal Shares on the date the written demand for appraisal is made, but who
thereafter transfers such Appraisal Shares prior to consummation of the Merger,
will lose any right to appraisal in respect of such Appraisal Shares.
Only a holder of record of Appraisal Shares is entitled to assert
appraisal rights for the Appraisal Shares registered in that holder's name. A
demand for appraisal should be executed by or on behalf of the holder of record,
fully and correctly, as such holder's name appears on such holder's stock
certificates. If the Appraisal Shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the Appraisal Shares are owned of record
by more than one owner as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a holder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is agent for such owner or owners. A record holder such as a broker who holds
Appraisal Shares as nominee for several beneficial owners may exercise appraisal
rights with respect to the Appraisal Shares held for one or more beneficial
owners while not exercising such rights with respect to the Appraisal Shares
held for other beneficial owners; in such case, the written demand should set
forth the number of Appraisal Shares as to which appraisal is sought. When no
number of Appraisal
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Shares is expressly mentioned, the demand will be presumed to cover all
Appraisal Shares in brokerage accounts or other nominee forms and those who wish
to exercise Appraisal Rights under Section 262 of the DGCL are urged to consult
with their brokers to determine the appropriate procedures for the making of a
demand for appraisal by such a nominee.
ALL WRITTEN DEMANDS FOR APPRAISAL SHOULD BE SENT OR DELIVERED TO WAHLCO
ENVIRONMENTAL SYSTEMS, INC., 3600 WEST SEGERSTROM AVENUE, SANTA ANA, CALIFORNIA
92704, ATTENTION: SECRETARY.
Within ten days after the consummation of the Merger, the Surviving
Corporation will notify each stockholder who has properly asserted appraisal
rights under Section 262 of the DGCL and has not voted in favor of the Merger
Agreement of the date the Merger became effective.
Within 120 days after the consummation of the Merger, but not
thereafter, the Company or any stockholder who has complied with the statutory
requirements summarized above may file a petition in the Delaware Chancery Court
demanding a determination of the fair value of the Appraisal Shares. The Company
is under no obligation to and has no present intention to file a petition with
respect to the appraisal of the fair value of the Appraisal Shares. Accordingly,
it is the obligation of stockholders wishing to assert appraisal rights to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262 of the DGCL.
Within 120 days after the consummation of the Merger, any stockholder
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of Appraisal Shares not voted in
favor of adoption of the Merger Agreement and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
Appraisal Shares. Such statements must be mailed within ten days after a written
request therefor has been received by the Surviving Corporation.
If a petition for an appraisal is filed timely, after a hearing on such
petition, the Delaware Chancery Court will determine the stockholders entitled
to appraisal rights and will appraise the "fair value" of their Appraisal
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Stockholders considering
seeking appraisal should be aware that the fair value of their Appraisal Shares
as determined under Section 262 of the DGCL could be more than, the same as or
less than the value of the consideration they would receive pursuant to the
Merger Agreement if they did not seek appraisal of their Appraisal Shares and
that investment banking opinions as to fairness from a financial point of view
are not necessarily opinions as to fair value under Section 262 of the DGCL. The
Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceedings.
The Delaware Chancery Court will determine the amount of interest, if
any, to be paid upon the amounts to be received by stockholders whose Appraisal
Shares have been appraised.
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The costs of the action may be determined by the Delaware Chancery Court and
taxed upon the parties as the Delaware Chancery Court deems equitable. The
Delaware Chancery Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all of the Appraisal Shares entitled to appraisal.
Any holder of Appraisal Shares who has duly demanded an appraisal in
compliance with Section 262 of the DGCL will not, after the consummation of the
Merger, be entitled to vote the Appraisal Shares subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those Appraisal Shares (except dividends or other distributions payable to
holders of record of Appraisal Shares as of a record date prior to the
consummation of the Merger).
If any stockholder who properly demands appraisal of his or her
Appraisal Shares under Section 262 of the DGCL fails to perfect, or effectively
withdraws or loses, his or her right to appraisal, as provided in Section 262 of
the DGCL, the Appraisal Shares of such stockholder will be converted into the
right to receive the consideration receivable with respect to such Appraisal
Shares in accordance with the Merger Agreement. A stockholder will fail to
perfect, or effectively lose or withdraw, his or her right to appraisal if,
among other things, no petition for appraisal is filed within 120 days after the
consummation of the Merger, or if the stockholder delivers to the Company a
written withdrawal of his or her demand for appraisal. Any such attempt to
withdraw an appraisal demand more than 60 days after the consummation of the
Merger will require the written approval of the Company.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH
EVENT A STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE
WITH RESPECT TO HIS OR HER APPRAISAL SHARES IN ACCORDANCE WITH THE MERGER
AGREEMENT).
Regulatory Approvals
No state or federal regulatory requirements must be complied with or
must be obtained in connection with the Merger.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary of the material
United States federal income tax consequences of the Merger and does not purport
to be a complete analysis or listing of all potential tax effects relative to a
decision whether to vote for the approval of the Merger. The discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial and
administrative decisions in effect as of the date hereof, all of which are
subject to change at any time, possibly with retroactive effect. The discussion
does not address all aspects of United States federal income taxation that may
be applicable to certain stockholders of the Company
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subject to special United States federal income tax treatment, including,
without limitation, foreign persons, insurance companies, tax-exempt entities,
retirement plans and persons who acquired their Shares pursuant to the exercise
of employee stock options or otherwise as compensation. The discussion addresses
neither the effect of applicable state, local or foreign tax laws, nor the
effect of any United States federal tax laws other than those pertaining to
United States federal income tax.
THE FOLLOWING DISCUSSION OF MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX TREATMENT OF ANY
PARTICULAR STOCKHOLDER OF THE COMPANY MAY BE AFFECTED BY MATTERS NOT DISCUSSED
HEREIN, EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO HIS OR HER OWN PARTICULAR CIRCUMSTANCES AND WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT
OF STATE, LOCAL AND FOREIGN TAX LAWS, ESTATE TAX LAWS AND PROPOSED CHANGES IN
APPLICABLE TAX LAWS.
Receipt of the Merger Consideration
The receipt of the Merger Consideration by a stockholder of the Company
in exchange for Shares pursuant to the Merger will be a taxable transaction for
United States federal income tax purposes. A stockholder of the Company
generally will recognize gain or loss for United States federal income tax
purposes in an amount equal to the excess of (A) the sum of (1) the amount of
cash received in respect of the Initial Payment and (2) the fair market value
(determined as of the effective time of the Merger) of the contractual right to
receive certain Contingent Payments (the "Contract Right") over (B) such
stockholder's adjusted tax basis in the Shares. Such gain or loss will be a
capital gain or loss if a stockholder of the Company held its Shares as capital
assets and will be long-term capital gain or loss if, as of the effective time
of the Merger, such Shares were held for more than one year. Long-term capital
gains of individuals derived with respect to capital assets are subject to tax
at preferential rates. The deductibility of capital losses is subject to certain
limitations. Gain or loss should be computed separately for different blocks of
Shares.
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Characterization of the Contract Rights
There is no authority directly on point that considers the proper tax
treatment of instruments or property rights that are substantially the same as
the Contract Rights. As a result, the tax treatment of the Contract Rights, and
any distributions with respect thereto, is uncertain. The Company intends to
take the position that the receipt of a Contract Right by a stockholder of the
Company pursuant to the Merger will be equivalent to the receipt of an ownership
interest in the Net Proceeds and that distributions received from the Exchange
Fund will be treated as payments under a contract for the sale or exchange of
Shares that are subject to Section 483 of the Code. Given the wholly contingent
nature of any payments that might be received in respect of a Contract Right, it
is not anticipated that a Contract Right will be treated as a debt instrument
for United States federal income tax purposes.
Although the Contract Rights will not be publicly traded, a stockholder
of the Company should be able to determine the value of and its basis in a
Contract Right by reference to the excess, if any, of (x) the fair market value
of the Shares immediately prior to the effective time of the Merger over (y) the
Initial Payment.
STOCKHOLDERS OF THE COMPANY SHOULD BE AWARE THAT THERE ARE NO
AUTHORITIES THAT CONSIDER THE TAX TREATMENT OF INSTRUMENTS THAT ARE
SUBSTANTIALLY THE SAME AS THE CONTRACT RIGHTS. THE IRS COULD ASSERT THAT THE
CONTRACT RIGHTS ARE DEBT INSTRUMENTS OR THAT THE TREATMENT OF THE CONTRACT
RIGHTS DIFFERS FROM THAT DESCRIBED HEREIN. STOCKHOLDERS OF THE COMPANY ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE RECEIPT, OWNERSHIP AND DISPOSITION OF A
CONTRACT RIGHT.
Application of Section 483 to the Contract Rights
Under Section 483 of the Code, a stockholder of the Company that
receives a Contract Right as a result of the Merger will not be required to
include any amount in income with respect to the Contingent Payments until such
payments, if any, are received by the Exchange Fund (or, under certain
circumstances, until the right to such payments become fixed and the total
amount of such payments can be determined with reasonable accuracy). If a
Contingent Payment is in fact received by the Exchange Fund, a portion of the
amount received will be treated under Section 483 as interest income that is
ordinary income.
The portion of any Contingent Payment that is characterized as interest
income will equal the excess of the total amount of the Contingent Payment
received over the present value of such payment as of the effective time of the
Merger. The discount rate used in calculating the present value of such payment
as of the effective time of the Merger will be the appropriate "applicable
federal rate" ("AFR"). The AFR is a rate reflecting an average of market yields
on United States Treasury debt obligations for different ranges of maturities
that is published monthly by the IRS. The relevant AFR will be the lower of (a)
the lowest AFR in effect during the 3-month period ending with the month that
includes the date on which the Agreement was signed or (b) the
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lowest AFR in effect during the 3-month period ending with the month that
includes the effective time of the Merger. In either case, the maturity range of
the relevant AFR will correspond to the period from the effective time of the
Merger to the date a Contingent Payment is received by the Exchange Fund or
deemed received.
Special rules will apply in determining the portion of any Contingent
Payment that should be characterized as imputed interest income under Section
483 if the amount of such payment becomes fixed more than 6 months before the
date on which such payment is actually due. These rules will apply when, for
example, distributions are not made by the Exchange Fund because the total
proceeds are, in the determination of the Shareholder's Representative, not
sufficient to justify the costs of a distribution. In general, if such rules
were applicable to a Contingent Payment, they would accelerate the recognition
of income for stockholders of the Company that utilize the accrual method of
accounting and could result in income recognition before a corresponding cash
distribution.
The proper tax treatment of the amount of any Contingent Payment in
excess of the amount characterized as interest income under the rules described
above is uncertain. The Company believes that any such excess should be treated
as gain in an amount equal to the difference between the net payment received by
a stockholder in the Company and the portion of such stockholder's basis in a
Contract Right that is properly allocable to such net payment. The method for
allocating basis is unclear. If a stockholder of the Company receives a payment
that is less than its basis in the Contract Right, such stockholder may not be
allowed a loss until it is determined that no further payments will be made.
When the receipt of a payment terminates all of the rights of a holder with
respect to a Contract Right, any gain or loss would generally be capital gain or
loss under Section 1234A of the Code. It is not clear, however, whether the same
treatment will apply to interim payments in respect of the Contract Rights.
Because the maximum amount of potential Contingent Payments that may be
deposited into the Exchange Fund is reasonably ascertainable as of the effective
time of the Merger, a stockholder of the Company could allocate a pro rata
portion of its basis in a Contract Right to each of the Contingent Payments as
such payments are received and distributed by the Exchange Fund by multiplying
the total amount of such stockholder's basis in a Contract Right by a fraction
having (1) a numerator equal to the amount of the particular Contingent Payment
received and (2) a denominator equal to the maximum amount of potential
Contingent Payments that may be received by such stockholder. If actual events
later demonstrated that the original pro rata allocations of basis made by a
stockholder of the Company were incorrect, then such stockholder would be
required to make adjustments to properly reflect such actual events. As stated
above, the basis allocation method that would apply to a Contract Right is
uncertain and stockholders of the Company should consult their own tax advisors
as to the proper method of basis recovery to be utilized upon the receipt of a
Contingent Payment.
Termination of the Exchange Fund
If and when the Exchange Fund terminates pursuant to the terms of the
Agreement, the amount of any final Contingent Payment distributed to a
stockholder of the Company (net of imputed interest under Section 483) generally
should be characterized as capital gain or loss to
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the extent such payment exceeds such stockholder's basis in a Contract Right.
Conversely, if identifiable events occur after the effective time of the Merger
which clearly establish the worthlessness of a Contract Right, a stockholder of
the Company should be entitled to recognize a capital loss, in the year in which
such identifiable events occur, in the amount of such stockholder's adjusted tax
basis in a Contract Right.
Other Characterizations of the Contract Rights
Among other potential characterizations, it is possible that the IRS may
assert that the Contract Rights are debt instruments for United States federal
income tax purposes. If such an assertion were determined to be correct, it is
possible that the Contract Rights would be subject to a different set of rules
set forth under the Contingent Payment Regulations (the "Noncontingent Bond
Method"). In general, if the Noncontingent Bond Method rules applied to the
Contract Rights, a stockholder of the Company (including a cash method holder)
would be required, among other things, to accrue interest income prior to the
receipt of any Contingent Payments and potentially in greater amounts than if
the rules under Section 483 applied to such Contract Rights. Stockholders of the
Company should consult their tax advisors concerning the tax consequences of
possible alternative characterizations of the Contract Rights.
Backup Withholding and Information Reporting
A stockholder of the Company may be subject to backup withholding at a
rate of 31% on the deemed receipt of interest income that would occur if a
Contingent Payment is in fact received and distributed by the Exchange Fund in
respect of a Contract Right (as discussed above). In general, backup withholding
will apply if a stockholder of the Company is not exempt from the backup
withholding rules and fails to comply with certain identification requirements
(such as providing a properly completed IRS Form W-9 to the Exchange Agent).
Backup withholding is not an additional tax and generally may be claimed as a
credit against the income tax liability of a stockholder of the Company,
provided that the required information is furnished to the IRS. Stockholders of
the Company should consult their tax advisors regarding the application of the
backup withholding rules to their particular situations.
THE MERGER AGREEMENT
The following is a brief summary of certain material provisions of the
Merger Agreement which is attached as Annex A to this proxy statement and
incorporated herein by reference. This summary and all other discussions of the
terms and conditions of the Merger and the Merger Agreement included elsewhere
in this proxy statement do not purport to be complete and are qualified in their
entirety by reference to the Merger Agreement. Capitalized terms used and not
otherwise defined herein have the meaning ascribed to such terms in the Merger
Agreement.
The Merger
The Merger Agreement provides that, following the approval and adoption
of the Merger Agreement by the stockholders of the Company and the satisfaction
or waiver of the other conditions to the Merger, Merger Sub will be merged with
and into the Company, with the
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Company continuing as the Surviving Corporation of the Merger. The Merger will
become effective on the date and at the time of the acceptance of the
Certificate of Merger by the Delaware Secretary of State or at such time
thereafter as is provided in the Certificate of Merger.
Merger Consideration
For each Share outstanding immediately prior to the effective time of
the Merger, stockholders of the Company will be entitled to receive the
following merger consideration: (1) an initial payment of approximately $1.35
million divided by the number of outstanding Shares, or approximately $0.08 per
Share (the Initial Payment), and (2) Contingent Payments of up to approximately
$2 million divided by the number of outstanding Shares, or up to approximately
an additional $0.12 per Share. The Initial Payment is subject to certain
adjustments and the amount of the Contingent Payments is dependent upon the
resolution of certain transactions. See "The Merger Consideration."
Voting and Option Agreement
The Funds and Mr. Beal have entered into a Voting and Option Agreement
with Thermatrix pursuant to which they have agreed to vote their Shares in favor
of the Merger Agreement and have granted Thermatrix an irrevocable proxy to vote
in favor of the Merger Agreement. Mr. Beal owns 266,860 Shares, and together, he
and the Funds hold approximately 83% of the Shares. Accordingly, the adoption of
the Merger Agreement by the Company's stockholders is expected to occur
irrespective of whether or the manner in which the Company's other stockholders
vote their Shares.
The irrevocable option is exercisable in whole but not in part at a
purchase price equal to the Merger Consideration if the Merger Agreement is
terminated in accordance with its terms for reasons other than the failure of
Thermatrix or the Company to fulfill any obligation under the Merger Agreement.
The Company has agreed to use all commercially reasonable efforts to
obtain the signature of Henry Huta to the Voting and Option Agreement.
Wexford Debts and Wexford Guarantees
At the effective time of the Merger, Thermatrix will pay the Wexford
Debts in full. The Wexford Debts means (i) the $4,704,139.73 set forth on
Schedule I of the Merger Agreement (the outstanding amounts on the Tranche A
loans, the Tranche B loans and the Chase Facility), (ii) any amounts approved by
the Executive Committee and advanced by Wexford to the Company from the date of
the Merger Agreement to the Closing Date, and (iii) in each case, accrued and
unpaid interest on such amounts from the date of the Merger Agreement to the
Closing Date in accordance with the terms of the Amended and Restated Credit
Agreement dated as of January 30, 1998.
On or prior to the Closing Date, Thermatrix will also replace, or will
have arranged for a third party to replace, Wexford as guarantor on the Wexford
Guarantees, which is defined as all
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guarantees by Wexford of any outstanding obligations of the Company and its
Subsidiaries as of the effective time of the Merger. As set forth on Schedule II
of the Merger Agreement, the Wexford Guarantees total $531,300.
Conversion of Securities
As of the effective time of the Merger, each issued and outstanding
Share (other than Shares held by Thermatrix, Merger SUB or any other
wholly-owned Subsidiary of Thermatrix) will be converted into the right to
receive the Merger Consideration. Shares held by any Dissenting Shareholder will
not be converted pursuant to the Merger unless and until such holder fails to
perfect or effectively withdraws or loses such holder's rights to demand an
appraisal under the Section 262 of the DGCL, whereupon such Shares will be
treated as if they had been converted into the right to receive the Merger
Consideration pursuant to the Merger Agreement. See "The Merger--Appraisal
Rights."
As of the effective time of the Merger, the Merger Agreement also
terminates all outstanding options and rights to purchase Shares issued under
the Company's 1996 Employee Stock Option Plan. In addition, the Surviving Entity
will not assume any outstanding warrants to purchase Shares, and will obtain
agreements to terminate all warrants held by Wexford and Wexford affiliates.
Exchange of Certificates
As soon as reasonably practicable after the effective time of the
Merger, the Exchange Agent will mail to each holder of record of a certificate
or certificates which immediately prior to the effective time of the Merger
represented outstanding Shares whose Shares were converted into the right to
receive the Merger Consideration (i) a letter of transmittal, (ii) instructions
for its use in effecting the surrender of the certificates in exchange for the
Merger Consideration; and (iii) the notice of approval of the Merger and
accompanying statutory materials, information and instruction as required by
Section 262 of the DGCL. Upon surrender of a certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
Thermatrix, together with such letter of transmittal, duly executed, the holder
of such certificate will be entitled to receive, in exchange for the
certificate, the Merger Consideration, and the certificate so surrendered will
immediately be canceled. Until so surrendered, each certificate will be deemed
at any time after the effective time of the Merger to represent only the right
to receive upon such surrender the Merger Consideration.
Any portion of the Exchange Fund which remains undistributed to the
stockholders of the Company within one month after the third anniversary of the
Closing Date will be delivered to Thermatrix and any stockholders of the Company
who have not previously complied with the exchange procedures may thereafter
look only to Thermatrix for payment of their claim for any Merger Consideration
and any dividends or distributions with respect to the Shares.
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Representations and Warranties
The Merger Agreement contains various representations and warranties of
the Company, subject to certain exceptions, regarding the Company and its
Subsidiaries as to, among other things: (i) due organization, existence, good
standing, corporate power and authority, and qualifications or licensing to do
business; (ii) capitalization, including the number of Shares and preferred
stock outstanding, the number of Shares issuable upon the exercise of Options,
the number of Shares issuable at the exercise price upon the exercise of
warrants, and the number of Shares held by any Subsidiary of the Company; (iii)
the Company's ownership interest in its Subsidiaries free and clear of all
Security Interests; (iv) the authorization, execution, and delivery of the
Merger Agreement and the consummation of the transactions contemplated thereby,
and the validity and enforceability thereof; (v) the absence of consents and
approvals necessary for consummation of the Merger, and the absence of any
violations, breaches or defaults which would result from compliance by the
Company with any provisions of the Merger Agreement; (vi) compliance with the
Securities Act and the Exchange Act in connection with the Company SEC Reports;
(vii) the financial statements included in the Company SEC Reports; (viii) the
absence of certain changes which would constitute a Material Adverse Effect;
(ix) certain tax matters; (x) the absence of certain restriction on their
respective business activities; (xi) certain matters related to property; (xii)
certain intellectual property matters; (xiii) the veracity and completeness of
the Disclosure Schedule of agreements, contracts, and commitments; (xiv) certain
employee and labor matters; (xv) certain employee benefit plan and ERISA
matters; (xvi) pending litigation or violation of any law which could reasonably
be expected to result in a Material Adverse Effect; (xvii) the holding of all
licenses, certificates, permits, franchises and rights from all appropriate
governmental authorities necessary for the conduct of their respective
businesses; (xviii) the provision of a list of insurance policies in effect;
(xix) the existence of related parties; (xx) the provision of client lists;
(xxi) certain environmental liability issues; and (xxii) the absence of certain
claims of brokers.
The Merger Agreement also contains various representations and
warranties of Thermatrix and Merger Sub, subject to certain exceptions, with
respect to Thermatrix and Merger Sub as to, among other things: (i) their due
organization, existence, good standing, and corporate power and authority to do
business; (ii) the authorization, execution and delivery of the Merger Agreement
and consummation of the transactions contemplated thereby, and the validity and
enforceability thereof; (iii) the absence of any violations of charter documents
or applicable law which would result from compliance with any provisions of the
Merger Agreement and the absence of consents and approvals necessary for
consummation of the Merger; (iv) the securing of financing commitments from
financial institutions with respect to the financing necessary to effect the
Merger and to consummate the other transactions contemplated by the Merger
Agreement; and (v) Thermatrix's representation that it is a sophisticated
purchaser with access to sufficient information to reach an informed and
knowledgeable decision to enter into this Merger Agreement. The accuracy of the
representations and warranties is not a condition to Thermatrix's obligation to
consummate the Merger, but the Company has an obligation to provide updates to
Thermatrix if it becomes aware of any inaccuracy.
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Covenants
During the period from the date of the Merger Agreement and continuing
until the earlier of the termination of the Merger Agreement or the effective
time of the Merger, the Company agrees as to itself and its Subsidiaries (except
to the extent that noncompliance with these covenants occurs because of the
Company's lack of funding), to carry on its business in the Ordinary Course of
Business, to pay its debts and taxes when due, subject to good faith disputes
over such debts or taxes, to pay or perform its other obligations when due, and,
to the extent consistent with such business, to use all reasonable efforts
consistent with past practices and policies to (i) preserve intact its present
business organization, (ii) keep available the services of its present officers
and key employees, (iii) maintain its properties, (iv) keep its insurance in
force, (v) preserve its relationships with clients, suppliers, distributors,
licensors, licensees, and others having business dealings with it, and (vi) pay
its accounts payable in the Ordinary Course of Business without material
increase in average days outstanding. The Company will promptly notify
Thermatrix of any event or occurrence not in the Ordinary Course of Business of
the Company or its Subsidiaries, where such event or occurrence would result in
a breach of any covenant of the Company or its Subsidiaries, set forth in the
Merger Agreement.
Except as expressly contemplated by the Merger Agreement, the Company
will not, without the prior written consent of Thermatrix (such consent not to
be unreasonably withheld): (a) declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for Shares, or purchase or otherwise acquire, directly or
indirectly, any Shares; (b) acquire or agree to acquire by merging or
consolidating with, or by purchasing any equity interest in or assets of, or by
any other manner, any business or any corporation, partnership or other business
organization or division, or otherwise acquire or agree to acquire any assets;
(c) sell, lease, license or otherwise dispose of any of its properties or assets
which are material, individually or in the aggregate, to its business and that
of its Subsidiaries, taken as a whole, except for transactions entered into in
the Ordinary Course of Business; (d) transfer or license to any Person or
otherwise extend, amend or modify any material rights to the Company
Intellectual Property Rights, other than the grant of non-exclusive licenses in
the Ordinary Course of Business substantially consistent with past practices;
issue any Shares or capital stock of any Subsidiary, or any securities which may
be exchanged or exercised for or converted into Company capital stock or the
capital stock of any Subsidiary (including, without limitation, any options or
warrants) other than Shares issuable upon exercise of existing options; (e) (i)
increase or agree to increase the compensation payable or to become payable to
its officers or employees, except for increases in salary or wages of employees
in the Ordinary Course of Business, (ii) grant any additional severance or
termination pay to, or enter into any employment or severance agreements with,
officers, (iii) grant any severance or termination pay to, or enter into any
employment or severance agreement with, any employee, except in settlement of
dispute with terminated employees, (iv) enter into any collective bargaining
agreement, or (v) establish, adopt, enter into or amend in any material respect
any bonus, profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination, severance
or other plan, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees; (f) revalue any material amount of its assets,
including writing down the
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value of inventory or discounting or writing off notes or accounts receivable
other than the Mannesmann Receivable, the LIM Funds, and other than in the
Ordinary Course of Business; (g) except with the approval of the Executive
Committee, incur any Indebtedness for borrowed money or guarantee any such
Indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities or guarantee any debt securities of others, other
than Indebtedness incurred under outstanding lines of credit in the Ordinary
Course of Business; (h) change any policy or take any action with respect to the
payment of accounts payable, and other than in the Ordinary Course of Business;
(i) incur or commit to incur capital expenditures other than in the Ordinary
Course of Business; (j) make any material change or take any material action
with respect to the amortization, capitalization or other accounting policies or
procedures, other than actions in the Ordinary Course of Business; (k) other
than with respect to the Designated Amounts and the Puerto Rico Tax Liability,
waive, release, assign, settle or compromise any material claims or litigation;
(l) except as described on the Disclosure Schedule, make any tax election or
settle or compromise any material federal, state, local or foreign tax
liability; or (m) take, or agree in writing or otherwise to take, any of the
actions described in Sections (a) through (l) above, or any action that
individually or in the aggregate could reasonably be expected to (x) have a
Material Adverse Effect, (y) materially impair the ability of the Company to
perform its obligations under the Merger Agreement or (z) prevent or materially
delay the consummation of the transactions contemplated by the Merger Agreement.
No Solicitation
Under the Merger Agreement, the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, through any officer,
director, employee, representative, agent or affiliate, (i) solicit, initiate,
or encourage (including by way of furnishing information) any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of the Shares (including without limitation by way of a
tender offer) or similar transactions involving the Company, other than the
transactions contemplated or permitted by the Merger Agreement (any of the
foregoing inquiries or proposals being referred to as a "Competing Offer"), (ii)
engage in negotiations or discussions concerning, or provide any non-public
information to any Person relating to, any Competing Offer; provided, that the
Company may contact parties with whom it had been having discussions to
terminate such discussions, or (iii) agree to, approve or recommend any
Competing Offer. Neither the Board, nor any committee thereof, will (a) withdraw
or modify, or propose to withdraw or modify, in any manner adverse to
Thermatrix, the approval or recommendation of the Board of the Merger, or (b)
approve or recommend, or propose to approve or recommend, any Competing Offer or
any other acquisition of the Shares, other than pursuant to the Merger or the
Merger Agreement. Notwithstanding the foregoing, nothing contained in the Merger
Agreement will prevent the Company or its Board of Directors from (A) furnishing
non-public information to, or entering into discussions or negotiations with,
any Person in connection with an unsolicited bona fide written Competing Offer
by such Person (including a new and unsolicited Competing Offer received by the
Company after the execution of the Merger Agreement from a Person whose initial
contact with the Company may have been solicited by such party prior to the
execution of the Merger Agreement) or recommending such an unsolicited bona fide
written Competing Offer to its stockholders, if and only to the extent that (1)
(x) the Company Board of Directors determines in good faith that such a
Competing
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Offer would, if consummated, result in a transaction more favorable to the
Company's stockholders than the transaction contemplated by the Merger Agreement
and that the Person making such Preferred Proposal has the financial means, or
the ability to obtain the necessary financing, to conclude such transaction, and
(y) the Board determines in good faith that the failure to take such action
would be inconsistent with the fiduciary duties of the Board of Directors to its
stockholders under applicable law (any such more favorable Competing Offer being
referred to as a "Preferred Proposal"); and (2) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such Person, the Board of Directors receives from such Person an executed
confidentiality agreement with confidentiality provisions not materially less
favorable to such Person than those contained in the Confidentiality Agreement
dated as of June 30, 1998 between Thermatrix and the Company (the
"Confidentiality Agreement") or (B) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to a Competing Offer.
The Company agrees to notify Thermatrix orally and in writing no later
than 24 hours after receipt by the Company (or its advisors) of any Competing
Offer or any request for nonpublic information in connection with a Competing
Offer or for access to the properties, books or records of such party by any
Person that informs such party that it is considering making, or has made, a
Competing Offer. Such notice to Thermatrix will indicate in reasonable detail
the identity of the offeror and the terms and conditions of such proposal,
inquiry or contact. The Company will take no action with respect to the
Competing Offer until 48 hours after notice is received by Thermatrix.
Additional Agreements
ACCESS TO INFORMATION. Upon reasonable notice and subject to applicable
law and other legal obligations, the Company will in good faith afford to the
officers, employees, accountants, counsel and other representatives of
Thermatrix, access, during normal business hours during the period prior to the
effective time of the Merger, to all its properties, books, contracts,
commitments, personnel and records and, during such period, the Company will
furnish promptly to Thermatrix (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as Thermatrix may reasonably
request. Unless otherwise required by law, the parties will hold any such
information which is nonpublic in confidence in accordance with the
Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to such access to information will affect or be deemed to
modify any representation or warranty contained in the Merger Agreement or the
conditions to the obligations of the parties to consummate the Merger.
LEGAL CONDITIONS TO MERGER. Each of Thermatrix and the Company will take
all reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required in connection
with approvals of or filings with any Governmental Entity) and will promptly
cooperate with and will use their best efforts to furnish information to each
other in connection with any such requirements imposed upon any of them in
connection with the Merger. Each of Thermatrix and the Company will: (i) take
all reasonable
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actions necessary to obtain (and will cooperate with each other in obtaining)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other third party, required to be obtained or made by
Thermatrix or the Company in connection with the Merger or the taking of any
action contemplated thereby or by this Agreement; (ii) diligently oppose or
pursue any rehearing, appeal or other challenge which may be available to it of
any refusal to issue any Approval or of any order or ruling of any Governmental
Entity which may adversely affect the ability of the parties hereto to
consummate the Merger or to take any action contemplated by any Approval or by
the Merger Agreement until such time as such refusal to issue any Approval or
any order or ruling has become final and non-appealable; and (iii) diligently
oppose any objections to, appeals from or petitions to reconsider or reopen any
Approval or the taking of any action contemplated thereby or by the Merger
Agreement.
UPDATE DISCLOSURE. From and after the date of the Merger Agreement until
the effective time of the Merger, each party to the Merger Agreement will
promptly notify the other party in writing, by written update to its respective
Disclosure Schedule or otherwise, as appropriate, of (i) the occurrence or
non-occurrence of any event which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by the Merger Agreement not to be satisfied, or (ii) the failure of
Thermatrix or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it pursuant to the Merger
Agreement which would be likely to result in any condition to the obligations of
any party to effect the Merger and the other transactions contemplated by this
Agreement not to be satisfied. Upon such written notification, the party
responsible for such occurrence, non-occurrence, non-compliance or
non-satisfaction will have the opportunity, for a period of 20 calendar days
from the date of such written notice, to cure such Event. If any Event is so
cured, such Event will not be a breach, notwithstanding anything to the contrary
set forth in the Merger Agreement.
SECURITY INTEREST. The Company, Pentney, WEP, Wexford, in its capacity
as principal stockholder of the Company and in its capacity as the Shareholder
Representative, and Thermatrix, will execute on or before the Closing Date, a
Security Agreement creating a valid and enforceable security interest, or
comparable interest under the laws of the relevant jurisdiction, in each of the
Mannesmann Receivable and all of WEP's right, title and interest in the LIM
Funds in favor of the stockholders. See "The Merger Consideration--The
Contingent Payments--Security Interest."
COLLECTION AND PAYMENT OF THE NET PROCEEDS. Thermatrix will cause the
Surviving Corporation to use commercially reasonable efforts to maximize the
recovery of the Net Proceeds as quickly as possible and will deposit such
amounts in the Exchange Fund promptly upon receipt. See "The Merger
Consideration--The Contingent Payments."
FEES AND EXPENSES. On or before the Closing Date, the Company will
submit to Thermatrix, or cause its service providers to submit to Thermatrix, a
detailed listing of reasonable expenses actually incurred by the Company in
connection with this transaction including, without limitation, reasonable fees
and expenses of counsel, reasonable fees and expenses of accountants, the cost
of directors and officers liability insurance, funding of a reserve account for
payment of the expected fees and expenses of the Exchange Agent, and mailing and
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photocopying costs incurred in connection with the proxy statement. At the
Closing, Thermatrix will pay all such expenses of the Company; provided however,
that if such expenses exceed $100,000, exclusive of the fee owing to Hera, LLC,
which shall not exceed $50,000, the Initial Payment shall be reduced by the
amount of such excess. See "The Merger Consideration--The Initial Payment."
Conditions to Merger
The respective obligations of each party to the Merger Agreement to
effect the Merger are subject to the satisfaction of the following conditions:
(a) the Merger Agreement will have been approved by the affirmative vote of the
holders of a majority of the outstanding Shares entitled to vote thereon,
present at a meeting at which a quorum is present in person or by proxy; (b)
other than the filing of the Certificate of Merger, all authorizations,
consents, orders or approvals of, or declarations or filings with, or
expirations of waiting periods imposed by, any Governmental Entity the absence
or nonoccurrence of which would be reasonably likely to have a Material Adverse
Effect will have been filed, occurred or been obtained; (c) no temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger or limiting or restricting
the conduct or operation by Thermatrix of the business of Thermatrix or the
Surviving Corporation after the Merger will have been issued, except for any
such order, injunction restraint or prohibition which would not be reasonably
likely to have a material adverse effect on Thermatrix; nor will there be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger by any Governmental Entity which
makes the consummation of the Merger illegal.
The obligations of Thermatrix to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Thermatrix: (a) the Company will have performed in all
material respects all material obligations required to be performed by it under
the Merger Agreement at or prior to the Closing Date; provided, however, that
the Company's performance of the obligations set forth in Sections 6.5, 6.6,
6.7, 6.10, 6.11, and 6.15 of the Merger Agreement, will not be a condition to
the obligation of Thermatrix to effect the Merger; provided, however, that if
any party having knowledge of an Event shall have failed to provide written
notice of such Event to the party responsible therefor, then such Event shall
not prevent such party from being deemed to have performed its obligations in
all material respects, and Thermatrix will have received a certificate signed on
behalf of the Company by the chief executive officer and the chief financial
officer of the Company to such effect and (b) Thermatrix and SUB will have
received an opinion of counsel for the Company covering such matters as is
customary in a transaction of this type and in form and substance reasonably
satisfactory to Thermatrix.
The obligation of the Company to effect the Merger is subject to the
satisfaction of each of the following conditions, any of which may be waived, in
writing, exclusively by the Company: (a) Thermatrix will have performed in all
material respects all material obligations required to be performed by them
under the Merger Agreement at or prior to the Closing Date; and the Company will
have received a certificate signed on behalf of Thermatrix by the chief
executive officer and the chief financial officer of Thermatrix to such effect;
(b) at the effective
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time of the Merger, the Wexford Debts will be paid in full; (c) on or prior to
the Closing Date, Thermatrix will have replaced, or will have arranged for a
third party to replace, Wexford as guarantor on the Wexford Guarantees; (d) the
Company, Pentney, WEP and Thermatrix will have executed and delivered the
Security Agreement; and (e) the Company will have received an opinion of counsel
for Thermatrix and SUB covering such matters as is customary in a transaction of
this type and in form and substance reasonably satisfactory to the Company.
Termination
The Merger Agreement may be terminated at any time prior to the
effective time of the Merger whether before or after approval of the matters
presented in connection with the Merger by the stockholders of Thermatrix or the
stockholders of the Company, as follows: (a) by mutual written consent of
Thermatrix and the Company; or (b) by either Thermatrix or the Company if the
Merger will not have been consummated within the later of ninety (90) days of
the date of the Merger Agreement and the expiration of and any additional period
pursuant to Section 6.7 of the Merger Agreement, provided, however, that the
right to terminate the Merger Agreement will not be available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such date; and
provided further that if such delay is caused by the SEC, then the Merger
Agreement will terminate not later than one hundred twenty (120) days after the
date of the Merger Agreement; (c) or by either Thermatrix or the Company if a
court of competent jurisdiction or other Governmental Entity will have issued a
final order, decree or ruling, or taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger, and all
appeals with respect to such order or action have been exhausted or the time for
appeal of such order, decree, ruling or action shall have expired; or (d) by
Thermatrix if, at the Company Stockholders' Meeting (including any adjournment
or postponement thereof), the requisite vote of stockholders of the Company in
favor of the Merger Agreement shall not have been obtained (provided, that the
right to terminate the Merger Agreement will not be available to any party which
has not complied with its obligations hereunder in all material respects); or
(e) by Thermatrix if (i) the Board shall have withdrawn its recommendation of
the Merger Agreement or the Merger, (ii) an Alternative Transaction involving
the Company will have taken place or the Board will have recommended such an
Alternative Transaction to the stockholders of the Company or will have resolved
to engage in such an Alternative Transaction, or (iii) a tender offer or
exchange offer for forty percent (40%) or more of the outstanding Shares will
have been commenced or a registration statement with respect thereto will have
been filed (other than by Thermatrix or an affiliate thereof), and the Board
will have recommended that the stockholders of the Company tender their Shares
in such tender or exchange offer; or (f) by Thermatrix if a breach of any
covenant or agreement on the part of the Company set forth in the Merger
Agreement will have occurred which would cause the conditions set forth in
Section 7.2(a) of the Merger Agreement not to be satisfied, and, that with
respect to any breach of a covenant or agreement hereunder, such covenant or
agreement is incapable of being cured or, if capable of being cured, shall not
have been cured within twenty (20) Business Days following receipt by Thermatrix
of written notice of such breach from the Company; or (g) by the Company, if a
breach of any covenant or agreement on the part of Thermatrix set forth in this
Agreement will have occurred which would cause the conditions set forth in
Section 7.3(a) not to be satisfied, and, with respect to any breach of a
covenant or agreement hereunder, such covenant or
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agreement is incapable of being cured or, if capable of being cured, will not
have been cured within twenty (20) Business Days following receipt by the
Company of written notice of such breach from Thermatrix.
In the event of termination of the Merger Agreement, there will be no
Liability or obligation on the part of Thermatrix, the Company, or their
respective officers, directors, stockholders or Affiliates, except as set forth
in Section 8.3 of the Merger Agreement and further except to the extent that
such termination results from the willful breach by a party of any of its
representations, warranties, covenants or agreements in the Merger Agreement;
and provided, that the provisions of Section 8.3 of the Merger Agreement and the
Confidentiality Agreement will remain in full force and effect and survive any
termination of the Merger Agreement.
Fees and Expenses
If the Merger Agreement is terminated by Thermatrix pursuant to Section
8.1(d), 8.1(e), or Section 8.1(f) of the Merger Agreement, the Company shall pay
to Thermatrix all fees and expenses incurred by Thermatrix relating to this
Agreement and the transactions contemplated hereby within five business days
after receipt of such request which shall not exceed $300,000. If this Agreement
is terminated by the Company pursuant to Section 8.1(g) of the Merger Agreement,
Thermatrix will pay to the Company all fees and expenses incurred by the Company
relating to the Merger Agreement and the transactions contemplated thereby
within five business days after receipt of such request not to exceed $100,000.
Amendment and Extension
The Merger Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time before
or after approval of the matters presented in connection with the Merger by the
stockholders of the Company, but, after any such approval, no amendment shall be
made which by law requires further approval by such stockholders, as applicable,
without such further approval. The Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
At any time prior to the effective time of the Merger, the parties
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
THE COMPANIES
The Business of the Company
The Company is a Delaware corporation with its principal executive
offices located at 3600 West Segerstrom Avenue, Santa Ana, California 92704
(telephone number (714) 979-7300).
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The Company designs, manufactures, and sells combined cycle gas turbine
products, metallic 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 Business of Merger Sub
Merger Sub is a Delaware corporation recently organized by Thermatrix
solely for the purpose of effecting the Merger. Merger Sub is wholly-owned by
Thermatrix. Merger Sub has no material assets, and will have no material assets.
Merger Sub has not engaged in any activities except in connection with the
Merger and will cease to exist upon the consummation of the Merger. Merger Sub's
address is c/o Thermatrix Inc., 2025 Gateway Place, Suite 132, San Jose, CA
95110-1005.
The Business of Thermatrix
Thermatrix is a global industrial technology company engaged in the
development, manufacture and sale of industrial process equipment for the
destruction of volatile organic compounds and hazardous air pollutants
(collectively, "VOCs"). The core component of the Thermatrix's technology is its
proprietary flameless thermal oxidizer ("FTO"), which is capable of treating
virtually all VOCs while achieving destruction removal efficiency ("DRE") of
99.99% or higher with de minimis formation of hazardous by-products such as
oxides of nitrogen ("NOx"), carbon monoxide ("CO") and products of incomplete
combustion ("PICs"). Thermatrix sells its flameless thermal oxidizer as a
stand-alone unit or as an integrated system. In addition, Thermatrix's product
line also includes PADRE(R), a proprietary technology used to capture and
recover very low concentration VOCs from low to-medium vapor streams.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar and Share Amounts in Thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
SUMMARY OF OPERATIONS 1998 1997 1997 1996 1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $28,891 $37,548 $49,729 $43,051 $60,100 $69,897 $82,121
Operating Loss (2,377) (1,147) (3,683) (12,945) (12,536) (73,523) (16,353)
Net loss (3,351) (2,445) (5,419) (10,809) (11,352) (66,149) (10,896)
Basic loss per common (0.37) (1.38) (3.07) (6.12) (6.43) (37.48) (6.17)
share (1)
Average shares outstanding 9,124 1,765 1,765 1,765 1,765 1,765 1,765
(1)
Backlog at period end 10,950 17,690 12,435 23,899 20,613 32,250 33,500
Number of employees at 386 398 425 354 423 508 814
period end
FINANCIAL POSITION AT YEAR END
Working capital (deficit) $1,565 $4,120 $1,474 $5,163 $12,713 ($6,860) $5,695
Property, plant and equip, 4,190 4,601 4,601 5,190 5,921 10,232 15,468
net
Goodwill, net -- -- -- -- -- 2,606 53,491
Total assets 22,696 27,095 25,191 29,820 46,519 58,930 129,780
Long-term debt (1) 1,825 13,003 13,304 12,145 7,948 1,037 1,265
Other liabilities 2,270 2,088 2,118 2,435 3,689 4,128 3,300
Stockholders' equity 2,523 (5,160) (8,348) (2,820) 7,367 6,678 72,653
(deficit) (1)
FINANCIAL PERFORMANCE
Current Ratio 1.1 1.2 1.1 1.3 1.5 0.9 1.1
Gross Profit Margin 23.7% 21.0% 18.5% 9.2% 14.3% 7.5% 21.3%
</TABLE>
(1) On May 15, 1998, the Company completed its restructuring plan, including a
rights offering, a one-for-ten reverse stock split, and the conversion to equity
of approximately $11.8 million of Company debt at the rate of one share of
post-split common stock for each $1.00 of debt. The Company used $1.8 million of
the net proceeds of the rights offering to terminate the debt portion of the SVB
facility and retained approximately $400,000 of proceeds as working capital. The
share and per share data for all prior periods have been adjusted to reflect the
one-for-ten reverse stock split which was effected as part of the restructuring
plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998
(the "Form 10-Q"), and with the audited Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's annual report on Form 10-K for the year ended
December 31, 1997 included as a part of this proxy statement.
The Company
The Company operates through several subsidiaries which focus on
specific products and/or geographical regions. These entities are coordinated
through a common corporate management. Wahlco Engineered Products, Inc. (AWEP,
Inc.@) designs, manufactures and markets diverters, dampers and expansion
joints. WEP designs, manufactures and sells dampers, diverters, and expansion
joints. Pentney Engineering Ltd., installs pipework, provides general
fabrication, mechanical plant installation and manufactures hydraulic equipment.
Teddington Bellows Ltd. designs and manufactures metallic expansion joints.
Wahlco, Inc. designs, manufactures and services equipment to control air
pollution, and manufactures and markets heaters and thermocouples. Treste Plant
Hire Ltd. rents equipment to the mechanical construction industry.
On August 5, 1998, the Company and LTG Lufttechnische GmbH ("LTG")
mutually agreed to terminate the license agreement for the sale and
manufacturing of products for the reduction and control of volatile organic
compounds. The agreement with LTG was originally signed in November, 1995.
The Company is 81.5% owned by the Funds.
Results of Operations
Three months ended September 30, 1998 vs. Three months ended September 30, 1997
REVENUES. Revenues of $9.4 million for the third quarter were $1.4
million, or 14%, below revenues of $10.8 million in the third quarter of 1997.
Revenues at WEP, primarily dampers and diverters, totaled $0.8 million in the
third quarter of 1998, down $1.1 million from revenues reported in the third
quarter of 1997. This reflects the impact on this product line of the economic
slowdown in South Asia. Revenues at Pentney and Teddington in the third quarter
were down $0.2 million and $0.1 million, respectively, from revenues reported in
the third quarter of 1997, due to lower order activity in the U. K. WEP Inc.
reported revenues of $3.0 million in the third quarter of 1998, essentially
unchanged from revenues in the comparable quarter.
Revenues from the sale, rental and service of FGC systems and related
equipment totaled $2.2 million in the third quarter of 1998, down $0.2 million
compared to the third quarter of
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1997. Demand for clean air products continues to be weak, which the Company
believes is a result of on-going deregulation in the domestic electric utility
industry.
COST OF REVENUES. Cost of revenues totaled $7.2 million for the quarter
just ended compared to $8.7 million for the third quarter of 1997, 77% and 81%
of revenues, respectively. Cost of revenues decreased in the third quarter of
1998, compared to the third quarter of 1997, in line with the reduction in
revenues. Cost of revenues decreased as a percent of revenues in the third
quarter of 1998 compared to 1997 due to improved profit margins on several FGC
system contracts.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). Third quarter SG&A expense
of $3.1 million was essentially unchanged from SG&A expense in the third quarter
of 1997. SG&A expenses in the third quarter of 1998 included $300 thousand of
additional reserve for tollgate taxes and $220 thousand of costs related to a
service and installation operation in the U.K., which is now discontinued.
Absent these expenses, SG&A expenses in the third quarter would have been $2.6
million. The decrease in SG&A expense in 1998 over 1997 reflects the impact of
cost reduction programs implemented over the past year.
INTEREST EXPENSE. Third quarter interest expense totaled $183 thousand,
down from interest expense of $471 thousand reported in the third quarter of
1997. The decline in interest expense is primarily due to the elimination of
interest costs on the approximately $11.8 million of debt, owed by the Company
to WESAC, which was converted to equity as part of the Restructuring Plan. (See
Note 4 to the Form 10-Q).
INCOME TAXES. Due to the existence of net operating losses, the Company
has not recorded an income tax provision in the accompanying financial
statements. In addition, the Company has established a 100 percent valuation
allowance against deferred tax assets (consisting principally of net operating
loss carry-forwards). These operating losses expire on various dates through
2013.
NET LOSS. The 1998 third quarter net loss of $1.1 million compares to a
net loss of $1.5 million for the third quarter of 1997. The reduced loss was the
result of the above mentioned factors.
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
REVENUES. Revenues for the nine months ended September 30, 1998 of $28.9
million were $8.6 million, or 23%, below revenues of $37.5 million reported for
the same nine month period of 1997. Revenues from the sale of dampers and
expansion joints at WEP, Inc. in Maine totaled $8.1 million for the nine months
just ended, down $4.1 million from revenues of $12.2 million reported in the
comparable nine months of last year. Revenues at WEP, Inc. in 1997 benefited
from a $10.5 million backlog at December 31, 1996. Backlog at December 31, 1997
declined to $4.5 million, reflecting a low order replacement rate at WEP, Inc.
in 1998. Revenues at WEP declined $2.2 million in the nine months ended
September 30, 1998 compared to the first nine months of last year. Activity at
WEP, Inc. and WEP declined as a result of the weakness in Southeast Asian
markets. Revenues from the sale and servicing of FGC and related
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systems totaled $7.3 million during the first nine months of 1998, down $1.7
million from revenues of $9.0 million from the sales of these systems in the
first half of 1997. Demand continues to be weak for the Company=s air pollution
control products. Revenues at Pentney and Teddington were down due to lower
activity in the U. K market.
COST OF REVENUES. Cost of revenues for the nine months ended September
30, 1998 totaled $22.0 million, representing 76% of revenues, compared to cost
of revenues of $29.7 million, representing 79% of revenues for the same period
last year. Cost of revenues represented a lower percentage of revenues in 1998
due to sales of products with higher margins, particularly FGC Systems, in 1998
than those sold in 1997.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expense totaled $9.2
million for the nine months ended September 30, 1998, up $0.2 million from SG&A
expense of $9.0 million for the nine months ended September 30, 1997. SG&A
expenses for the first nine months of this year included approximately $0.6
million of expenses related to the operations and wind-down of an installation
and service operation in the United Kingdom and $0.3 million for additional
tollgate tax reserves. Absent these expenses, SG&A expense in the first nine
months of this year would have totaled $8.3 million, favorable to SG&A expense
of $9.0 million for the first nine months of last year by approximately $0.7
million. SG&A expenses, and related staffing levels, continue to be reviewed and
reduced.
INTEREST EXPENSE. Interest expense totaled $1.1 million for the nine
months ended September 1998, down from interest expense of $1.4 million reported
in the comparable nine months of 1997. The decline in interest expense is
primarily due to the elimination of interest costs on the approximately $11.8
million of debt which was converted to equity as part of the Restructuring Plan.
(See Note 4 to the Form 10-Q).
INCOME TAXES. Due to the existence of net operating losses, the Company
has not recorded an income tax provision in the accompanying financial
statements. In addition, the Company has established a 100 percent valuation
allowance against deferred tax assets (consisting principally of net operating
loss carry-forwards). These operating losses expire on various dates through
2013.
NET LOSS. The net loss for the nine month period in 1998 totaled $3.4
million, $0.9 million worse than the net loss of $2.5 million reported in the
same period of 1997. The loss this year was caused by the factors mentioned
above.
Backlog
Backlog, defined as work for which the Company has entered into a signed
agreement or has received a requisition or purchase order, totaled $10.9 million
at September 30, 1998, compared to $17.7 million at September 30, 1997 and $12.4
million at December 31, 1997. Approximately $3.4 million of the backlog at
September 30, 1998 is scheduled for delivery after December 31, 1998.
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The Company's backlog, revenues and earnings from year to year may be
substantially affected by whether the Company has received one or more
significant orders and by fluctuations in foreign currencies. The Company's
major customers have historically changed from year to year because once the
Company's products have been installed, they can operate for many years without
the need for replacement.
Year 2000 Conversion
The Company uses fully integrated operational and accounting software
packages which are commercially available in all of its major facilities.
Additionally, the Company has developed various proprietary software packages
which are integrated into several of its final products to monitor and control
the processes at customer locations. All of the commercially available products
and the proprietary software could potentially be affected by the date change in
the year 2000.
The Company continues to assess the impact of the year 2000 issue on its
operations, and has received assurances from the vendors of the licensed
operational and accounting software that all date-sensitive issues related to
the year 2000 conversion have been resolved. The Company has identified the
programming changes which are required to configure its proprietary software and
has implemented a corporate-wide corrective program.
Based upon representations from the vendors of the Company=s licensed
software, the Company believes it will be able to achieve year 2000 compliance
with regard to its operational programs. Regarding the proprietary software
installations, the required programming and software modifications have been
identified and the Company is taking steps to implement a compliance program. A
schedule is in place to achieve compliance with the remaining systems by the
year 2000 deadline. The Company is also communicating with suppliers, financial
institutions and others to coordinate year 2000 conversions.
Based on present information, the Company believes that it will be able
achieve year 2000 compliance through a combination of modifying certain existing
programs and systems and the replacement of other programs with new systems that
are already compliant.
The Company expects that expenses and capital expenditures associated
with achieving year 2000 compliance will not have a material effect on its
financial statements in 1998 and 1999. However, there can be no guarantee that
full compliance will be achieved and actual results could differ materially from
those planned.
Subsequent Event
On November 9, 1998, the Company entered into the Merger Agreement with
Thermatrix which provides for the Company to become a wholly-owned subsidiary of
Thermatrix, subject to shareholder approval. Shareholders holding more than 83%
of the shares have agreed to vote their shares for the Merger at a meeting of
stockholder to be held for that purpose. See "The Merger Consideration" and "The
Merger--The Merger Agreement."
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Liquidity and Capital Resources
The Company had a working capital position of $1.6 million at September
30, 1998, compared to working capital of $1.5 million at December 31, 1997.
The Company has sustained recurring operating losses, and has been
dependent on advances from and facilities provided by Wexford to fund cash
requirements. As a result, the report of the Company's independent auditors in
the 1997 Annual Report on Form 10-K expressed concerns about the Company's
ability to continue as a going concern, absent such financial support. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classifications of assets, or
the amounts and classification of liabilities that may result from the possible
termination of funding facilities and the consequent inability of the Company to
continue as a going concern.
In order to fund its operations, the Company would either have to
continue to borrow money or eliminate its cash flow deficits. The Merger
Agreement permits either or both of Wexford and Thermatrix to make loans to the
Company during the period prior to the closing of the merger. However, neither
Wexford nor Thermatrix is obligated to advance any such loans. The Merger
Agreement also provides that any loans provided by Wexford that are approved by
the Executive Committee will be refinanced by Thermatrix at the closing of the
merger. The Merger Agreement also provides that any loans provided by Wexford
during this period in excess of $200 thousand per month, or in excess of $500
thousand in the aggregate, would cause an equivalent reduction in the purchase
price payable to the shareholders by Thermatrix under the Merger Agreement. If
loan capital is not available, the Company would have to eliminate operating
cash flow deficits in order to meet its obligations as they become due. The
Company continues to make efforts to reduce its cash flow deficits by improving
the collection of accounts receivable and exploring cost-cutting measures, but
there is no assurance such measures will be successful. However, if the Company
remains independent, management believes that it will need to obtain a
consistent source of financing.
41
<PAGE>
<PAGE>
MARKET PRICES OF COMMON STOCK
The Shares traded on the NYSE under the symbol "WAL" until July 14,
1998. Since July 15, 1998, the Shares have been traded on the OTC Bulletin Board
under the symbol "WALO." Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The following table reflects the
range of the reported high and low closing prices of Shares on the NYSE
Composite Tape, or the OTC Bulletin Board, as the case may be, for the calendar
quarters indicated. The stock prices have been adjusted retroactively to give
effect to the Company's May 19, 1998 one-for-ten reverse stock split.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1996
First Quarter $18.75 $12.50
Second Quarter 13.75 6.25
Third Quarter 6.25 3.75
Fourth Quarter 5.00 2.8125
Year ended December 31, 1997
First Quarter 4.6875 1.25
Second Quarter 4.46875 1.40625
Third Quarter 18.125 3.4375
Fourth Quarter 8.75 3.75
Year ended December 31, 1998
First Quarter 5.625 2.1875
Second Quarter 2.50 0.15625
Third Quarter (through September 30, 1998) 1.875 0.15625
</TABLE>
On November 6, 1998, the last full trading day prior to the execution, delivery
and public announcement of the Merger Agreement, the closing price of the Shares
was $0.40265 per share, as reported on the OTC Bulletin Board. As of such date,
the high and low sale prices of the Shares were $0.40625 and $0.203125,
respectively. On December 2, 1998, the most recent practicable date prior to the
mailing of this proxy statement, the closing price of Shares was $0.09 per
share, as reported on the OTC Bulletin Board. Stockholders are encouraged to
obtain current market quotations for Shares.
The Company has never paid dividends or made any distribution on or with
respect to the Shares, other than issuance of rights in the rights offering.
42
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<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table contains certain information as of November 1, 1998
regarding the beneficial ownership of the Shares by (i) the Company's Chief
Executive Officer, (ii) the other most highly compensated executive officers of
the Company whose compensation exceeded $100,000 in 1997 and who were serving as
such at the end of the 1997, (iii) all of the directors and executive officers
of the Company as a group, and (iv) each person or entity who, to the knowledge
of the Company, is the beneficial owner of more than five percent of the
outstanding Shares.
The numbers and percentages assume for each person or group listed, the
exercise of all stock options and warrants held by such person or group that are
exercisable within 60 days of November 1, 1998, in accordance with Rule
13d-3(d)(1) of the Securities Exchange Act of 1934, but not the exercise of such
stock options owned by any other person. All outstanding options will be
canceled as of the effective time of the Merger. Unless otherwise noted,
beneficial ownership includes both sole voting and dispositive powers with
respect to the Shares shown. On November 1, 1998 there were 16,323,074 Shares
outstanding.
<TABLE>
<CAPTION>
NAME (1) NUMBER OF SHARES PERCENT OF
BENEFICIALLY OWNED (2) CLASS
<S> <C> <C>
Wexford Management LLC 14,485,720 (3) 82.8%
C. Stephen Beal 566,860 (4) 3.4%
Maarten D. Hemsley 74,341 (5) *
Paul H. Hunn 15,000 (6) *
Mark L. Plaumann 25,000 (6) *
Barry J. Southam 82,762 (6) *
A. Noel DeWinter 42,500 (6) *
-----------------
All directors and executive
officers as a group (6 persons) 806,463 (7) 4.9%
</TABLE>
- ------------------
* One percent or less.
(1) The address of Wexford Management LLC is 411 West Putnam Avenue,
Greenwich, Connecticut 06830. The address of all of the individuals
listed in the table above is the address of the Company's headquarters
set forth on the first page of this proxy statement.
(2) Share numbers are based upon information furnished by the stockholders
themselves or on filings with the Securities and Exchange Commission.
(3) Represents Shares owned by the Funds (as described in the chart below)
of which Wexford is deemed to be the beneficial owner. Wexford acts as
investment manager for the Funds and has sole voting and dispositive
power over the Shares. Includes 1,174,845 Shares subject to purchase
under currently exercisable warrants, which will be canceled at the
effective time of the Merger.
(4) Of these Shares, 300,000 are purchasable within 60 days of November 1,
1997 under an outstanding stock option at an exercise price of $0.875
per Share, which will be canceled as of the effective time of the
Merger.
(5) Of these Shares, 15,000 are purchasable within 60 days of November 1,
1997 under an outstanding stock option at an exercise price of $0.875
per Share, which will be canceled as of the effective time of the
Merger.
(6) These Shares are purchasable within 60 days of November 1, 1997 under an
outstanding stock option at an exercise price of $0.875 per Share, which
will be canceled as of the effective time of the Merger.
(7) This number includes 480,262 Shares that are purchasable within 60 days
of November 1, 1997 under outstanding stock options at an exercise price
of $0.875 per Share, which will be canceled as of the effective time of
the Merger.
43
<PAGE>
<PAGE>
Pursuant to a Stock Purchase Agreement dated as of May 15, 1995, WESAC,
purchased all of the Shares (amounting to 14,260,000 Shares before giving effect
to the Reverse Stock Split) held by Pacific Diversified Capital Company ("PDC"),
which represented approximately 81% of the then outstanding Shares, 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 was set at 13%. The purchase by WESAC was
funded through the sale of 94% of its Shares to two of the Funds and the balance
to Mr. Hemsley, Mr. Beal and another executive of the Company who has since
resigned. As a result of the restructuring plan, which included a conversion of
approximately $11.8 million of Company debt into equity, liquidation of WESAC
and a distribution of all of its Shares to its stockholders and creditors, the
Funds received the Shares. A Schedule 13D filed by WESAC, Wexford and the Funds
listed below indicates that the Funds have sole voting and dispositive powers
with respect to the Shares.
<TABLE>
<CAPTION>
TOTAL SHARES
SHARES WARRANT BENEFICIALLY
NAME OF STOCKHOLDER DIRECTLY OWNED SHARES* OWNED
<S> <C> <C> <C>
Wexford Special Situations 1996, L.P. 1,263,698 786,089 2,049,787
Wexford Special Situations 1996 234,760 146,033 380,793
Institutional, L.P.
Wexford Special Situations 1996, Limited 64,025 39,827 103,852
Wexford-Euris Special Situations 1996, L.P. 326,170 202,896 529,066
Wexford Capital Partners II, L.P. 7,995,556 -0- 7,995,556
Wexford Overseas Partners I, L.P. 3,426,666 -0- 3,426,666
---------- --------- ----------
Totals: 13,310,875 1,174,845 14,485,720
</TABLE>
*These warrants are currently exercisable at a purchase price of $1.36 per
share and by their terms expire in 2001, but will be terminated at the
effective time of the Merger.
STOCKHOLDER PROPOSALS
The Company will hold its next Annual Meeting only if the Merger is not
consummated. In the event of such a meeting, in order to have been considered
for inclusion in the Company's proxy materials for the next Annual Meeting of
Stockholders, stockholder proposals must have been received at the Company's
principal executive offices in Santa Ana, California no later than a reasonable
time prior to the printing and mailing of its proxy materials.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements set forth in this proxy statement
have been audited by Arthur Anderson LLP, independent certified public
accountants.
Representatives of Arthur Andersen LLP will attend the special meeting
and will have an opportunity to make a statement and to respond to appropriate
questions from stockholders.
44
<PAGE>
<PAGE>
OTHER MATTERS
The Company has filed its Annual Report on Form 10-K for the year ended
December 31, 1997 with the Securities and Exchange Commission as well as
quarterly reports on Form 10-Q for each of the first three fiscal quarters of
1997. These reports contain detailed information concerning the Company and its
operations, supplementary financial information and certain schedules.
A copy of the Form 10-K, and Form 10-Q reports, without exhibits, will
be furnished to stockholders free of charge upon written request to:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, California 92704.
Attention: Investor Relations
A copy of any exhibit will be furnished to any stockholder upon written request
to the same address and payment to the Company of a copying charge of
twenty-five cents per page. The Form 10-K is also included as a part of this
proxy statement.
December 7, 1998 By Order of the Board of Directors,
Roger M. Barzun, Secretary
45
<PAGE>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____ to ____
COMMISSION FILE NUMBER 1-10478
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0391175
(State or other jurisdiction of incorporation (I.R.S. Identification No.)
or organization)
3600 WEST SEGERSTROM AVENUE
SANTA ANA, CALIFORNIA 92704
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 979-7300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
Common Stock, Par Value $0.01 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K [X]
At February 27, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $1,482,688.
At February 27, 1998, there were 17,649,000 shares of the registrant's common
stock outstanding.
Part III incorporates information by reference from a definitive Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
the close of the registrant's fiscal year ended December 31, 1997.
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Wahlco Environmental Systems, Inc. ("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 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.
GENERAL DEVELOPMENT OF BUSINESS
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. ("WESAC"), an affiliate
of Wexford Capital Corporation, its 81% stock interest in the Company.
On March 30, 1990, the Company acquired all of the capital stock of Wahlco
Engineered Products, Inc. ("WEP Inc.") 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.
DESCRIPTION OF THE BUSINESS
The Company's business is operated through its subsidiaries:
Wahlco Engineered Products, Inc. (U. S.) 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.) ("WEP 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.
Wahlco, Inc. (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.
2
<PAGE>
<PAGE>
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.
Treste Plant Hire, Ltd. (U. K.) 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 and other industrial markets.
DAMPERS, DIVERTERS, EXPANSION JOINTS, PIPING SYSTEMS, HYDRAULIC EQUIPMENT AND
OTHER SERVICES (78% OF 1997 REVENUES; 80% OF 1996 REVENUES)
Gas flow diverters direct the flow of exhaust gases from gas turbines
either to the atmosphere via the 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 1996 and 1997, only a small portion of these businesses was driven by
environmental regulation.
WARRANTIES. Warranties for the Company's products generally average from 12
to 48 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, NOX, VOC SYSTEMS, HEATERS AND THERMOCOUPLES, AND RELATED PRODUCTS AND
SERVICES (22% OF 1997 REVENUES; 20% OF 1996 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 ESPs.
3
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<PAGE>
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.
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
tubular heaters, immersion heaters, duct heaters, tubular elements, and silicone
rubber heaters.
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.
WARRANTIES. Warranties for FGC, NOx 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, NOx 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 twenty-four U.S. patents and corresponding foreign
patents and/or applications. Existing patents expire between 1999 and 2015.
Although initially enhanced by its patent rights, the Company believes its
ability to compete effectively in the FGC market depends primarily upon its
engineering, scientific and technological expertise and its reputation for
successful installations. This includes a database of information relating to
coal and ash analysis and precipitator size and operating conditions. In
addition, the Company has competed successfully in the sale of its sulfur
dioxide-based and ammonia conditioning systems, which are not protected by
patents, and in the sale of its sulfur-burning FGC systems in foreign countries
in which it does not have significant patent protection.
During 1996, the Company was awarded four new U.S. patents covering
different approaches to environmentally beneficial "In-duct gas conditioning"
which the Company believes could become an important FGC technology. Foreign
patent applications for this technology are in progress.
In May 1992, the Company acquired from L&C Steinmuller GmbH three U.S. and
a number of corresponding foreign patents which broadly cover the core component
of Wahlco's entry into the market for the control of NOx emissions.
The Company holds several U.S. and foreign patents, relating to dampers,
diverters and expansion joints, which expire between 1998 and 2015. In addition,
a number of applications are pending, for some of which patent grants are
imminent. As these patents and applications relate to a diverse range of
products, and because the Company's business is more dependent upon the
engineering quality of the Company's products, the Company does not view its
success as dependent upon any single patent.
Dampers, diverters, expansion joints and related services are marketed
under the trademarks or tradenames "WAHLCO," "METRO-FLEX," and "TEDDINGTON."
4
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<PAGE>
RESEARCH AND PRODUCT DEVELOPMENT
Expenditures for research and product development were approximately $294
thousand in 1997 and $277 thousand in 1996. 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. In its diverter product range, Wahlco is carrying out
research into the effects of high temperature cycling and flow characteristics
of GT exhaust systems.
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, Inc.'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.
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.
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. During 1997, the primary VOC control markets
in the U.S. were wood products, semiconductor manufacturing, printing/coating,
surface finishing, metal decorating and chemical processing.
Marketing and sales for Wahlco Engineered Products, Inc. ("WEP, Inc.") is
based in Lewiston, Maine and focuses on customers in the power, pulp & paper,
cement, metals, and petro-chemical industries in North, Central and South
America through a network of approximately 28 independent sales representative
organizations.
WEP, Inc. also markets dampers and expansion joints to customers in Europe
and Asia through a network of 18 independent sales representative organizations
in Europe and Asia. In addition, WEP, Inc. sell diverters to U.S. based
customers for projects in Europe and Asia.
WEP Ltd.'s products are marketed internationally by 28 direct and
independent sales representatives in 34 countries. Sales, engineering and
technical support are performed from the Chesterfield, U.K. facility.
Pentney Engineering Ltd. is based in Chesterfield, England with a branch
office in Doncaster, England. These operations are involved in turnkey
mechanical plant installation and high-integrity steel and pipe-work
fabrication.
Teddington primarily markets its products through 11 of its own sales
agents.
Treste Plant Hire is based in Chesterfield, England, and operates a
mechanical equipment rental business.
5
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CUSTOMERS
No customer accounted for more than 10% of the Company's revenues in 1997.
(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 domestic manufacturers
including Chemithon, Inc. and Wilhelm Environmental Technologies, Inc., have
been successful in securing FGC contracts.
As a result of price competition, Wahlco has experienced a decline in
market share and in overall FGC margins. During the period 1993-1997, Wahlco
confronted competitive pricing pressures by reducing certain engineering and
manufacturing costs and by reconfiguring various products to better meet
customer demand.
Since there are several alternatives to FGC systems, Wahlco faces
substantial competition from companies providing devices which reduce
particulate emissions. Examples of such devices are scrubbers, certain ESPs, and
baghouses. Numerous factors may be considered by an electric utility in
determining whether to install FGC systems or an alternative technology to
achieve compliance. These include the amount of initial capital expenditures,
issues and policies related to fuel sources, related on-going operating and
maintenance costs, availability and associated costs of low and/or high sulfur
coal, the particular emission standards applicable to the public utility, and
the value of any credits or allowances which may be available.
One of the largest factors affecting the market and its competitive nature
has been the utilities' strategy to postpone adding FGC and other compliance
equipment by trading compliance credits and blending coals. By applying credits
earned on plants operating well within compliance levels to plants operating
below acceptable limits, some utilities have been able to postpone expenditures
for clean air technologies. In addition, 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 competes 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.
6
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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.
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 has
been a general increase in competition and an associated decrease in unit
prices. Changes specific to utility industry customers, such as the industry
wide deregulation and the availability of emission credit trading, caused many
air pollution control equipment customers to reevaluate or postpone capital
equipment decisions.
EMPLOYEES
At December 31, 1997, the Company employed 425 persons, of whom 316 were
engaged in production and operations, 35 were engaged in engineering and
scientific research, 42 were engaged in accounting and administration, 25 were
engaged in sales, and 7 were in general management.
At December 31, 1996 the Company employed 354 persons. The increase to 425
personnel at the end of 1997, primarily reflects the hiring of approximately 50
direct laborers at Pentney Limited in December to complete a contract in Europe.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS; EXPORT SALES
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. The collapse in Asian financial
markets in late 1997 and early 1998 is having a negative effect on certain of
the Company's products.
7
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ITEM 2. 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 thousand 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.
WEP Ltd., Pentney and Treste operate 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 32,000 square feet of manufacturing
space are subleased, which generates approximately $100 thousand per year. Lease
payments required on these facilities total $277 thousand per year. These lease
payments, which are part of the purchase agreement when the Company purchased
Pentney Engineering Ltd., are made to a company which is 50% owned by an officer
of the Company and a previous co-owner of Pentney Engineering Ltd. Teddington
owns and operates a 75,000 square foot facility near Swansea, in South Wales. In
March 1993, the Company purchased the facility for approximately $227 thousand.
The Company believes that its facilities are adequate for its current
operations.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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, 50, 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 February 1998. Prior thereto, he was Senior Vice
President, FGC Technologies, since March 1997. He served as Senior Vice
President, International Sales and Marketing for the Company since September
1991.
The officers are elected annually by the Board of Directors at the first
meeting following the Annual Meeting of Stockholders. There is no family
relationship between any of the officers or directors. There were no
arrangements or understandings between any officer and any other person pursuant
to which he was elected as an officer.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICE FROM JANUARY 1, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
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>
COMMON STOCK PRICE FROM JANUARY 1, 1996 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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>
The Company's Common Stock is listed on the New York Stock Exchange and
trades under the symbol WAL. At March 3, 1998, there were approximately 271
stockholders of record of the Company's Common Stock. This number does not
include shareholders whose shares are held in the name of a nominee.
ITEM 6. SELECTED FINANCIAL DATA
(Dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
SUMMARY OF OPERATIONS 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $49,729 $43,051 $60,100 $69,897 $ 82,121
Operating loss (3,683) (12,945) (12,536) (73,523) (16,353)
Net Loss (5,419) (10,809) (11,352) (66,149) (10,896)
Basic loss per common (0.31) (0.61) $(0.64) $(3.75) $ (0.62)
share
Average shares outstanding 17,649 17,649 17,649 17,649 17,649
Backlog at year end $12,435 $23,899 $20,613 $32,250 $33,500
Number of employees at 425 354 423 508 814
year end
- -------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Working capital (deficit) $ 1,474 $ 5,163 $12,713 $(6,860) $ 5,695
Property, plant and 4,601 5,190 5,921 10,232 15,468
equipment, net
Goodwill, net - - - 2,606 53,491
Total assets 25,191 29,820 46,519 58,930 129,780
Long-term debt 13,304(1) 12,145 7,948 1,037 1,265
Other liabilities 2,118 2,435 3,689 4,128 3,300
Stockholders' equity (8,348)(1) (2,820) 7,367 6,678 72,653
(deficit)
- -------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Current ratio 1.1 1.3 1.5 0.9 1.1
Gross Profit Margin 18.5% 9.2% 14.3% 7.5% 21.3%
</TABLE>
(1) The Company initiated a Capital Restructuring Plan which is described
in Management's Discussion and Analysis of Financial Condition and Results of
Operations. Long-Term Debt and Stockholders' Equity at December 31,
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1997, adjusted to give effect to the Capital Restructuring Plan, would be
approximately $0.4 million and a positive $5.1 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
Revenues in 1997 of $49.7 million increased $6.7 million, or 16%, from
revenues of $43.0 million in 1996. Revenues in 1996 included $4.0 million of
revenues from discontinued businesses, primarily from operations in Italy, the
sale of products from the Company's license agreement with Viking Water Systems,
Inc. and from the operations in Australia. Revenues in 1997 from continuing
businesses increased $10.7 million from revenues reported in 1996.
Revenues from the sales of gas flow diverters, dampers and expansion joints
at WEP, Inc. and WEP Limited increased $7.2 million. Revenues at Wahlco, Inc.
increased $3.1 million, from $8.0 million in 1996 to $11.1 million in 1997, the
result of five significant contracts in late 1996 and early 1997. Sales of
metallic expansion joints at Teddington Bellows decreased $0.8 million in 1997.
International revenues accounted for 64% of total revenues in 1997 compared to
67% of total revenues in 1996.
Cost of revenues in 1997 totaled $40.5 million and represented 82% of
revenues. In 1996, the Company's cost of revenues totaled $39.1 million and
represented 91% of revenues. Since cost of revenues in 1996 included $5.0
million of costs related to the three discontinued businesses mentioned above,
1996 cost of revenues, excluding the three operations, totaled $34.1 million
which represented 87% of revenues related to the ongoing businesses. The
decrease in cost of revenues, as a percent of revenues, for the continuing
businesses in 1997 compared to 1996 was due to a lower level of contract
provisions in 1997 versus 1996 and improved contract performance at Wahlco, Inc.
and WEP Ltd. In 1996, contract provisions totaling approximately $1.5 million
were taken in cost of revenues for several contracts at WEP Ltd. and Pentney. In
1997, these provisions totaled $0.7 million. Activity at Pentney temporarily
increased in the month of December as this operation hired significant
short-term direct laborers to complete one contract. Cost of revenues at Wahlco,
Inc. decreased to 77% of revenues in 1997 from 82% of revenues in 1996, due to
tighter contract and manufacturing cost controls on large domestic contracts,
reduced levels of warranty expenses and lower unabsorbed manufacturing and
engineering overhead as a result of increased 1997 revenues.
Selling, general and administrative (SG&A) expense, before restructuring
charges and intangible write-downs, totaled $12.9 million in 1997, down $4.0
million and $6.3 million from SG&A expense of $16.9 million and $19.2 million in
1996 and 1995, respectively. SG&A expense, as a percent of revenues, before
restructuring charges and intangible write-downs, was 26% in 1997, 39% in 1996
and 32% in 1995. SG&A expenses in 1997 benefited from the absence of
approximately $2.4 million of expenses related to the discontinued operations in
Italy, Australia and at Viking Water Systems, Inc. Additionally, SG&A expenses
in 1997 were down from 1996 levels in all but two continuing operations, as a
result of personnel reductions and tighter cost controls. SG&A expenses 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 in 1996 related
to reserves required in the Company's Italian operation. SG&A expenses in 1997
included approximately $0.9 million of increased bad debt and contract related
accruals.
Net interest and other expenses increased $0.9 million in 1997 over 1996.
Interest expense increased $0.2 million, as a result of increased borrowings
from WESAC, and other income declined in 1997 with an absence of gains on the
sales of fixed assets and higher miscellaneous other income reported in 1996.
The Company was unable to provide a tax benefit against domestic losses in
1997 due to the absence of deferred tax liabilities. Deferred tax liabilities of
$5.0 million, recorded at the time of the acquisition by WESAC of PDC's shares
in the Company, were consumed by domestic losses prior to 1997.
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
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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 and De-NOx 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 $16.9 million in 1996, down from
$19.2 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% majority stockholder, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a negative cash flow from operating activities in 1997 of
$3.3 million, compared to a negative cash flow of $4.1 million in 1996. The
negative cash flow in 1997 resulted from the net loss of $5.4 million, partially
offset by reductions in working capital, principally accounts receivable and
inventories. The negative cash flow in 1996 resulted primarily from the net loss
of $10.8 million reported in that year, partially offset by a reduction in
inventories and accounts receivable.
In February 1997, 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 "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. In 1997 and 1996, the Company funded
its operating cash flow deficits through borrowings from its 81% stockholder,
WESAC and the Chase Facility, as further described below.
11
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The Company had a working capital position of $1.5 million at December 31,
1997 compared to working capital of $5.2 million at December 31, 1996. The
decrease in working capital reflects a $3.6 million reduction in current assets,
primarily accounts receivable and inventories, coupled with a $2.6 million
increase in notes payable, reflecting borrowings from the Chase Facility.
To secure the Company's performance on long-term contracts and customer
advances, the Company is contingently liable in the amount of $4.1 million at
December 31, 1997 under standby letters of credit and performance bonds. These
are secured by $1.2 million of restricted cash at December 31, 1997.
Capital expenditures in 1997 totaled $645 thousand compared to $402
thousand in 1996. Approximately $305 thousand was spent on additions to the
rental equipment inventory at Treste Plant Hire Ltd., approximately $91 thousand
was spent for information networks and computers, $78 thousand on
fixtures/equipment at a new Pentney operation and the balance for new machinery
and equipment.
In October 1995, the Company entered into a loan and security agreement
with Silicon Valley Bank. 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 $1.8 million at December 31, 1997, which included $1.7 million
of cash borrowings and $109 thousand of cash collateral provided by WBSAC for
letters of credit issued under this loan arrangement.
In August 1996, WESAC agreed to lend the Company up to $1.6 million at an
annual rate of 13%. The Company had drawn $1.5 million against this loan as of
December 31, 1997, and issued warrants covering 3,404,255 shares of common stock
to four WESAC partnerships which provided the funding.
On September 18, 1997, the Company announced plans to make a rights
offering to its public stockholders. Holders of the 3,389,000 common shares
publicly traded were issued eight rights for each share of stock owned. Each
right entitles the holder to purchase one share of the Company's common stock at
$0.10 per share. The rights are freely transferable. The Company filed a
registration statement relating to the rights offering on February 3, 1998 and
the rights offering received stockholder approval on March 2, 1998.
A total of 27,112,000 rights have been offered to the existing shareholders
to purchase pre-split shares of the Company's common stock at the exercise price
of $0.10 per share. The Wexford 1995 Funds have agreed to purchase at the
Subscription Price, all shares not subscribed for in the Rights Offering, if
any. As a result, the Company will receive cash proceeds of approximately $2.7
million from the rights offering before deduction of cash expenses, which are
estimated at $0.5 million, for estimated net proceeds of $2.2 million. The
Company plans to utilize $1.7 million of these net proceeds to pay off the
Silicon Valley Bank facility mentioned above.
The Company's rights offering is part of a plan of financial restructuring
which expires on May 6, 1998. As of April 30, 1998, the Company will owe WESAC a
total of approximately $11.7 million for loans made by WESAC at various times to
the Company in 1995 and 1996. Subsequent to the rights offering, the Company
intends to effect a one-for-ten reverse stock split on or about May 13, 1998.
After the completion of the rights offering and the reverse stock split, the
WESAC debt will be converted into common stock of the Company at a rate of $1.00
of converted debt for each share of post-split common stock. After giving effect
to the rights offering, the reverse stock split and the WESAC debt conversion,
there will be approximately 16,261,000 shares of common stock of the Company
issued and outstanding.
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 $3.0 million (the
"Tranche A Line") until the closing of the rights offering. 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.
At the closing of the rights offering, the Wexford Funds under the 1998
credit agreement will make available to the Company an additional line of credit
of up to $2.5 million (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
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Chase Facility, described below, on or after January 30, 1998, the Company's
availability under the Tranche A Line, through the closing date of the rights
offering, or the Tranche B Line, from and after the closing of the rights
offering, will be reduced dollar for dollar by the amount of such borrowings.
The Company has drawn $1.5 million under the Tranche A facility and
anticipates that it will need to draw a total of $2.5 million as Tranche A loans
prior to the closing of the rights offering. Any amounts drawn under the Tranche
A facility and not repaid by the proceeds of the rights offering will be
extended to December 31, 2000. The Company does not expect to repay Tranche A
advances from the net proceeds of the rights issue, rather the remaining funds
will be used to fund current working capital requirements.
The Chase Facility had a funding capacity of approximately $5.5 million at
December 31, 1997 and the Company's total cash borrowings under the Chase
Facility totaled $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 Letters of credit under the
Chase Facility. 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 Company of the terms applicable to such loan or letter of credit.
The current borrowings bear interest at the average annual rate of 9.5%.
The Company plans to use the Chase Facility for letters of credit and
off-shore bank guarantees, as well as loans to the extent the terms offered are
advantageous to the Company. The Chase Facility supplements the 1998 Credit
Agreement.
Because the proceeds of the rights offering will be utilized to pay down
the $1.7 million secured loan with Silicon Valley Bank, and WESAC will convert
approximately $11.7 million of secured debt, the only funded debt remaining on
the balance sheet after the completion of the restructuring plan will be the
approximately $2.65 million of short-term funding provided through the Chase
Facility through the end of December 1997, funds outstanding under the Tranche A
line and certain equipment leases. The Company anticipates that the rights
offering will provide it with working capital of approximately $500 thousand,
after retiring the Silicon Valley Bank loan and paying expenses related to the
offering. Additionally, the Company will have access to the $2.5 million Tranche
B line upon the completion of the rights offering and the debt conversion.
The Company believes that the new 1998 Credit Agreement and the net cash
available from the rights offering, will be adequate to fund the Company's
operations during 1998. Although loans will be done pursuant to the 1998 Credit
Agreement or the Chase Facility, which are either collateralized or funded by
the Wexford Funds (the 81% parent), there can be no assurance that (i) loans
will be available under the 1998 Credit Agreement or the Chase Facility, or if
made, will not be called for repayment, or (ii) such sources of liquidity will
be sufficient to meet the Company's needs. 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. This could have the
effect of requiring that additional cash resources be obtained. Therefore, the
Company is continuing to seek additional sources of financing, as well as
exploring unrelated sources of new equity capital, although there can be no
assurance that the Company will be successful in doing so or that any such
financing or equity capital would be available on acceptable terms.
The Company has been out of compliance with certain of the NYSE listing
standards for some time. In connection with the proposed restructuring, the
Company will issue additional shares of common stock and has met with the NYSE
on both of these matters. While the Company intends to address the compliance
issues, there is no assurance that the restructuring plan will allow the Company
to achieve compliance with the NYSE listing criteria.
YEAR 2000 CONVERSION
The Company uses fully integrated operational and accounting software
packages which are commercially available in all of its major facilities.
Additionally, the Company has developed various proprietary software packages
which are integrated into several of its final products to monitor and control
the processes at customer locations. All of the commercially available products
and the proprietary software could potentially be affected by the date change in
the year 2000.
The Company continues to assess the impact of the year 2000 issue on its
operations, and has received assurances from the vendors of the licensed
software that all date-sensitive issues related to the year 2000 conversion have
been
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resolved. The Company is aware of programming changes which are required to
configure its proprietary software and, is in the process of detailing a plan to
further identify the issues and implement a corrective program. Findings to date
do not suggest that these costs will be material.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130 REPORTING COMPREHENSIVE INCOME and SFAS No. 131 DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION were issued in June
1997. The Company will adopt SFAS No. 130 and SFAS No. 131 in 1998 and
anticipates that such adoption will not materially impact the Company's
financial statements.
BACKLOG AND BOOKINGS
Backlog at December 31, 1997 was $12.4 million compared to $23.9 million at
December 31, 1996. The backlog at WEP, Inc. returned to more normal levels from
a record high on December 31, 1996 and the backlog at Wahlco, Inc. is down due
to the depressed market for domestic air pollution control products. 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 $2.2
million of the December 31, 1997 backlog is scheduled for delivery after
December 31, 1998. 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, 1997 was $2.3
million (net of tax) compared to $2.0 million as of December 31, 1996.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURES
Statements contained in this report, including Management's Discussion and
Analysis, are forward looking statements that involve a number of risks and
uncertainties which may cause the Company's actual operating results to differ
materially from the projected amounts. Among the factors that could cause actual
results to differ materially are risk factors listed from time to time in the
Company's SEC reports including:
the Company's highly competitive marketplace,
changes in, as well as, enforcement levels of federal, state and local
environmental legislation and regulations that change demand for a
significant portion of the Company's products and services,
the ability to obtain new contracts (some of which are significant) from
existing and new clients,
the execution of the expected new projects and those projects in backlog
within the most recent cost estimates and
the favorable resolution of existing claims, including warranty issues,
arising in the ordinary course of businesses.
14
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<PAGE>
ITEM 8. 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, 1997 and 1996, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 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 majority
shareholder. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company has announced a capital
restructuring plan, in conjunction with its majority shareholder, which is
described in Note 2. The majority shareholder has indicated its willingness to
fund 1998 working capital requirements subject to the covenants of the 1998
credit agreement. 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
March 13, 1998 Arthur Andersen LLP
15
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<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS: $ 1,645 $ 1,853
Cash and cash equivalents 1,219 1,050
Restricted cash and cash equivalents 10,322 12,069
Accounts receivable
Cost and estimated earnings in excess of 2,357 2,148
billings on uncompleted contracts
Inventories 2,899 4,738
Other current assets 1,149 1,365
--------- ---------
TOTAL CURRENT ASSETS 19,591 23,223
Property, plant and equipment, net 4,601 5,190
Other assets 999 1,407
--------- ---------
$ 25,191 $ 29,820
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 2,978 $ 373
Accounts payable 6,801 9,622
Accrued payroll and payroll related
liabilities 1,591 1,589
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,068 1,356
Current portion of long-term debt 273 228
Taxes payable 204 317
Other accrued liabilities 5,202 4,575
--------- ---------
TOTAL CURRENT LIABILITIES 18,117 18,060
Long-term debt 13,304 12,145
Other liabilities 2,118 2,435
Deferred income taxes - -
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 or par value 90,855 90,735
Retained deficit (97,103) (91,684)
Foreign currency translation adjustment (2,276) (2,047)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (8,348) (2,820)
--------- ---------
$ 25,191 $ 29,820
</TABLE>
See notes to consolidated financial statements.
16
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<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product sales $ 42,342 $ 36,346 $ 49,558
Rental, service and other 7,387 6,705 10,542
49,729 43,051 60,100
COSTS AND EXPENSES:
Cost of revenues:
Product sales 34,970 32,685 43,421
Rental, service and other 5,570 6,412 8,099
Selling, general and administrative 12,872 16,899 19,171
Restructuring and other
intangibles write-downs - - (590)
Goodwill amortization and write-downs - - 2,535
53,412 55,996 72,636
Operating loss (3,683) (12,945) (12,536)
OTHER INCOME (EXPENSE):
Interest and other income 151 875 359
Interest and other expense (1,887) (1,663) (2,125)
(1,736) (788) (1,766)
Loss before income taxes (5,419) (13,733) (14,302)
Benefit from income taxes - (2,924) (2,950)
Net loss $ (5,419) $ (10,809) $ (11,352)
Basic loss per common share $ (0.31) $ (0.61) $ (0.64)
Diluted loss per common share (0.31) (0.61) (0.64)
Weighted average common shares
outstanding 17,649 17,649 17,649
</TABLE>
See notes to consolidated financial statements.
17
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<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL RETAINED FOREIGN
IN EXCESS EARNINGS CURRENCY TOTAL
COMMON STOCK OF PAR (ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT VALUE DEFICIT) ADJUSTMENT EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
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)
Net loss - - - (5,419) - (5,419)
Stock option programs - - 120 - - 120
Change in foreign currency
translation adjustment
(net of deferred taxes
of $123) - - - - (229) (229)
Balance, December 31, 1997 17,649,000 $ 176 $90,855 $ (97,103) $(2,276) $(8,348)
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (5,419) $(10,809)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: 1,249 1,406
Depreciation and amortization - -
Non-current asset write-downs (8) (2,924)
Deferred income taxes
Loss (gain) on sale of fixed assets 19 (83)
Deferred compensation 120 311
Changes in current assets and liabilities
net of effects from acquisitions:
Accounts receivable 1,453 4,982
Refundable income taxes - -
Costs and estimated earnings in excess of
billings on uncompleted contracts (240) 5,254
Inventories 1,772 4,596
Other current assets 179 317
Accounts payable (2,594) 24
Accrued payroll and payroll related 25 (425)
liabilities
Billings in excess of costs and estimated
earnings on uncompleted contracts (257) (1,134)
Income taxes payable (107) (87)
Other accrued liabilities 459 (5,520)
------ ------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (3,349) (4,092)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities - -
Purchase of property, plant and equipment (645) (402)
Proceeds from dispositions of property, plant
and equipment 53 46
Change in other assets 263 774
------ ------
NET CASH PROVIDED BY INVESTING ACTIVITIES (329) 418
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC 1,358 2,738
Payments to WESAC - -
Borrowings on notes payable 2,937 11
Payments on notes payable (320) (714)
Borrowings on long-term debt 69 53
Payments on long-term debt (220) (280)
Payments to Pacific Diversified Capital
Company - -
Advances from Pacific Diversified Capital
Company - -
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 3,824 1,808
Effect of exchange rate changes on cash (185) (378)
Increase (decrease) in cash and cash equivalents (39) (2,244)
Cash and cash equivalents, beginning of year 2,903 5,147
Cash and cash equivalents, end of year $ 2,864 $ 2,903
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash (paid for) received from income taxes $ (119) $ (107)
Cash (paid for) interest $ (495) $ (541)
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wahlco Environmental Systems, Inc. ("the Company") was incorporated on
February 6, 1990 as a Delaware corporation and issued ten shares of common stock
to Pacific Diversified Capital Company ("PDC"), a wholly-owned subsidiary of San
Diego Gas & Electric Company ("SDG&E"). On April 25, 1990, the Company issued an
additional 14,259,990 shares of common stock to PDC in exchange for all of the
outstanding stock of Wahlco, Inc. ("Wahlco"), at that time a wholly-owned
subsidiary of PDC.
In May 1990, the Company issued 3,389,000 shares of common stock in its
initial public offering. Total proceeds to the Company, net of underwriters'
discount and expenses related to the offering, were approximately $37,881. As a
result of the offering, PDC's ownership interest in the Company was reduced to
approximately 81%.
On May 15, 1995, PDC entered into a purchase agreement with WES Acquisition
Corporation ("WESAC"), an affiliate of Wexford Capital Corporation, under which
WESAC purchased $4,900 of the Company's outstanding debt to PDC, and PDC
contributed to the capital of the Company the remaining approximately $20,000
the Company owed to PDC. Pursuant to the same agreement, WESAC agreed to
purchase PDC's 81 percent stock interest in the Company. The share transfer was
approved under the Hart-Scott-Rodino Antitrust Act on June 2, 1995, and the
purchase of the stock interest was completed on June 6, 1995.
OPERATIONS
The Company designs, manufactures, and sells combined cycle gas turbine
products, metallic 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'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 $5,419 in 1997, $10,809 in 1996, and $11,352 in
1995, and a net cash outflow from operations of $3,349 in 1997, $4,092 in 1996,
and $10,338 in 1995. The cash flow deficits in 1997 and 1996 were funded through
borrowings from WESAC and the Chase Facility as described more fully in Note 2.
As a result, without the ongoing support of WESAC, its 81% shareholder, and
the Wexford Funds, these conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company believes that the financing
available from a restructuring plan announced in late 1997, which is more fully
described in Note 2 to the Consolidated Financial Statements, will be adequate
to fund the Company's operations during 1998. In summary, the restructuring plan
provides funds from the net proceeds available from a rights offering and a new
1998 credit agreement with the Wexford funds. Additionally, the Company's
capital structure will be enhanced by the conversion of approximately $11,730
(April 30, 1998) of WESAC debt to equity and future earnings will be benefitted
by the elimination of approximately $1,500 of annual interest expense related to
this debt.
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.
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
20
<PAGE>
<PAGE>
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from most of the Company's large contracts are recognized using
the percentage-of-completion method. Under this method, revenues are recognized
in the same proportion as the percentage of costs incurred during the period to
estimated total costs for each contract. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to revenue recognition and are recognized in the period in which the
revisions are determined. It is reasonably possible that the revenues and
estimated costs on certain contracts may change in the near term.
Revenues from other products are recognized on a completed contract basis,
where revenues and their associated costs are recognized when the contract is
complete or when the product is shipped.
Revenues from rental and service contracts are recognized over the
respective lease or service period.
Cost of revenues includes all direct materials, labor costs and indirect
costs related to contract performance such as indirect labor, warranty,
supplies, tools, repairs and depreciation.
Selling, general and administrative costs are charged to expense as
incurred.
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, 1997, $1,219 of cash was pledged to the Company's various
banks as collateral for the letters of credit and other off-shore bank
guarantees.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated over the
following estimated useful lives, predominantly using the straight-line method:
Buildings and improvements 5 to 35 years
Machinery and equipment 3 to 15 years
21
<PAGE>
<PAGE>
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 a result, management took
substantial write-downs against goodwill and other intangibles during the
quarter ended June 30, 1994, reduced the amortization period from 40 to 20 years
effective June 1, 1994 and wrote-off the remaining goodwill during the fourth
quarter of 1995. (See note 5).
In March, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("FAS 121") which changed the method
of accounting for long-lived assets. 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 1997 or 1996.
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 WESAC, retroactive to January 1,
1995. The Company has not and is not expected to enter into a similar tax
sharing arrangement with WESAC.
As a result of domestic taxable losses, the Company had tax loss
carry-forwards at December 31, 1996 sufficient to shelter $12,200 of future
taxable income.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
128, relating to the presentation of earnings per share and disclosure of
information about capital structure. FASB 128 superseded APB Opinion No. 15,
which had governed the calculation and presentation of earnings per share for
many years.
Under FASB 128, primary earnings per share is replaced with basic earnings
per share. The computation of fully diluted earnings per share, where
appropriate, is still required, but fully diluted earnings per share is called
"diluted earnings per share" under FASB 128.
Since there has been no change in the Company's average number of common
shares outstanding, the calculation of basic earnings per share under FASB 128
is identical to the calculation of earnings per share under APB Opinion No. 15.
Additionally, since the calculation of diluted earnings per share under FASB
128, for entities with losses from continuing operations, will always result in
anti-dilutive per share amounts, the provisions of FASB 128 relative to the
calculation of diluted earnings per share have no impact at the present time.
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.
22
<PAGE>
<PAGE>
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 $1,137, $981 and $2,209 in 1995, 1996, and 1997,
respectively.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 presentation.
2. CAPITAL RESTRUCTURING PLAN
On September 18, 1997, the Company announced plans to make a rights
offering to its public stockholders. Holders of the 3,389,000 common shares
publicly traded will be issued eight rights for each share of stock owned. Each
right will entitle the holder to purchase one share of the Company's common
stock at $0.10 per share. The rights expect to trade in the NASDAQ over the
counter market under the symbol WALZR. The Company filed a Registration
Statement relating to the rights offering on February 5, 1998 and the rights
offering received stockholder approval on March 2, 1998.
A total of 27,112,000 rights have been offered to the existing shareholders
to purchase pre-split shares of the Company's common stock at the exercise price
of $0.10 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 "Wexford 1995 Funds" have agreed to
purchase at the Subscription Price, all shares not subscribed for in the Rights
Offering, if any. As a result, the Company will receive cash proceeds of
approximately $2,700 from the rights offering before deduction of cash expenses,
which are estimated at $500, for estimated net proceeds of $2,200. The Company
plans to utilize $1,700 of these net proceeds to pay off the Silicon Valley Bank
facility (see Note 6).
The Company's rights offering is part of a plan of financial restructuring
which expires on May 6, 1998. As of April 30, 1998, the Company will owe WESAC a
total of approximately $11,730 for loans made by WESAC at various times to the
Company in 1995 and 1996. Subsequent to the rights offering, the Company intends
to effect a one-for-ten reverse stock split on or about May 13, 1998. After the
completion of the rights offering and the reverse stock split, the WESAC debt
will be converted into common stock of the Company at the rate of $1.00 of
converted debt for each share of post split common stock. After giving effect to
the rights offering, the reverse stock split and the WESAC debt conversion,
there will be approximately 16,261,000 shares of common stock of the Company
issued and outstanding. The Company's financial statements at December 31, 1997
do not give effect to the capital restructuring plan.
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 (the "Tranche A
Line") until the closing of the rights offering. 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.
At the closing of the rights offering, the Wexford Funds under the 1998
credit agreement will make available to the Company an additional line of credit
of up to $2,500 (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, described in Note 5, on or after January 30, 1998, the
Company's availability under the Tranche A Line, through the closing date of the
rights offering, or the Tranche B Line, from and after the closing of the rights
offering, will be reduced dollar for dollar by the amount of such borrowings.
The Company has drawn $1,500 under the Tranche A facility and anticipates
that it will need to draw a total of $2,500 as Tranche A loans prior to the
closing of the rights offering. Any amounts drawn under the Tranche A facility
and not repaid by the proceeds of the rights offering will be extended to
December 31, 2000. The Company does not expect to
23
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<PAGE>
repay Tranche A advances from the net proceeds of the rights issue, rather they
will be used to fund current working capital requirements.
The Chase Facility had a funding capacity of approximately $5,500 on
December 31, 1997 and the Company's cash borrowings under the Chase Facility
totaled $2,650. 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 $2,800 Letters of credit under the Chase Facility. 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 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
off-shore bank guarantees, as well as loans to the extent the terms offered are
advantageous to the Company. The Chase facility supplements the 1998 credit
agreement.
Because the proceeds of the rights offering will be utilized to pay down
the $1,700 secured loan with Silicon Valley Bank, and WESAC will convert
approximately $11,730 of secured debt (April 30, 1998), the only funded debt
remaining on the balance sheet will be the approximately $2,650 of short-term
funding provided through the Chase Facility through the end of December 1997,
any funds borrowed under the Tranche A line and certain equipment leases. The
Company anticipates that the rights offering will provide it with working
capital of approximately $500, after retiring the Silicon Valley Bank loan and
paying expenses related to the offering. Additionally, the Company will have
access to the $2,500 Tranche B line upon the completion of the rights offering
and the debt conversion.
The Company believes that the new 1998 Credit Agreement and the net cash
available from the rights offering, will be adequate to fund the Company's
operations during 1998. Although these loans will be effected pursuant to the
1998 Credit Agreement or the Chase Facility, which are either collateralized or
funded by the Wexford Funds, there can be no assurance that (i) loans will be
available under the 1998 Credit Agreement or the Chase Facility, or if made,
will not be called for repayment, or (ii) such sources of liquidity will be
sufficient to meet the Company's needs. 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. This could have the
effect of requiring that additional cash resources be obtained. Therefore, the
Company is continuing to seek additional sources of financing, as well as
exploring unrelated sources of new equity capital, although there can be no
assurance that the Company will be successful in doing so or that any such
financing or equity capital would be available on acceptable terms.
The Company has been out of compliance with certain of the NYSE listing
standards for some time. In connection with the proposed recapitalization, the
Company anticipates issuing additional shares of common stock and has met with
the NYSE on both of these matters. While the Company intends to address the
compliance issues, there can be no assurance that the restructuring plan will
allow the Company to achieve compliance with the NYSE listing criteria.
24
<PAGE>
<PAGE>
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INVENTORIES
Raw materials $ 1,189 $ 1,375
Work in process 1,441 3,152
Finished goods 269 211
-------- --------
$ 2,899 $ 4,738
Other accrued liabilities:
Commissions $ 946 $ 994
Warranty 2,012 1,279
Restructuring 37 249
Accrued contract costs 865 880
Other 1,342 1,223
-------- --------
$ 5,202 $ 4,575
Property, plant and equipment, at cost:
Land $ 270 $ 270
Buildings and improvements 4,272 4,290
Machinery and equipment 11,681 11,301
-------- --------
16,223 15,861
Less accumulated depreciation
and amortization (11,622) (10,671)
-------- --------
$ 4,601 $ 5,190
</TABLE>
4. GOODWILL AND OTHER INTANGIBLE WRITE-DOWNS
During 1995, 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. Since December 31, 1995, the Company
has had no goodwill on the balance sheet.
5. LINES OF CREDIT
In February 1997, 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 "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. In December 1997, the Chase Facility
had a funding capacity of $5,500 and the Company's total cash borrowings under
the Chase Facility totaled $2,650.
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 $2,800
letters of credit under the Chase Facility. Before making each loan or issuing
each letter of credit, the Chase Manhattan Bank ("Chase") advises the Company of
the terms applicable to such loan or letter of credit. The current borrowings
bear interest at the average rate of 9.5%.
25
<PAGE>
<PAGE>
Selected data, with respect to the Chase Facility is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at December 31 $2,650 $0 $0
Interest rate at December 31 9.5% 0% 0%
Maximum amount outstanding $2,650 $0 $0
Average amount outstanding $638 $0 $0
Weighted average interest rate 9.5% 0% 0%
</TABLE>
The average amounts outstanding and weighted average interest rates during
each year are based on daily balances outstanding.
6. LONG-TERM DEBT
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
$4,000working 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.
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. 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.
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 deposited cash collateral equivalent to the funds borrowed with Silicon
Valley Bank. As part of the loan and security agreement in October 1995 and
there negotiation in October 1996, the Company issued warrants to SVB to
purchase175,000 shares of the Company's Common Stock at $2.29 per share, which
warrants expire on October 26, 2000.
In December 1997, SVB agreed to extend the stated maturity of the SVB Loan
to December 31, 2000. Outstanding borrowings under the SVB Loan at December
31,1997, totaled $1,809 including $1,700 of cash borrowings and $109 of cash
collateral backing letters of credit.
In August 1996, WESAC agreed to lend the Company up to $1,600. The loan
bears interest at an annual rate of 13%, and is secured by substantially all of
the assets of the Company. Interest and a commitment fee of $32 payable to WESAC
are compounded. The Company had drawn $1,500 against this loan as of December31,
1997. As of December 31, 1997, the Company owed to WESAC approximately $11,244
including interest loans made by WESAC at various times in 1995 and 1996. On
March 13, 1998, the maturity of all of the loans with WESAC was extended to
December 31, 1999.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
7.9525% note payable, due in
monthly installments of $19 to Sanwa
Business Credit Corp. (principal
and interest) through June 2000,
secured by related lease payments $ 516 $ 702
Secured term loan from WESAC,
bearing interest at 13.0% and due
December, 1999. 6,559 5,763
Secured term loan from WESAC,
bearing interest at 13.0% and due
December, 1999. 2,696 2,372
Secured loan from Silicon Valley
Bank, bearing interest
</TABLE>
26
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
at 5.5% and due December 1999. 1,700 1,700
Secured term loan from WESAC,
bearing interest at 13.0% and due
December, 1999. 1,801 1,585
Other credit agreements 305 251
------- -------
13,577 12,373
Less current portion (273) (228)
------- -------
$13,304 $12,145
</TABLE>
The fair value of each of the long-term debt instruments discussed above,
as well as the notes payable discussed in Note 5, approximate the carrying
amounts within an insignificant difference based on current market interest
rates for similar instruments.
Under agreements reached between the Company and WESAC on April 12, 1996
and March 12, 1997, 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 $2,656 and $1,304, as of December 31, 1997
and 1996, respectively, under this agreement.
Principal payments due on long-term debt for the years subsequent to
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 273
1999 11,493
2000 1,811
2001 0
--------
Total $ 13,577
</TABLE>
7. INCOME TAXES
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ - $ - $ -
Deferred - (2,266) (2,286)
State
Current - - -
Deferred - (658) (664)
Puerto Rico
Current - - -
Deferred - - -
Foreign
Current - - -
Deferred - - -
----- -------- --------
Benefit from income taxes $ - $ (2,924) $ (2,950)
</TABLE>
27
<PAGE>
<PAGE>
The benefit from income taxes differs from the amount obtained by applying
the statutory tax rate as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal benefit at statutory rate $ (1,842) $ (4,669) $ (4,863)
Federal benefit not allowable (pre-acquisition) - - 1,326
Goodwill amortization - - 735
State taxes, net of Federal impact (224) (498) (703)
Limitation on benefit from current year net operating losses 1,506 1,327 -
Puerto Rican earnings (benefited) taxed at lower rates - - 44
Foreign losses without current benefit 560 1,816 1,032
Reduction in Federal and state tax liabilities no longer required - (900) (106)
Investment loss in foreign affiliates and other - - (415)
------- -------- --------
Benefit from income taxes $ - $ (2,924) $ (2,950)
</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.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Accruals $ 1,360 $ 1,681
Net operating loss carry forwards 6,138 4,904
Total deferred tax assets 7,498 6,585
Valuation allowance (3,629) (2,423)
Net deferred tax assets 3,869 4,162
Deferred tax liabilities
Depreciation 795 1,088
Basis adjustments on purchased assets 3,074 3,074
Total deferred tax liabilities 3,869 4,162
Net deferred tax assets (liabilities) $ 0 $ 0
</TABLE>
The Company has provided residual Puerto Rico tollgate tax on approximately
$11,000 of undistributed earnings as of December 31, 1997 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.
As a result of domestic taxable losses, the Company had tax loss
carry-forwards at December 31, 1996 sufficient to shelter $12,200 of future
taxable income.
8. RELATED PARTY TRANSACTIONS
Included in other assets at December 31, 1997 and 1996 are $270 and $282,
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.
28
<PAGE>
<PAGE>
9. 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>
1998 $1,127
1999 1,056
2000 1,010
2001 588
2002 4
------
Total $3,785
</TABLE>
Total rental expense for the years ended December 31, 1997, 1996 and 1995
was $1,193, $1,296 and $1,251, respectively.
10. 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, 1997,
1996, and 1995 were $0, $324, and $419, respectively.
11. STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan, 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
$109 and $201 in 1997 and 1996, 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 expiration date of 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.
On March 2, 1998 the stockholders of the Company approved the adoption by
the Board of Directors in November 1996 of the 1996 Employee Stock Option Plan,
which provides for the issuance of up to 2.250 million shares of common stock to
directors, officers, employees, consultants and advisors of the Company. No
options had been granted under the 1996 plan at December 31, 1997.
Information with respect to the Amended Plan follows:
<TABLE>
<CAPTION>
Rights and
options
Available Number of Rights Number of
Issuance Rights Price Stock Options
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994
Granted 1,157,390 567,510 $4.50-13.00 40,000 $
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cancelled - - 2,069,920
(124,600) - -
Outstanding at December 31, 1995 94,520 442,910 4.50-13.00 2,109,920
Granted - - 345,048
Canceled (145,510) - (220,612)
Outstanding at December 31, 1996 115,594 297,400 4.50-13.00 2,234,356
Granted - - - -
Exercised - - - (5,000)
Canceled - (17,850) - (15,000)
Outstanding at December 31, 1997 153,444 279,550 4.50-13.00 2,214,356
Exercisable 279,550 $4.50-13.00 1,790,606 $
</TABLE>
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net loss and earnings per share would have been
the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Loss: As Reported $(5,419) $(10,809) $(11,352)
Pro Forma (5,623) (11,554) $(12,084)
Basic EPS: As Reported $(0.31) $ (0.61) $ (0.64)
Pro Forma (0.32) (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, 1995,
1996 and 1997, and changes during the years then ended, is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Shares Wtd Avg Shares Wtd Avg Shares W
(000) Ex Price (000) Ex Price (000) E
----- -------- ----- -------- ----- -
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 2,234,356 $ .760 2,109,920 $ .756 40,000
Granted 0 345,048 - 2,069,920
Exercised (5,000) 0.490 0 0 0
Forfeited (15,000) 0.490 (220,612) 0.490 0
Expired 0 0 0 0
Outstanding at end of year 2,214,356 $7.762 2,234,356 $.760 2,109,920
Exercisable at end of year 1,790,606 1,419,016 753,960
Weighted average fair value of
options granted $0.53
</TABLE>
The options granted vest through 2000 and expire from 2000 to 2006.
30
<PAGE>
<PAGE>
At December 31, 1997, a total of 1,564,356 options outstanding have an
exercise price of $0.49 per share, 580,000 shares have an exercise price of
$.992 per share, 30,000 shares have an exercise price of $1.875 per share, and
40,000 have an exercise price of $7.25 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 thermal power generation
after-boiler market, the gas-turbine power-generation market, and the steel and
chemical industries. 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.
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>
1997
Revenues $27,458 $22,271 $0 $49,729
Operating loss (2,340) (1,343) 0 (3,683)
Loss before income taxes (3,772) (1,647) 0 (5,419)
Identifiable assets 15,458 9,733 0 25,191
- -----------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------
</TABLE>
Export sales were as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Canada $ 315 $ 413 $ 685
Europe 408 997 3,228
Asia 8,869 2,869 3,451
Africa and Other 297 1,932 1,331
------ ------ ------
$9,889 $6,211 $8,695
</TABLE>
31
<PAGE>
<PAGE>
There were no sales to individual customers constituting 10% or more of
total revenues in 1997, 1996 or 1995.
14. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts, the
Company at December 31, 1997 is contingently liable in the amount of
approximately $4,085 under standby letters of credit and off-shore bank
guarantees.
The Company is contingently liable under a repurchase agreement related to
the sale of a customer equipment lease contract to a lease lender in 1993. As of
December 31, 1997, the contingent liability totaled $1,467. The Company believes
any liability under the repurchase agreement is unlikely.
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.
32
<PAGE>
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Net Income
Gross Net Income (Loss)
Revenue Margin (Loss) Per Share
------- ------ ------ ---------
<S> <C> <C> <C> <C>
1997
Quarters:
First $ 12,734 $ 2,751 $ (604) $ (0.03)
Second 14,062 3,067 (390) (0.03)
Third 10,752 2,058 (1,451) (0.08)
Fourth 12,181 1,313 (2,974) (0.17)
----------- ---------- ----------- ----------
Total $ 49,729 $ 9,189 $ (5,419) $ (0.31)
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) (0.27)
----------- ---------- ----------- ----------
Total $ 43,051 $ 3,954 $ (10,809) $ (0.63)
</TABLE>
During the second and fourth quarters of 1996, the Company's gross margin,
net loss and net loss per share were affected by write-downs and restructuring
charges. In the fourth quarter of 1997, the Company's gross margin, net loss and
net loss per share were negatively impacted by contract provisions and reserves
for bad debts. See Management's Discussion and Analysis of Financial Condition
and Results of Operations.
33
<PAGE>
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Wahlco Environmental Systems, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Costs Charged to Other Deductions -
Beginning of Period and Expenses Accounts - Describe Describe(1)
------------------- ------------ ------------------- -----------
<S> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $3,206 $1,017 $1,858
Inventory valuation reserve 169 0 1
Restructuring reserve 249 0 212
Warranty reserve 1,279 2,209 1,476
------ ------ ------
Total $4,903 $3,226 $3,547
Year ended December 31, 1996:
Allowance for doubtful accounts $1,277 $2,350 $ 421
Inventory valuation reserve 286 120 237
Restructuring reserve 375 0 126
Warranty reserve 826 981 528
------ ------ ------
Total $2,764 $3,451 $1,312
Year ended December 31, 1995:
Allowance for doubtful accounts $ 923 $ 870 $ 516
Inventory valuation reserve 1,110 141 965
Restructuring reserve 1,819 (590) 854
Warranty reserve 1,662 1,137 1,973
------ ------ ------
Total $5,514 $1,558 $4,308
</TABLE>
(1) Amounts charged off during the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING ANDFINANCIAL DISCLOSURE.
None.
34
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is
included in the Company's Proxy Statement to be filed pursuant to Schedule 14A
in connection with the Company's 1998 Annual Meeting of Stockholders under the
section captioned "Election of Directors" and is incorporated herein by
reference thereto. Information regarding the Company's executive officers is set
forth in Part I hereof, above, under the caption "Executive Officers" and is
incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1998 Annual Meeting of Stockholders under the sections captioned "Directors'
Compensation" and "Executive Compensation" and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1998 Annual Meeting of Stockholders under the section captioned "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1998 Annual Meeting of Stockholders under the section captioned "Compensation
Committee Interlocks and Insider Participation" and is incorporated herein by
reference thereto.
35
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
(a) 1. Financial Statements, included in Part II of this report:
Reports of Independent Public Accountants 15
Consolidated Balance Sheets at December 31, 1997 and 1996 16
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995 17
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years ended December 31, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996, and 1995 19
Notes to Consolidated Financial Statements 20
2. Financial Statement Schedules, included in Part II of this report:
Schedule II Valuation and Qualifying Accounts 34
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable,
and therefore have been omitted.
3. Exhibits
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of the Company. (FILED AS AN EXHIBIT TO THE COMPANY'S
REGISTRATION STATEMENT NO. 33-33698, AS AMENDED.)
3.2 Bylaws of the Company. (FILED AS AN EXHIBIT TO THE COMPANY'S REGISTRATION
STATEMENT NO. 33-33698, AS AMENDED.)
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
10.1 Grant of Industrial Tax Exemption by the Commonwealth of Puerto Rico to
Wahlco International, Inc., a Delaware corporation, dated as of March 10,
1982. (FILED AS AN EXHIBIT TO THE COMPANY'S REGISTRATION STATEMENT NO.
33-33698, AS AMENDED.)
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.2 Order of Conversion of Grant of Puerto Rico Industrial Tax Exemption to
Wahlco International, Inc. dated as of October 29, 1987, and as amended
on March 8, 1989. (FILED AS AN EXHIBIT TO THE COMPANY'S REGISTRATION
STATEMENT NO. 33-33698, AS AMENDED.)
10.3 Redemption and Indemnification Agreement, dated as of October 28, 1987,
by and among Pacific Diversified Capital Company, Wahlco, Inc., Robert R.
Wahler, as Trustee of the Wahler Family Trust, Triple R, John H.
McDonald, Westfore, a California limited partnership and Corona
Properties, a California limited partnership. (FILED AS AN EXHIBIT TO THE
COMPANY'S REGISTRATION STATEMENT NO. 33-33698, AS AMENDED.)
X10.4 Form of Idemnity Agreement between the Company and each of its directors
and officers. (FILED AS AN EXHIBIT TO THE COMPANY'S REGISTRATION
STATEMENT NO. 33-33698, AS AMENDED.)
10.5 Standard Industrial Lease, dated as of September 3, 1991, by and between
Triple R, a California general partnership and Wahlco Inc., a California
corporation. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1991.)
10.6 First Addendum to Standard Industrial Lease, dated as of September 3,
1991 between Triple R and Wahlco, Inc. (FILED AS AN EXHIBIT TO THE
COMPANY'S THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1991.)
10.7 Second Amendment to Office Lease, dated as of December 16, 1991, by and
between BCG and the Company. (FILED AS AN EXHIBIT TO THE COMPANY'S THE
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1991.)
10.8 Installment Note, dated as of July 20, 1992, by and between Wahlco, Inc.
and Sanwa Business Credit Corporation, a Delaware corporation. (FILED AS
AN EXHIBIT TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1992.)
10.9 Guaranty Agreement, dated as of July 20, 1992, by and between the Company
and Sanwa. (FILED AS AN EXHIBIT TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1992.)
10.10 Security Agreement, dated as of July 20, 1992, by and between Wahlco,
Inc. and Sanwa, with accompanying Consent and Acknowledgment of the
Company, as Guarantor. (FILED AS AN EXHIBIT TO THE COMPANY'S THE
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1992.)
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
X10.11 First Amended and Restated 1990 Incentive Award Plan. (FILED AS AN
EXHIBIT TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1992.)
10.12 Letter Agreement dated August 31, 1993, by and between the Company,
Wahlco, Inc., Wahlco Power Products, Inc., a Delaware corporation,
Bachmann Companies, Inc., and Sanwa. (FILED AS AN EXHIBIT TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 1994.)
</TABLE>
37
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.13 Settlement Agreement, dated as of October 7, 1994, by and between Wahlco
Power Products, Inc. and ABB Air Preheater, Inc. (FILED AS AN EXHIBIT TO
THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1994.)
10.14 Mutual General Release, dated as of October 6, 1994, between Wahlco Power
Products, Inc. and ABB Air Preheater, Inc. (FILED AS AN EXHIBIT TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 1994.)
10.15 Assignment of Note, Loan Agreement and Collateral Documents. (FILED AS AN
EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1994.)
10.16 Promissory Note, dated as of May 15, 1995, between the Company and WES
Acquisition Corp. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994.)
10.17 Commitment letter, dated as of May 15, 1995 from WES Acquisition Corp. to
the Company for a secured term loan in the principal amount of $2
million. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1994.)
X10.18 Employment Agreement between the Company and C. Stephen Beal dated as of
May 5, 1995. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995.)
X10.19 Employment Agreement between the Company and A. Noel DeWinter dated as of
May 16, 1995. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995.)
X10.20 Employment Agreement between the Company and Barry J. Southam dated June
1, 1995. (FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON FORM
10-Q FOR THE YEAR ENDED DECEMBER 31, 1995.)
10.21 Loan and Security Agreement between Wahlco, Inc. and Silicon Valley Bank.
(FILED AS AN EXHIBIT TO THE COMPANY'S THE ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1995.)
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
10.22 Amendment and Forbearance Agreement, dated as of May 9, 1996, by and
between Silicon Valley Bank and Wahlco, Inc. (FILED AS AN EXHIBIT TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1996.)
10.23 Term Loan Agreement and Warrant Agreement and Form of Warrant between the
Company and WES Acquisition Corp. dated August 28, 1996. (FILED AS AN
EXHIBIT TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1996.)
10.24 Letter Agreement dated March 12, 1997 between the Company and WES
Acquisition Corp. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
</TABLE>
38
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.25 Letter Agreement dated April 12, 1996 between the Company and WES
Acquisition Corp. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
10.26 Promissory Note dated as of May 9, 1996 made by the Company to WES
Acquisition Corp. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
10.27 Promissory Note dated as of November 15, 1996 made by the Company to WES
Acquisition Corp. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
10.28 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996, L. P. (FILED AS AN EXHIBIT TO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
10.29 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996 Institutional, L. P. (FILED AS AN EXHIBIT TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996.)
10.30 Warrant dated as of November 15, 1996 issued by the Company to Wexford
Special Situations 1996 Limited. (FILED AS AN EXHIBIT TO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
10.31 Warrant dated as of November 15, 1996 issued by the Company to Wexford -
Euris Special Situations 1996, L. P. (FILED AS AN EXHIBIT TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996.)
10.32 Term Loan Agreement, dated as of July 28, 1995, between WES Acquisition
Corp. and the Company for a secured term loan in the principal amount of
$2.0 million. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1996.)
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
10.33 Restructuring Agreement dated as of January 30, 1998 among the Company,
WES Acquisition Corp., the other parties named therein and Wexford
Management LLC, as Agent. (FILED AS AN EXHIBIT TO THE COMPANY'S
REGISTRATION STATEMENT NO. 333-42805.)
10.34 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. (FILED AS AN EXHIBIT TO THE
COMPANY'S REGISTRATION STATEMENT NO. 333-42805.)
10.35 Agreement between the Company and ChaseMellon Shareholder Services, Inc.
re Subscription Agency. (FILED AS AN EXHIBIT TO THE COMPANY'S
REGISTRATION STATEMENT NO. 333-42805.)
10.36 $750,000 promissory note dated as of July 2, 1997 between the Company and
The Chase Manhattan Bank. (FILED AS AN EXHIBIT TO THE COMPANY'S
REGISTRATION STATEMENT NO. 333-42805.)
</TABLE>
39
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.37 $1,000,000 promissory note dated as of October 13, 1997 between the
Company and The Chase Manhattan Bank. (FILED AS AN EXHIBIT TO THE
COMPANY'S REGISTRATION STATEMENT NO. 333-42805.)
10.38 $400,000 promissory note dated as of November 17, 1997 between the
Company and The Chase Manhattan Bank. (FILED AS AN EXHIBIT TO THE
COMPANY'S REGISTRATION STATEMENT NO. 333-42805.)
10.39 Waiver letter of Silicon Valley Bank dated as of December 19, 1997 re:
extension of maturity and waiver of covenants. (FILED AS AN EXHIBIT TO
THE COMPANY'S REGISTRATION STATEMENT NO. 333-42805.)
X10.40 Wahlco Environmental Systems, Inc. 1996 Employee Stock Option Plan.
(FILED AS AN EXHIBIT TO THE COMPANY'S REGISTRATION STATEMENT NO.
333-42805.)
21 Subsidiaries of the Company. (FILED AS AN EXHIBIT TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995.)
*27 Financial Data Schedule (Filing by EDGAR only and AS AN EXHIBIT TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1997)
</TABLE>
X Management contract or compensatory plan.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report. [or if any, list them and the item numbers of the
8-K filed]
40
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: May 30, 1998 WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: /s/ C. Stephen Beal
--------------------------------------
C. Stephen Beal
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints each of C. Stephen Beal, A. Noel DeWinter and
Roger M. Barzun jointly and severally his true and lawful attorneys-in-fact and
agent with full power of substitution for him and in his name, place and stead
in any and all capacities to sign on his behalf, individually and in each
capacity stated below, to file any and all amendments to this Annual Report on
Form 10-K with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises as fully as he might or could necessary to be done in and
about the premises as fully as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE/CAPACITY DATE
<S> <C> <C>
/s/ C. Stephen Beal President & Chief Executive Officer May 30, 1998
- -------------------------- (principal executive officer) and
C. Stephen Beal Director
/s/ A. Noel DeWinter Vice President & Chief Financial May 30, 1998
- -------------------------- Officer (principal financial and
A. Noel DeWinter accounting officer)
/s/ Maarten D. Hemsley Director May 30, 1998
- --------------------------
Maarten D. Hemsley
/s/ Paul H. Hunn Director May 30, 1998
- --------------------------
Paul H. Hunn
/s/ Mark L. Plaumann Director May 30, 1998
- --------------------------
/s/ David R. A. Steadman Director May 30, 1998
</TABLE>
41
<PAGE>
<PAGE>
[FRONT SIDE OF PROXY CARD]
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
PROXY/VOTING INSTRUCTION CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
WAHLCO ENVIRONMENTAL SYSTEMS, INC. FOR THE SPECIAL MEETING ON DECEMBER 29, 1998
The undersigned appoints Roger M. Barzun and Mark L. Plaumann and each
of them, with full power of substitution in each, the proxies of the
undersigned, to represent the undersigned and vote all shares of Wahlco
Environmental Systems, Inc. Common Stock which Stock the undersigned may be
entitled to vote at the Special Meeting of Stockholders to be held on December
29, 1998, and at any adjournment or postponement thereof, as indicated on the
reverse side.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
(Continued, and to be signed and dated on the reverse side.)
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, California 92704-6495
<PAGE>
<PAGE>
[REVERSE SIDE OF PROXY CARD]
1. To approve and adopt the Agreement and Plan of Merger, dated as of November
9, 1998, by and among Thermatrix Inc., TMX Acquisition Sub I, Inc., a
wholly-owned subsidiary of Thermatrix, and Wahlco Environmental Systems, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
Change of Address and
or Comments Mark Here [ ]
The signature on this Proxy should correspond exactly with
stockholder's name as printed to the left. In the case of
joint tenancies, co-executors, or co-trustees, both should
sign. Persons signing as Attorney, Executor,
Administrator, Trustee or Guardian should give their full
title.
DATED: _____________________________________________, 1998
__________________________________________________________
Signature
__________________________________________________________
Signature
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK
PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE
ENCLOSED PREPAID ENVELOPE
<PAGE>
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THERMATRIX INC.,
TMX ACQUISITION SUB I, INC.
AND
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
DATED AS OF NOVEMBER 9, 1998
A-1
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS......................................................................................1
ARTICLE 1. THE MERGER............................................................................7
1.1 Effective Time of The Merger......................................................7
1.2 Closing...........................................................................7
1.3 Effects of the Merger.............................................................8
1.4 Directors and Officers............................................................8
ARTICLE 2. CONVERSION OF SECURITIES..............................................................8
2.1 Conversion of Capital Stock.......................................................8
2.2 Exchange of Certificates..........................................................9
2.3 Appraisal Rights.................................................................11
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF TARGET.............................................11
3.1 Organization.....................................................................12
3.2 TARGET Capital Structure.........................................................12
3.3 Subsidiaries.....................................................................13
3.4 Authority and Status.............................................................13
3.5 No Conflict; Required Filings and Consents.......................................13
3.6 SEC Filings; Financial Statements................................................14
3.7 No Undisclosed Liabilities.......................................................15
3.8 Absence of Certain Changes or Events.............................................15
3.9 Taxes............................................................................16
3.10 Restrictions on Business Activities..............................................17
3.11 Title to Properties; Absence of Liens and Encumbrances...........................17
3.12 Intellectual Property............................................................17
3.13 Agreements, Contracts and Commitments............................................18
3.14 Employees; Employment Matters....................................................20
3.15 Employee Benefit Plans...........................................................21
3.16 Litigation.......................................................................21
3.17 Licenses and Permits; Compliance with Law........................................21
3.18 Insurance........................................................................22
3.19 Related Parties..................................................................22
3.20 Clients..........................................................................22
3.21 Warranty; Unbillable Work........................................................23
3.22 Environmental Liability..........................................................23
</TABLE>
A-2
<PAGE>
<PAGE>
<TABLE>
<S> <C>
3.23 Brokers or Finders...............................................................23
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB......................................24
4.1 Organization.....................................................................24
4.2 Authority; No Conflict; Required Filings and Consents............................24
4.3 Financing........................................................................25
4.4 Sophisticated Purchaser; Access to Information; No Oral Representations..........25
ARTICLE 5. CONDUCT OF BUSINESS..................................................................25
5.1 Covenants of TARGET..............................................................25
5.2 SEC Filings; Financial Statements................................................27
5.3 Cooperation......................................................................27
5.4 Board of Directors...............................................................28
ARTICLE 6. ADDITIONAL AGREEMENTS................................................................28
6.1 No Solicitation..................................................................28
6.2 Proxy Statement..................................................................29
6.3 Stockholders' Meeting............................................................30
6.4 Consents.........................................................................30
6.5 Access to Information............................................................30
6.6 Legal Conditions to Merger.......................................................30
6.7 Update Disclosure; Breaches; Opportunity to Cure.................................31
6.8 Trading Prohibitions.............................................................31
6.9 Voting Agreement.................................................................31
6.10 Additional Agreements; Reasonable Efforts........................................31
6.11 Security Interest................................................................32
6.12 Collection and Payment of the Net Proceeds.......................................32
6.13 Payment of Wexford Debts and Replacement of Wexford Guarantees...................33
6.14 Working Capital..................................................................33
6.15 Subsidiaries.....................................................................33
6.16 Fees and Expenses................................................................33
ARTICLE 7. CONDITIONS TO MERGER.................................................................34
7.1 Conditions to Each Party's Obligation to Effect the Merger.......................34
7.2 Additional Conditions to Obligations of BUYER....................................34
7.3 Additional Conditions to Obligations of TARGET...................................35
ARTICLE 8. TERMINATION AND AMENDMENT............................................................35
</TABLE>
A-3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
8.1 Termination......................................................................35
8.2 Effect of Termination............................................................37
8.3 Fees and Expenses................................................................37
8.4 Amendment........................................................................38
8.5 Extension; Waiver................................................................38
ARTICLE 9. MISCELLANEOUS.......................................................................38
9.1 Nonsurvival of Representations, Warranties and Agreements........................38
9.2 Notices..........................................................................38
9.3 Interpretation...................................................................40
9.4 Counterparts.....................................................................40
9.5 Governing Law....................................................................40
9.6 Arbitration......................................................................40
9.7 Assignment.......................................................................41
9.8 Entire Agreement; No Third Party Beneficiaries...................................41
9.9 Severability.....................................................................41
9.10 Exhibits and Schedules Incorporated..............................................41
</TABLE>
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C>
Exhibit A Voting and Option Agreement
Schedule I Wexford Debts
Schedule II Wexford Guarantees
Schedule 3 TARGET Disclosure Schedule
Schedule 4 BUYER Disclosure Schedule
Schedule 7.2 Third Party Consents
</TABLE>
A-4
<PAGE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1998 (this
"AGREEMENT") by and among Thermatrix Inc., a Delaware Corporation ("BUYER"), TMX
Acquisition Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of
BUYER ("SUB"), and Wahlco Environmental Systems, Inc., a Delaware corporation
("TARGET").
RECITALS
A. The Boards of Directors of BUYER, SUB and TARGET deem it advisable
and in the best interests of each corporation and its respective stockholders
that BUYER and TARGET combine in order to advance the long-term business
strategies, goals and interests of BUYER and TARGET;
B. The combination of BUYER and TARGET shall be effected by the terms of
this Agreement through a transaction in which SUB will merge with and into
TARGET, TARGET will be the surviving corporation and will become a wholly-owned
subsidiary of BUYER.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
DEFINITIONS
"Alternative Transaction" shall have the meaning set forth in Section
8.1.
"Approval" shall have the meaning set forth in Section 6.6.
"Business day" means a Monday through Friday on which banks are
generally open for business in California.
"BUYER Disclosure Schedule" shall have the meaning set forth in Article
4.
"BUYER Expenses" shall have the meaning set forth in Section 8.3(a).
"Certificate of Merger" shall have the meaning set forth in Section 1.1.
"Certificate(s)" shall have the meaning set forth in Section 2.2(b).
"Closing" shall have the meaning set forth in Section 1.2.
"Closing Date" shall have the meaning set forth in Section 1.2.
A-5
<PAGE>
<PAGE>
"COBRA" shall have the meaning set forth in Section 3.14(d).
"Competing Offer" shall have the meaning set forth in Section 6.1(a).
"Confidentiality Agreement" shall have the meaning set forth in Section
6.1(a).
"Constituent Corporations" shall have the meaning set forth in Section
1.3(a).
"Contingent Payments" shall have the meaning set forth in Section
2.1(c)(ii).
"Credit Agreement" shall have the meaning set forth in the definition of
"Wexford Debts."
"Designated Amounts" shall mean (i) ,637,310 due from Mannesmann Demag
together with any fees or interest on such amount that may be recovered (the
"MANNESMANN RECEIVABLE"), and (ii) (x) ,688,310 on deposit with London
International and Mercantile, a company organized under the laws of the United
Kingdom ("LIM"), to secure WEP's obligation to indemnify LIM against any
payments LIM may be required to make to customers of WEP holding guarantees
issued by LIM to secure WEP's obligations to such customers under WEP
warranties, (y) the rate of return due to WEP on such amount and (z) any and all
other payments due and owing to WEP from LIM in respect of such amounts without
giving effect to any set off against such funds by LIM in respect of fees owed
to LIM by WEP in respect of the LIM guarantees ((x), (y) and (z) collectively,
the "LIM FUNDS").
"DGCL" shall have the meaning set forth in Section 1.1.
"Dissenting Shares" shall have the meaning set forth in Section 2.3.
"Dissenting Stockholder" shall have the meaning set forth in Section
2.3.
"Effective Time" shall have the meaning set forth in Section 1.1.
"Environmental Claim" shall mean any notice, claim, act, cause of action
or investigation by any person alleging potential liability (including potential
liability for investigatory costs, cleanup costs, governmental response costs,
natural resources damages, property damages, personal injuries or penalties)
arising out of, based on or resulting from (i) the presence, or release into the
environment, of any Hazardous Materials or (ii) any violation, or alleged
violation, of any Environmental Laws.
"Environmental Laws" shall mean all federal, state, local and foreign
laws and regulations relating to pollution or the environment (including ambient
air, surface water, ground water, land surface or subsurface strata) or the
protection of human health and worker safety, including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of
A-6
<PAGE>
<PAGE>
Hazardous Materials, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials.
"ERISA Affiliate" shall mean any corporation or other business entity
that is included in a controlled group of corporations within which TARGET is
also included, as provided in Section 414(b) of the Code; or which is a trade or
business under common control with TARGET, as provided in Section 414(c) of the
Code; or which constitutes a member of an affiliated service group within which
TARGET is also included, as provided in Section 414(m) of the Code; or which is
required to be aggregated with TARGET pursuant to regulations issued under
Section 414(o) of the Code. All ERISA Affiliates are listed in the TARGET
Disclosure Schedule.
"Event" shall have the meaning set forth in Section 6.7.
"Exchange Act" shall have the meaning set forth in Section 3.5(b).
"Exchange Agent" shall have the meaning set forth in Section 2.2(a).
"Exchange Fund" shall have the meaning set forth in Section 2.2(a).
"GAAP" means generally accepted accounting principles as in effect from
time to time, applied consistently with the principles used in preparing
financial statements of the respective party.
"Governmental Entity" shall have the meaning set forth in Section
3.5(b).
"Hazardous Materials" means chemicals, pollutants, contaminants, wastes,
toxic substances, radioactive and biological materials, asbestos-containing
materials (ACM), hazardous substances, petroleum and petroleum products or any
fraction thereof.
"Include" shall have the meaning set forth in Section 9.3.
"Include without limitation" shall have the meaning set forth in Section
9.3.
"Indebtedness" of any Person means all obligations of such Person which
in accordance with GAAP should be classified upon a balance sheet of such Person
as liabilities of such Person, and in any event, regardless of how classified in
accordance with GAAP, shall include: (i) all obligations of such Person for
borrowed money or which have been incurred in connection with the purchase of
property or assets; (ii) obligations secured by any Security Interest upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations; (iii) obligations created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person, notwithstanding the fact that the
rights and remedies of the seller, lender or lessor under such agreement in the
event of default are limited to repossession or sale of the property; and (iv)
that portion of capitalized lease obligations properly classified as a liability
on a balance sheet in accordance with GAAP.
A-7
<PAGE>
<PAGE>
"Initial Payment" shall have the meaning set forth in Section 2.1(c)(i).
"Interim Funding Cap" shall mean any amounts advanced to TARGET by
Wexford with the approval of the Executive Committee, up to a total equal to the
product of $200,000 and the number of months from the date hereof to the Closing
Date (prorated for partial months), and a maximum of $500,000 in the aggregate.
"Latest Financial Statements" shall have the meaning set forth in
Section 3.6(c).
"Liability" means any liability (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated, and whether due or
to become due), obligation or Indebtedness.
"LIM" shall have the meaning set forth in the definition of "Designated
Amounts."
"LIM Funds" shall have the meaning set forth in the definition of
"Designated Amounts."
"Mannesmann Receivable" shall have the meaning set forth in the
definition of "Designated Amounts."
"Material Contracts" shall have the meaning set forth in Section 3.13.
"Merger" shall have the meaning set forth in Section 1.3(a).
"Merger Consideration" shall have the meaning set forth in Section
2.1(c)(ii).
"Net Proceeds" shall mean (i) the Designated Amounts collected on or
before the third anniversary of the Closing Date (ii) plus the amount by which
the Puerto Rico Tax Liability is less than $1.5 million (the "PR SURPLUS") or
minus the amount by which the Puerto Rico Tax Liability exceeds $1.8 million
(the "PR DEFICIT"), in each case as such amount shall be finally determined on
or before the third anniversary of the Closing Date, (iii) minus the reasonable
costs of collection, defense or settlement actually incurred on or before the
third anniversary of the Closing Date in collecting or seeking to collect the
Designated Amounts or in respect of counterclaims, and (iv) minus collection
fees owing to BUYER pursuant to Section 6.12 hereof; provided, however, that if
a final determination of the Puerto Rico Tax Liability shall not have been
reached on or before the third anniversary of the Closing Date, there shall be
no PR Surplus and no PR Liability.
"Ordinary Course of Business" means the ordinary course of business of
TARGET and its Subsidiaries, consistent with past custom and practice of TARGET
and its Subsidiaries (including with respect to quantity and frequency).
"Person" means any individual, trust, corporation, partnership, limited
partnership, limited
A-8
<PAGE>
<PAGE>
liability company or other business association or entity, court, governmental
body or governmental agency.
"Pentney" shall mean Pentney Engineering, Ltd., a limited liability
company organized under the laws of the United Kingdom, and an indirectly
wholly-owned subsidiary of TARGET.
"Plans" means: (i) all employee benefit plans as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA");
(ii) all other severance pay, deferred compensation, excess benefit, vacation,
stock, stock option, fringe benefit and incentive plans, contracts, schemes,
programs, funds, commitments, or arrangements of any kind; and (iii) all other
plans, contracts, schemes, programs, funds, commitments, or arrangements
providing money, services, property, or other benefits, whether written or oral,
formal or informal, qualified or nonqualified, funded or unfunded, and including
any that have been frozen or terminated, which pertain to any employee, former
employee, director, officer, stockholder, consultant, or independent contractor
of TARGET or any ERISA Affiliate of TARGET and (i) to which TARGET or any ERISA
Affiliate of TARGET is or has been a party or by which any of them is or has
been bound or (ii) with respect to which TARGET or any ERISA Affiliate of TARGET
has made any payments or contributions since December 31, 1987 or (iii) to which
TARGET or any ERISA Affiliate of TARGET may otherwise have any Liability
(including any such plan or arrangement formerly maintained by TARGET or any
ERISA Affiliate of TARGET).
"PR Deficit" shall have the meaning set forth in the definition of "Net
Proceeds."
"Preferred Proposal" shall have the meaning set forth in Section 6.1(a).
"PR Surplus" shall have the meaning set forth in the definition of "Net
Proceeds."
"Proxy Statement" shall have the meaning set forth in Section 6.2(a).
"Puerto Rico Tax Liability" means all taxes, including penalties and
interest, paid to or claimed by the Commonwealth of Puerto Rico on or after the
date of this Agreement with respect to operations conducted by TARGET and its
Subsidiaries in Puerto Rico prior to the date of this Agreement, and all legal,
accounting and other expenses incurred on or after the date of this Agreement in
connection with the investigation, defense and settlement of such tax
liabilities.
"Reserve" shall have the meaning set forth in Section 2.2(d).
"SEC" shall have the meaning set forth in Section 3.5(b).
"Securities Act" shall have the meaning set forth in Section 3.2(b).
"Security Interest" means any mortgage, pledge, security interest,
charge, lien or other encumbrance or right of any third party.
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"Security Agreement" shall have the meaning set forth in Section 6.11.
"Shareholders" shall mean the beneficial owners of the TARGET Common
Stock issued and outstanding immediately prior to the Effective Time.
"Shareholder Representative" shall mean Wexford Management LLC as
representative of the Shareholders.
"Subsidiary" means, with respect to any Person, any corporation or other
entity, whether incorporated or unincorporated, of which (i) such Person or any
other Subsidiary of such Person is a general partner (excluding partnerships,
the general partnership interests of which held by such Person or any Subsidiary
of such Person do not have a majority of the voting interest in such
partnership) or (ii) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries, or by such Person and
one or more of its Subsidiaries.
"Surviving Corporation" shall have the meaning set forth in Section
1.3(a).
"TARGET Balance Sheet@ shall have the meaning set forth in Section
3.6(b).
"TARGET Common Stock" shall have the meaning set forth in Section
3.2(a).
"TARGET Disclosure Schedule" shall have the meaning set forth in Article
3.
"TARGET Expenses" shall have the meaning set forth in Section 8.3(b).
"TARGET Intellectual Property Rights" shall have the meaning set forth
in 3.12(a).
"TARGET Material Adverse Effect" means a material adverse effect on the
business, operations, employee or client relations, properties, assets
(including intangible assets), liabilities (contingent or otherwise), financial
condition or results of operations of TARGET and its Subsidiaries taken as a
whole.
"TARGET Preferred Stock" shall have the meaning set forth in Section
3.2(a).
"TARGET SEC Reports" shall have the meaning set forth in Section 3.6(a).
"TARGET Stockholders Meeting" shall have the meaning set forth in
Section 6.2(a).
"Tax" or "Taxes" means any and all federal, state, local and foreign
taxes, assessments and
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other governmental charges, duties, impositions and liabilities, including taxes
based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll, recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts, including any obligations with respect to taxes of a
predecessor entity.
"Tax return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party" shall have the meaning set forth in Section 8.1.
"Voting Agreement" shall have the meaning set forth in Section 6.9.
"WEP" shall mean Wahlco Engineered Products, Ltd., a limited liability
company formed under the laws of the United Kingdom, and an indirectly
wholly-owned subsidiary of TARGET.
"Wexford" shall have the meaning set forth in Section 6.9.
"Wexford Debts" shall mean all Indebtedness of TARGET and its
Subsidiaries which is owed to or guaranteed by Wexford (i) as set forth on
SCHEDULE I hereto, and (ii) any amounts approved by the Executive Committee and
advanced by Wexford to TARGET from the date hereof to the Closing Date, and
(iii) in each case, accrued and unpaid interest on such amounts from the date
hereof to the Closing Date in accordance with the terms of the Amended and
Restated Credit Agreement dated as of January 30, 1998 (the "CREDIT AGREEMENT").
"Wexford Guarantees" shall mean all guarantees by Wexford of any
outstanding obligations of TARGET and its Subsidiaries (other than the Wexford
Debts) as of the Effective Time. SCHEDULE II hereto sets forth the Wexford
Guarantees.
ARTICLE 1.
THE MERGER
1.1 Effective Time of The Merger. Subject to the provisions of this
Agreement, a certificate of merger prepared in accordance with Section 252 of
the Delaware General Corporation Law ("DGCL") (the "CERTIFICATE OF MERGER")
shall be duly prepared, executed and acknowledged by TARGET, SUB and such other
parties as may be appropriate, and thereafter the Certificate of Merger shall be
delivered to the Delaware Secretary of State for filing as soon as practicable
on or after the date on which the Closing occurs. The Merger shall become
effective on the date and at the time of the acceptance of the Certificate of
Merger by the Delaware Secretary of State or at such time thereafter as is
provided in the Certificate of Merger (the "EFFECTIVE TIME").
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1.2 Closing. The closing of the Merger (the "CLOSING") will take place
at 10:00 a.m., Pacific Time, on a date to be specified by BUYER and TARGET,
which shall be no later than two (2) business days following the satisfaction of
the conditions hereto (the "CLOSING DATE"), at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, unless another
date or place is agreed to in writing by BUYER and TARGET.
1.3 Effects of the Merger.
(a) At the Effective Time, (i) the separate existence of SUB
shall cease and SUB shall be merged (the "MERGER") with and into TARGET (SUB and
TARGET are sometimes referred to herein as the "CONSTITUENT CORPORATIONS" and
TARGET is sometimes referred to herein as the "SURVIVING CORPORATION"), (ii) the
Certificate of Incorporation of TARGET as in effect immediately prior to the
Effective Time shall become the Certificate of Incorporation of the Surviving
Corporation, and (iii) the Bylaws of TARGET as in effect immediately prior to
the Effective Time shall become the Bylaws of the Surviving Corporation.
(b) At and after the Effective Time, the effects of the Merger
shall be as provided in the applicable provisions of the DGCL. Without limiting
the generality of the foregoing, and subject thereto, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all and
singular rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, and all debts due to
either of the Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation, and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Constituent Corporations, and the title to any
real estate vested by deed or otherwise, in either of the Constituent
Corporations, shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thereafter attach to the Surviving
Corporation, and may be enforced against it to the same extent as if such debts
and liabilities had been incurred by it.
1.4 Directors and Officers. The directors of SUB immediately prior to
the Effective Time shall be the initial directors of the Surviving Corporation,
and the officers of SUB immediately prior to the Effective Time shall be the
officers of the Surviving Corporation.
ARTICLE 2.
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of
the Merger and
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without any action on the part of the holders of any shares of TARGET Common
Stock or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of
the capital stock of SUB shall be converted into and become one fully paid and
nonassessable share of common stock, $.01 per share, of the Surviving
Corporation.
(b) Cancellation of Treasury Stock and BUYER-Owned Stock. Any
shares of TARGET Common Stock that are owned by BUYER, SUB or any other
wholly-owned Subsidiary of BUYER shall be canceled and retired and shall cease
to exist and no stock of BUYER or other consideration shall be delivered in
exchange therefor.
(c) Conversion of TARGET Common Stock. Subject to Section 2.3,
each issued and outstanding share of TARGET Common Stock (other than shares to
be canceled in accordance with Section 2.1(b)) shall be converted into the right
to receive an amount per share equal to the sum of the following:
(i) An initial payment of $1,581,768.50 minus any amounts
advanced by Wexford to TARGET from the date hereof to the Closing Date in excess
of the Interim Funding Cap, divided by the number of shares of TARGET Common
Stock outstanding as of the Effective Time (the "INITIAL PAYMENT"). The Initial
Payment will be payable upon surrender of Certificates for TARGET Common Stock
in accordance with Section 2.2. The Initial Payment is subject to reduction as
set forth in Section 6.16.
(ii) Contingent payments equal to (A) the Net Proceeds
divided by (B) the number of shares of TARGET Common Stock outstanding as of the
Effective Time (the "CONTINGENT PAYMENTS" and together with the Initial Payment,
the "MERGER CONSIDERATION"). The Contingent Payments will be deposited with the
Exchange Agent in accordance with Section 2.2 hereof.
All shares of TARGET Common Stock, when converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a Certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the Initial
Payment and Contingent Payment in consideration therefor upon the surrender of
such Certificate in accordance with Section 2.2, without interest.
(d) TARGET Stock Plans, Options and Rights. All outstanding
options and rights to purchase TARGET Common Stock issued under the TARGET 1996
Employee Stock Option Plan shall be terminated as of the Effective Time.
(e) TARGET Warrants. The Surviving Entity will not assume any
outstanding warrants to purchase TARGET Common Stock. TARGET will obtain
agreements to terminate all warrants held by Wexford and Wexford affiliates.
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2.2 Exchange of Certificates. The procedures for exchanging outstanding
shares of TARGET Common Stock for cash pursuant to the Merger shall be as
follows:
(a) Exchange Agent. As of the Effective Time, BUYER shall deposit
with Boston Equiserve or another agent approved by BUYER and the Shareholder
Representative (the "EXCHANGE AGENT"), for the benefit of the Shareholders, the
aggregate amount of the Initial Payment payable pursuant to Section 2.1 in
exchange for outstanding shares of TARGET Common Stock. BUYER shall deposit, or
cause the Surviving Corporation to deposit, with the Exchange Agent any amounts
constituting all or part of the Net Proceeds promptly as such Net Proceeds are
received by the Surviving Corporation. The cash deposited for the Initial
Payment and Contingent Payments as it shall be constituted from time to time is
referred to as the "EXCHANGE FUND."
(b) Exchange Procedures. As soon as reasonably practicable after
the Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of TARGET Common Stock (each a "CERTIFICATE" and,
collectively, the "CERTIFICATES") whose shares were converted pursuant to
Section 2.1 into the right to receive the Merger Consideration (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as BUYER and TARGET may reasonably specify), (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the Merger
Consideration; and (iii) the notice of approval of the Merger and accompanying
statutory materials, information and instruction as required by Section 262 of
the DGCL. Upon surrender of a Certificate for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by BUYER, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive, in exchange for the Certificate, the Merger
Consideration, and the Certificate so surrendered shall immediately be canceled.
In the event of a transfer of ownership of TARGET Common Stock which is not
registered in the transfer records of TARGET, the Merger Consideration may be
paid to a transferee if the Certificate representing such TARGET Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.2, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration. The instructions for effecting the surrender of the Certificates
shall set forth procedures that must be taken by the holder of any Certificate
that has been lost, destroyed or stolen. It shall be a condition to the right of
such holder to receive the Merger Consideration that the Exchange Agent shall
have received, along with the letter of transmittal, a duly executed lost
certificate affidavit, including an agreement to indemnify BUYER, signed exactly
as the name or names of the registered holder or holders appeared on the books
of TARGET immediately prior to the Effective Time, together with a customary
bond and such other documents as BUYER or the Exchange Agent may reasonably
require in connection therewith.
(c) No Further Ownership Rights in TARGET Common Stock. Merger
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Consideration paid pursuant to this Section 2.2 shall be deemed when paid in
full to have been paid in full satisfaction of all rights pertaining to such
shares of TARGET Common Stock. There shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of TARGET Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Section
2.2.
(d) Distribution from Exchange Fund. No amounts other than the
Initial Payment shall be distributed from the Exchange Fund prior to the earlier
of the first anniversary of the Closing Date or the date on which the Puerto
Rico Tax Liability is finally determined. From such date until the expiration of
the Exchange Fund, amounts may be distributed from the Exchange Fund as and when
determined by the Shareholder Representative; provided, however, that until the
earlier of the final determination of the Puerto Rico Tax Liability and the
third anniversary of the Closing Date, an amount equal to 125% of the excess of
the estimated Puerto Rico Tax Liability (as estimated in good faith by BUYER)
over $1,800,000 (the "RESERVE") shall not be distributed from the Exchange Fund;
and provided further that unless the Shareholder Representative shall have
instructed BUYER not to proceed with litigation to recover any funds that may
constitute Net Proceeds, then for each unresolved item in the Designated
Amounts, the Reserve shall be increased by $50,000.
(e) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the stockholders of TARGET within one month
after the third anniversary of the Closing Date shall be delivered to BUYER, and
any stockholders of TARGET who have not previously complied with this Section
2.2 shall thereafter look only to BUYER for payment of their claim for any
Merger Consideration and any dividends or distributions with respect to TARGET
Common Stock.
(f) No Liability. Neither BUYER nor TARGET shall be liable to any
holder of shares of TARGET Common Stock, as the case may be, in respect of any
Merger Consideration delivered to a public official as required by any
applicable abandoned property, escheat or similar law.
2.3 Appraisal Rights. The shares of TARGET Common Stock ("DISSENTING
SHARES") held by any stockholder of TARGET who has demanded an appraisal
pursuant to the DGCL (a "DISSENTING STOCKHOLDER") shall not be converted
pursuant to the Merger unless and until the holder thereof shall have failed to
perfect or shall have effectively withdrawn or lost such holder's rights to
demand an appraisal under the DGCL, and shall be entitled to receive only the
payment provided for by the DGCL. If any such holder shall fail to perfect or
shall have effectively withdrawn or lost the right to demand an appraisal, the
Dissenting Shares held by such Dissenting Stockholder shall thereupon be treated
as though such shares had been converted into the right to receive the Merger
Consideration pursuant to the terms hereof.
ARTICLE 3.
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REPRESENTATIONS AND WARRANTIES OF TARGET
TARGET represents and warrants to BUYER and SUB that the statements
contained in this Article 3 are true and correct, except as set forth in the
disclosure schedule delivered by TARGET to BUYER (the "TARGET DISCLOSURE
SCHEDULE"). The TARGET Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
3, and the disclosure in any paragraph shall qualify only the corresponding
paragraph in this Article 3.
3.1 Organization. The TARGET Disclosure Schedule lists each of TARGET's
Subsidiaries. Each of TARGET and its active Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
respective jurisdiction of its incorporation, has all requisite corporate power
to own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified and/or licensed
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a TARGET
Material Adverse Effect. Except as set forth on the TARGET Disclosure Schedule,
neither TARGET nor any of its Subsidiaries directly or indirectly owns any
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for, any corporation, partnership, joint venture or other
business association or entity, excluding securities in any publicly traded
company held for investment by TARGET and comprising less than one percent (1%)
of the outstanding stock of such company.
3.2 TARGET Capital Structure.
(a) The authorized capital stock of TARGET consists of 50,000,000
shares of common stock, par value $0.01 per share ("TARGET COMMON STOCK"), and
10,000,000 shares of Preferred Stock, par value $0.01 per share ("TARGET
PREFERRED STOCK"). As of October 31, (i) 16,323,074 shares of TARGET Common
Stock were issued and outstanding, all of which are duly authorized, validly
issued, fully paid and nonassessable, (ii) there were options and rights
outstanding under the TARGET Stock Option Plans, entitling the optionees
thereunder upon valid exercise to acquire in the aggregate 1,342,556 shares of
TARGET Common Stock, (iii) there were warrants outstanding entitling the holders
thereof upon valid exercise to acquire in the aggregate 1,306,133 shares of
TARGET Common Stock at the exercise prices set forth on the TARGET Disclosure
Schedule, and (iv) no shares of TARGET Common Stock were held by any Subsidiary
of TARGET. No change in such capitalization has occurred since such date other
than the exercise and termination of stock options outstanding. No shares of
TARGET Preferred Stock were issued and outstanding. All shares of TARGET Common
Stock subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and nonassessable. There
are no obligations, contingent or otherwise, of TARGET or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of TARGET
Common Stock or the capital stock of any TARGET Subsidiary or make any
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity.
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(b) Except as set forth in this Section 3.2, there are no equity
securities of any class of TARGET or any of its Subsidiaries, or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as set forth in this Section 3.2, there are
no options, warrants, equity securities, calls, rights, commitments or
agreements of any character to which TARGET or any of its Subsidiaries is a
party or by which any of them are bound obligating TARGET or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of TARGET or any of its Subsidiaries or
obligating TARGET or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. To the knowledge of TARGET, there are no voting trusts,
proxies or other agreements or understandings with respect to the shares of
capital stock of TARGET other than the Voting Agreement attached hereto as
Exhibit A. All of the outstanding TARGET Common Stock, options or warrants were
either registered under the Securities Act of 1933, as amended (the "SECURITIES
ACT") or were issued pursuant to valid exemptions from registration. TARGET has
taken all actions necessary such that after the Effective Time there will not
exist any rights of any nature granting any Person a right to acquire the
securities of TARGET and/or its Subsidiaries.
3.3 Subsidiaries. TARGET directly or indirectly owns all of the
outstanding stock of each of its Subsidiaries free and clear of all Security
Interests, agreements, preemptive rights, and/or limitations on TARGET's voting
rights, charges or other restrictions of any nature, and all such shares are
duly authorized, validly issued, fully paid and nonassessable.
3.4 Authority and Status.
(a) The execution, delivery and performance by TARGET of this
Agreement and each and every other agreement, document and instrument provided
for herein have been duly authorized and approved by a unanimous vote of the
TARGET Board of Directors except that Mark L. Plaumann, a representative of
Wexford on the Board, may abstain from voting subject only to the approval of
the Merger by TARGET's stockholders under applicable provisions of TARGET's
Certificate of Incorporation and the DGCL. The Board of Directors of TARGET has
(i) determined that the Merger is fair to and in the best interests of the
stockholders of TARGET and (ii) resolved to submit the Merger to and recommend
approval of the Merger by the stockholders of TARGET.
(b) TARGET has the corporate power and authority to execute and
deliver this Agreement, to perform hereunder and, upon approval of the
transactions provided for herein by the stockholders of TARGET, to consummate
the transactions contemplated hereby without any other corporate or stockholder
approval. Assuming this Agreement and each and every agreement, document or
instrument to be executed, delivered and performed by TARGET in connection
herewith are valid and legally binding obligations of BUYER and Sub, this
Agreement and each and every agreement, document and instrument to be executed,
delivered and performed by TARGET in connection herewith constitute or will,
when executed and delivered, constitute the valid and legally binding obligation
of TARGET enforceable against it in accordance with their respective terms,
except as enforceability may be limited by applicable equitable principles or by
bankruptcy,
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insolvency, reorganization, moratorium, or similar laws from time to time in
effect affecting the enforcement of creditors' rights generally.
3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by TARGET does
not, and the consummation of the transactions contemplated by this Agreement
will not, (i) conflict with, or result in any violation or breach of, any
provision of the Certificate of Incorporation or Bylaws of TARGET; (ii) result
in any violation or breach of, require any consent or approval under, or
constitute (with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of any material benefit) under any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, lease, contract or
other agreement, instrument or obligation to which TARGET or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound; or (iii) subject to the consents, approvals, orders,
authorizations, filings and registrations specified in Section 3.5(b), conflict
with or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to TARGET or any
of its Subsidiaries or any of their properties or assets; other than, in the
case of clause (ii) or (iii) above, any such conflicts, violations, defaults, or
rights that individually or in the aggregate could not reasonably be expected to
(x) have a TARGET Material Adverse Effect, (y) materially impair the ability of
TARGET to perform its obligations under this Agreement or (z) prevent or
materially delay the consummation of any of the transactions contemplated by
this Agreement.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality ("GOVERNMENTAL
ENTITY") is required by or with respect to TARGET or any of its Subsidiaries in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) the filing of the
applicable Certificate of Merger with the Delaware Secretary of State; (ii) the
filing of the Proxy Statement with the Securities and Exchange Commission (the
"SEC") in accordance with the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"); (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws; and (iv) such other consents, approvals,
orders, authorizations, registrations, declarations and filings as to which the
failure to obtain or make could not reasonably be expected to (x) have a TARGET
Material Adverse Effect, (y) materially impair the ability of TARGET to perform
its obligations under this Agreement or (z) prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement.
3.6 SEC Filings; Financial Statements.
(a) TARGET has filed all forms, each registration statement,
schedule, report, proxy statement and document required to be filed by TARGET
with the SEC since the date of its initial public offering (collectively, the
"TARGET SEC REPORTS"). The TARGET SEC Reports (i)
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at the time filed, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in the TARGET SEC Reports or necessary in order to make
the statements in the TARGET SEC Reports, in the light of the circumstances
under which they were made, not misleading. None of TARGET's Subsidiaries is
required to file any forms, reports or other documents with the SEC. TARGET has
made all filings with the SEC in a timely manner as required by law and no event
has occurred that requires an additional filing or any amendment to a prior
filing.
(b) Each of the consolidated financial statements (including, in
each case, any related notes) contained in the TARGET SEC Reports complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted for presentation in Quarterly Reports on Form
10-Q), and fairly presented the consolidated financial position of TARGET and
its Subsidiaries as at the respective dates and the consolidated results of
their operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were subject to normal and recurring
year-end adjustments which were not or are not material in amount. The audited
balance sheet of TARGET as of December 31, 1997 is referred to herein as the
"TARGET BALANCE SHEET."
(c) TARGET has provided BUYER with a consolidated balance sheet
and related statements of income, changes in stockholder's equity and cash flows
for TARGET and each of its Subsidiaries as of and for the three month period
ended September 30, 1998 ("LATEST FINANCIAL STATEMENTS"). The Latest Financial
Statements are consistent with the accounting policies used in preparing the
consolidated financial statements attached to the TARGET SEC Reports and fairly
present the results for the interim period presented thereby, except that such
financial statements are subject to normal and recurring year-end adjustments
which are not material in amount.
3.7 No Undisclosed Liabilities. Except as set forth in the TARGET
Disclosure Schedule, the Company does not have any Liability in excess of fifty
thousand dollars ($50,000) that (i) has not been reflected in the Latest
Financial Statements or (ii) has not arisen in the Ordinary Course of Business
since September 30, 1998. Except as reflected on the Latest Financial
Statements, or disclosed in the TARGET Disclosure Schedule, no customer has
asserted a right of refund or set off from TARGET.
3.8 Absence of Certain Changes or Events. Since the date of the Latest
Financial Statements, TARGET and its Subsidiaries have conducted their
businesses only in the Ordinary Course of Business and, since such date, there
has not been (i) any material damage, destruction or loss (whether or not
covered by insurance) with respect to TARGET or any of its Subsidiaries; (ii)
any material change by TARGET in its accounting methods, principles or
practices; (iii) any increase in dividends or employee compensation or benefits
payable by TARGET, except for
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increases in the Ordinary Course of Business; (iv) any revaluation by TARGET of
any of its assets, including, without limitation, writing down the value of
capitalized software or inventory or writing off notes or accounts receivable
other than in the Ordinary Course of Business; (v) any change in any material
respect in which the business of TARGET and its Subsidiaries has been conducted,
including, without limitation, billing of clients or collection of accounts
receivable, purchases of goods and services or payment of accounts payable; (vi)
any agreement and/or understanding entered into which materially alters or
amends any licensing or contractual arrangements with respect to any TARGET
Intellectual Property Rights, other than in the Ordinary Course of Business;
(vii) any loss or change in the relationships with any client, contractor or
supplier that would constitute a TARGET Material Adverse Effect; (viii) any
declaration, setting aside or payment of a dividend or other distribution with
respect to the capital stock of TARGET, or any direct or indirect redemption,
purchase or other acquisition by TARGET of any of its capital stock other than
pursuant to the exercise of repurchase rights under stock option agreements;
(ix) any increase in the salary or other compensation payable or to become
payable by TARGET to any of its officers, directors, or advisors, or the
declaration, payment or commitment or obligation of any kind for the payment, by
TARGET, of a bonus or other additional salary or compensation to any such
person; (x) except as reflected on the Latest Financial Statements, any loan by
TARGET to any person or entity, incurring by TARGET of any indebtedness,
guaranteeing by TARGET of any indebtedness, issuance or sale of any debt
securities of TARGET or guaranteeing of any debt securities of others except for
advances to employees for travel and business expenses in the Ordinary Course of
Business; or (xi) any other transaction, commitment, dispute, or any other
action or event or condition that would be reasonably likely to have a TARGET
Material Adverse Effect. BUYER acknowledges and agrees that recent and/or
ongoing operating losses of TARGET do not make untrue the representations made
in this Section 3.8.
3.9 Taxes.
(a) TARGET and its Subsidiaries have, as of the date hereof, and
will prior to the Effective Time have, timely and accurately filed all federal,
state, foreign and local income, franchise, sales, real and personal property,
payroll and other tax returns and reports required to be filed by them prior to
such dates and have timely paid, or will prior to the Effective Time timely pay,
all taxes shown on such returns as owed for the periods of such returns,
including all withholding or other payroll related taxes shown on such returns.
The tax basis of all assets of TARGET and the Subsidiaries as reflected on their
books and records is correct and accurate in all material aspects. Except as
described on the TARGET Disclosure Schedule, neither TARGET nor any Subsidiary
is, nor is either TARGET or any Subsidiary expected to become, subject to any
additional taxes, interest, penalties or other similar charges with respect to
the tax returns and reports referred to in the first sentence of this Section
3.9(a) that would individually or in the aggregate have a TARGET Material
Adverse Effect. No assessments or notices of deficiency or other written
communications have been received by TARGET, with respect to any tax return that
has not been paid, discharged or fully reserved on the TARGET Balance Sheet, and
no amendments or applications for refund have been filed or are planned with
respect to any such return. TARGET does not have any material liabilities for
Taxes that have not been accrued for or reserved on the TARGET Balance Sheet,
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contingent or otherwise. There are no agreements between TARGET or any
Subsidiary and any taxing authority, including, without limitation, the IRS,
waiving or extending any statute of limitations with respect to any tax return,
and neither TARGET nor any of its Subsidiaries has filed any consent or election
under the Code, including, without limitation, any election under Section 341(f)
of the Code.
(b) Neither TARGET nor any of its Subsidiaries has made any
payments, or is obligated to make any payments, or is a party to any agreement
that under certain circumstances could obligate it, or any successor in
interest, to make any payments, that will not be deductible under Section 280G
of the Code.
(c) TARGET and its Subsidiaries (i) have withheld the proper
amounts necessary to comply with the tax withholding provisions of all
applicable laws for all compensation paid to the officers and employees of
TARGET and its Subsidiaries, (ii) have correctly prepared and duly and timely
filed all returns and reports relating to those amounts withheld from their
officers and employees and to their employer liability for employment taxes
under the Tax Code and applicable state and local laws and (iii) have duly and
timely paid and remitted to the appropriate taxing authorities the amounts
withheld from their officers and employees and any additional amounts that
represent their employer liability under applicable law for employment taxes.
(d) No assessments or notices of deficiency or other written
communications have been submitted to TARGET by the IRS, any foreign, state or
local taxing authority, or any other investigation or audit, that will have, or
can be expected to have, a TARGET Material Adverse Effect.
(e) Neither TARGET nor any of its Subsidiaries is a "United
States real property holding corporation" as defined in Section 897(c)(2) of the
Code.
3.10 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon TARGET or any of its
Subsidiaries which has the effect of prohibiting or materially impairing any
current or future business practice of TARGET or any of its Subsidiaries, any
acquisition of property by TARGET or any of its Subsidiaries or the conduct of
business by TARGET or any of its Subsidiaries as currently conducted or as
proposed to be conducted by TARGET or any of its Subsidiaries.
3.11 Title to Properties; Absence of Liens and Encumbrances.
(a) Section 3.11 of the TARGET Disclosure Schedule sets forth a
list of all real property owned by TARGET or any of its Subsidiaries.
(b) TARGET, including its Subsidiaries, has good and valid title
to, or, in the case of leased properties and assets, valid leasehold interests
in, all of its properties and assets, free and clear of any Liens, except for
defects in title, easements, restrictive covenants and similar
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encumbrances or impediments that, in the aggregate, do not and will not
materially interfere with the use of the properties or assets subject thereto or
affected thereby or otherwise materially impair business operations at such
properties.
(c) All material assets owned or leased by TARGET and its are in
good operating condition and reasonable state of repair, subject only to
ordinary wear and tear.
3.12 Intellectual Property.
(a) TARGET and its Subsidiaries own, or have a valid license to
use, the rights to all patents, trademarks, trade names, service marks,
copyrights and any applications therefor, technology, trade secrets, know-how
and any other intellectual property rights (the "TARGET INTELLECTUAL PROPERTY
RIGHTS") that are material to the conduct of the business of TARGET and its
Subsidiaries taken as a whole. No claims are pending or, to the knowledge of
TARGET, threatened that TARGET or any of its Subsidiaries is infringing or
otherwise adversely affecting the rights of any person with regard to any
material TARGET Intellectual Property Right. To TARGET's knowledge, no person is
infringing the rights of TARGET or any of its Subsidiaries with respect to any
material TARGET Intellectual Property Right.
(b) TARGET and its Subsidiaries use fully integrated operational
and accounting software packages which are commercially available. Additionally,
TARGET and its Subsidiaries have developed various proprietary software packages
which are integrated into several of its final products to monitor and control
the processes at customer locations. All of the commercially available products
and the proprietary software could potentially be affected by the date change in
the year 2000. TARGET and its Subsidiaries continue to assess the impact of the
year 2000 issue on business operations, and have received assurances from the
vendors of such licensed software that all date-sensitive issues related to the
year 2000 conversion have been resolved. TARGET and its Subsidiaries are aware
of programming changes which are required to configure its proprietary software
and are in the process of implementing a corrective program. To TARGET's
knowledge, the costs associated with such corrective program will not be
material.
3.13 Agreements, Contracts and Commitments. The TARGET Disclosure
Schedule contains a true and complete list of all material contracts,
agreements, commitments and other instruments (identified by title, date and
parties) (whether oral or written), to which TARGET or its Subsidiaries is a
party, including all:
(a) material leases, rental agreements or other contracts or
commitments affecting the ownership or leasing of, title to or use of any
interest in real or personal property and all maintenance or service agreements
relating to any real or personal property requiring payments in excess of
$100,000 per annum;
(b) contracts or commitments providing for payments by TARGET
or its Subsidiaries in excess of $50,000 per annum based in any manner upon the
sales, purchases,
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receipts, income or profits of TARGET or its Subsidiaries;
(c) any fidelity or surety or completion bond;
(d) any agreement of indemnification or guaranty issued other
than in the Ordinary Course of Business;
(e) license agreements;
(f) employment contracts or commitments regarding employees or
independent contractors requiring annual payments by TARGET or any of its
Subsidiaries of an amount in excess of $50,000; and any other material
contracts, plans or commitments providing for any continuing payment of any type
or nature, including, without limitation, any severance, termination, parachute,
or other payments (whether due to a change in control, termination or otherwise)
and bonuses and vested commissions, in each case, requiring payments by TARGET
or any of its Subsidiaries of an amount in excess of $50,000 in any 12-month
period;
(g) any collective bargaining agreements;
(h) instruments or arrangements evidencing or related to
Indebtedness for money borrowed or to be borrowed, whether directly or
indirectly, by way of purchase-money obligation, guaranty, subordination,
conditional sale, lease-purchase or otherwise;
(i) any agreement relating to the disposition or acquisition of
assets or any interest in any business enterprise outside the Ordinary Course of
the Business;
(j) joint product development agreements with any party other
than BUYER;
(k) except as provided in agreements disclosed elsewhere on the
TARGET Disclosure Schedule, any written arrangement concerning non-competition;
(l) agreements with any employee, or Plans, the benefits of which
are contingent on, or the terms of which are materially altered upon, the
occurrence of a transaction of the nature contemplated by this Agreement
involving TARGET or its Subsidiaries; and
(m) agreements or Plans the benefits of which will be increased
or accelerated by the occurrence of the transactions contemplated by this
Agreement.
(n) written arrangements not disclosed on the TARGET Disclosure
Schedule pursuant to any other provision in this Section 3.13 under which the
consequences of a default or termination could have a TARGET Material Adverse
Effect;
The contracts, agreements, commitments and other instruments
listed or required to
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be listed on the TARGET Disclosure Schedule are herein referred to as the
"MATERIAL CONTRACTS."
To TARGET's knowledge, all the Material Contracts are valid and
binding upon TARGET or the applicable Subsidiary and upon the other parties
thereto and are in full force and effect and enforceable in accordance with
their terms, except as enforceability may be affected by bankruptcy, insolvency,
moratorium or similar laws affecting creditors rights generally and general
principles of equity relating to the availability of equitable remedies. Neither
TARGET nor any of its Subsidiaries is in violation of or in default under (nor
does there exist any condition which upon the passage of time or the giving of
notice would cause such a violation of or default under) any Material Contract
to which it is a party or by which it or any of its properties or assets is
bound, except for violations or defaults that could not, individually or in the
aggregate, reasonably be expected to result in a TARGET Material Adverse Effect.
Except as set forth on the TARGET Disclosure Schedule, there are no material
contracts or commitments that require the performance of services or provision
of products by TARGET at a direct cost for each such contract or commitment
reasonably expected to be in excess of the revenue to be derived pursuant to the
terms of such contract or commitment. Except for terms specifically described on
the TARGET Disclosure Schedule, neither TARGET nor any Subsidiary has received
any payment from any contracting party in connection with or as an inducement
for entering into any contract, agreement, policy or instrument except for
payment for actual services rendered or to be rendered by TARGET or its
Subsidiaries consistent with amounts historically charged for such services. The
TARGET Disclosure Schedule also sets forth the amount of client payments to
TARGET or its Subsidiaries through the date hereof with respect to services not
yet performed by TARGET or its Subsidiaries, which payments individually exceed
$1,000,000. All such payments through the date of the Latest Financial
Statements are reflected in the Latest Financial Statements.
3.14 Employees; Employment Matters.
(a) Except as disclosed on the TARGET Disclosure Schedule,
neither TARGET nor its Subsidiaries have any unsatisfied Liability to any
previously terminated employee or independent contractor. TARGET and its
Subsidiaries have disclosed all written employee handbooks, policies, programs
and arrangements to BUYER.
(b) No key employee or group of employees has informed either
TARGET or its Subsidiaries of any plans to terminate their employment with
TARGET or its Subsidiaries as a result of the transactions contemplated hereby
or otherwise. Neither TARGET nor its Subsidiaries have experienced any strikes,
grievances, other collective bargaining disputes or claims of unfair labor
practices. Neither TARGET nor its Subsidiaries have any knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of TARGET and its Subsidiaries.
(c) Except as set forth on Section 3.13(f) of the TARGET
Disclosure Schedule or as provided by applicable law, all persons employed by
TARGET and its Subsidiaries are employees at will or otherwise employed such
that TARGET and its Subsidiaries may terminate their
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employment at any time, with or without cause, without creating any material
cause of action against TARGET and its Subsidiaries or otherwise giving rise to
any material liability of TARGET and its Subsidiaries for wrongful discharge,
breach of contract or tort.
(d) Except as disclosed on the TARGET Disclosure Schedule,
TARGET and its Subsidiaries have complied in all material respects with all
applicable laws relating to labor in each jurisdiction wherein TARGET and its
Subsidiaries conduct business, including, without limitation, any requirements
of the Immigration and Nationalization Act of 1952, as amended by the
Immigration Reform and Control Act of 1986 and the regulations promulgated
thereunder, any provisions thereof relating to wages, termination pay, vacation
pay, fringe benefits, collective bargaining and the payment and/or accrual of
the same and all insurance and all other costs and expenses applicable thereto,
and neither TARGET nor its Subsidiaries are liable for any arrearage, or any
costs or penalties for failure to comply with any of the foregoing. Without
limiting the generality of the foregoing, neither TARGET nor its Subsidiaries
have incurred a violation of Part 6 of Subtitle B of Title I of ERISA ("COBRA")
or any other applicable state or foreign insurance continuation law. No COBRA or
other state or foreign insurance continuation law violation exists or will exist
with respect to any employees of either TARGET or its Subsidiaries prior to and
including the Effective Time, nor will any such violation occur as a result of
the transactions contemplated hereby.
(e) Each Person whom TARGET or its Subsidiaries has retained
as an independent contractor during the past three years qualifies as an
independent contractor and not as an employee of TARGET or its Subsidiaries
under the Code and all applicable state laws. Neither the execution of this
Agreement nor the consummation of the transactions contemplated hereby shall
cause TARGET or its Subsidiaries to be in breach of any agreement with any
employment, contractor or consultant or cause TARGET or its Subsidiaries to be
liable to pay any severance or other amount to any employee, contractor or
consultant of TARGET or its Subsidiaries.
3.15 Employee Benefit Plans. TARGET and each of its Plans have at all
times complied in all material respects with all applicable laws relating to
labor and employee benefits in each jurisdiction wherein TARGET and its
Subsidiaries conduct business, including without limitation, all applicable
provisions of ERISA and the Code, and any applicable federal, state and foreign
laws relating to wages, termination pay, vacation pay, fringe benefits,
collective bargaining and the payment and/or accrual of the same and all taxes,
insurance and all other costs and expenses applicable thereto.
3.16 Litigation. The TARGET Disclosure Schedule sets forth each instance
in which TARGET or any of its Subsidiaries (i) is subject to any unsatisfied
judgment, order, decree, stipulation, injunction or charge or (ii) is a party to
or, to the knowledge of TARGET, is threatened to be made a party to, any charge,
complaint, action, suit, proceeding, hearing, or investigation of or in any
court or quasi- judicial or administrative agency of any Federal, state, local,
or foreign jurisdiction or before any arbitrator, in each case that could
reasonably be expected to result in any TARGET Material Adverse Effect. TARGET
has no knowledge of any basis on which such charge,
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complaint, action, suit, proceeding, hearing, or investigation may be brought or
threatened against TARGET or its Subsidiaries.
3.17 Licenses and Permits; Compliance with Law. TARGET and its
Subsidiaries hold all licenses, certificates, permits, franchises and rights
from all appropriate federal, state or other public authorities necessary for
the conduct of their respective businesses and the use of their respective
assets, except for such licenses, certificates, permits, franchises and rights
the absence of which would not individually or in the aggregate have a TARGET
Material Adverse Effect. Except for any matters which will not have a TARGET
Material Adverse Effect, TARGET and its Subsidiaries presently are conducting
their respective businesses so as to comply with all applicable statutes,
ordinances, rules, regulations and orders of any governmental authority.
Further, TARGET and its Subsidiaries are not presently charged with, or, to the
knowledge of TARGET, under governmental investigation with respect to, any
actual or alleged violation of any statute, ordinance, rule or regulation, or
presently the subject of any pending or, to the knowledge of TARGET, threatened
adverse proceeding by any regulatory authority having jurisdiction over their
respective businesses, properties or operations. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will result in the termination of any license, certificate, permit,
franchise or right held by TARGET or any of its Subsidiaries, and all such
licenses, certificates, permits, franchises and rights will inure to the benefit
of the Surviving Corporation after the consummation of the transactions
contemplated by this Agreement.
3.18 Insurance. TARGET has provided to BUYER a list and description of
each insurance policy currently in effect where TARGET is the beneficiary,
including the name of each insurer, policy coverage, coverage amounts and
premiums payable. With respect to the insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of TARGET and its Subsidiary, to the knowledge of TARGET,
there is no claim by TARGET and its Subsidiaries pending under any of such
policies or bonds as to which coverage has been questioned, denied, or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies and bonds have been paid and TARGET and its Subsidiaries
are otherwise in material compliance with the terms of such policies and bonds
(or other policies and bonds providing substantially similar insurance
coverage). TARGET has no knowledge of any threatened termination of, or premium
increase with respect to, any of such policies. TARGET does not have any key-man
life insurance policies or any other policies under which TARGET's Stockholders
are beneficiaries, other than any policies under which TARGET's Stockholders may
be beneficiaries in their capacities as employees of the Company.
3.19 Related Parties. Except for the Wexford Debts and the Wexford
Guarantees and except as set forth on the TARGET Disclosure Schedule or in the
TARGET SEC Reports, to the knowledge of TARGET, no stockholder owning greater
than a five-percent (5%) interest in TARGET, no Affiliate or member of the
immediate family of any such stockholder, and no officer or director or member
of the immediate family of such officer or director of TARGET or any Subsidiary
possesses, directly or indirectly, any beneficial interest in, or is a director,
officer or employee of, or member of the immediate family of a director, officer
or employee of, any
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corporation, partnership, firm, association or business organization that is a
client, supplier, customer, lessor, lessee, lender, creditor, borrower, debtor
or contracting party with or of TARGET or any Subsidiary, in each case, such
that would be required to be disclosed by TARGET in its public filings (except
as a stockholder holding less than a one-percent (1%) interest in a corporation
whose shares are traded on a national or regional securities exchange or in the
over-the-counter market), other than arrangements with TARGET principals and
experts in the Ordinary Course of Business.
3.20 Clients. TARGET shall provide BUYER with a true and accurate list
of all of the clients that generated at least $1,000,000 in revenues to TARGET
in 1997 or are expected to generate $1,000,000 in billings in 1998. Since the
date of the Latest Financial Statements, no client of TARGET and its
Subsidiaries accounting for more than 5% of revenues of TARGET and its
Subsidiaries, taken as a whole; in fiscal 1997, has canceled, materially reduced
the scope of, or otherwise adversely modified its relationship with TARGET or
its Subsidiaries and, to the knowledge of TARGET, no such Person has any
intention to do so, and there are no disputes or problems or notices of
dissatisfaction with or from any such client of TARGET or its Subsidiaries and
the consummation of the transactions contemplated hereby will not, to the
knowledge of TARGET, adversely affect any relationships with such clients.
3.21 Warranty; Unbillable Work. All services rendered by TARGET and its
Subsidiaries have been in material conformity with all applicable contractual
commitments and all warranties, and TARGET and its Subsidiaries have no
Liability for damages in connection therewith, in excess of the warranty
reserves for client claims set forth on the TARGET Balance Sheet. TARGET and its
Subsidiaries have provided Buyer with accurate reports of Buyer's historical
warranty experience.
3.22 Environmental Liability.
(a) TARGET and its Subsidiaries have been and are in compliance
in all material respects (which compliance includes, but is not limited to, the
possession of all permits and other governmental authorizations required under
applicable Environmental Laws and compliance with the terms and conditions
thereof other than such permits and authorizations as to which the failure to
obtain could reasonably be expected to (x) have a TARGET Material Adverse
Effect, (y) materially impair ability of the TARGET to perform its obligations
under this Agreement or (z) prevent or materially delay the consummation of any
of the transactions contemplated by this Agreement) with all Environmental Laws
and the Company has not received any notice of any alleged claim, violation of
or liability under any Environmental Laws which has not heretofore been cured or
for which there is any remaining liability;
(b) Neither TARGET nor any of its Subsidiaries have received
notice of any Environmental Claim filed or threatened against it, or against any
person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law and there are no
past or present actions, activities, circumstances, conditions, events or
incidents, that to the knowledge of TARGET could reasonably be expected to form
the basis of any
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Environmental Claim against the Company, the business thereof, or against any
person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law;
(c) Neither TARGET nor any of its Subsidiaries have disposed of,
emitted, discharged, handled, stored, transported, used or released any
Hazardous Materials, arranged for the disposal, discharge, storage or release of
any Hazardous Materials, or exposed any employee or other individual to any
Hazardous Materials or condition so as to give rise to any material liability or
corrective or remedial obligation under any Environmental Laws; and
(d) To the knowledge of TARGET no Hazardous Materials are present
in, on, or under any properties owned, leased or used at any time (including
both land and improvements thereon) by TARGET or its Subsidiaries or for its
business, and, to the knowledge of TARGET, no reasonable likelihood exists that
any Hazardous Materials will come to be present in, on, or under any properties
owned, leased or used (including both land and improvements thereon) by the
Company for its business, so as to give rise to any material liability or
corrective or remedial obligation under any Environmental Laws.
3.23 Brokers or Finders. Other than the fees and expenses of Hera, LLC,
which amount will be paid by TARGET, TARGET has not incurred, nor will it incur,
any liability for brokerage or finders' fee or agents' commissions or similar
fee in connection with any of the transactions contemplated by this Agreement.
The Initial Payment shall be reduced to the extent such fees and expenses
incurred in connection with this transaction exceed $50,000.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB
BUYER and SUB represent and warrant to TARGET that the statements
contained in this Article 4 are true and correct, except as set forth in the
disclosure schedule delivered by BUYER to TARGET (the "BUYER DISCLOSURE
SCHEDULE"). The BUYER Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
4, and the disclosure in any paragraph shall qualify only the corresponding
paragraph in this Article 4.
4.1 Organization. BUYER and SUB are corporations duly organized, validly
existing and in good standing under the laws of the State of Delaware.
4.2 Authority; No Conflict; Required Filings and Consents.
(a) BUYER and SUB have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate action on the part of BUYER
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and Sub. This Agreement has been duly executed and delivered by BUYER and SUB
and constitutes the valid and binding obligation of BUYER and Sub, enforceable
in accordance with its terms, except as such enforceability may be limited by
(i) bankruptcy laws and other similar laws affecting creditors' rights generally
and (ii) general principles of equity, regardless of whether asserted in a
proceeding in equity or at law.
(b) The execution and delivery of this Agreement by BUYER and SUB
does not, and the consummation of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach of
any provision of the Certificate of Incorporation or Bylaws of BUYER or of Sub,
or (ii) subject to the consents, approvals, orders, authorizations, filings and
registrations specified in Section 4.2(c), conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to BUYER or Sub, except for such
violations which would not be reasonably likely to have a material adverse
effect on the parties' ability to consummate the transactions contemplated by
this Agreement.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to BUYER or SUB in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of the Certificate of Merger with the Delaware
Secretary of State, and (ii) such other consents, authorizations, filings,
approvals and registrations which in the aggregate, if not obtained or made,
would not be reasonably likely to have a material adverse effect on the parties'
ability to consummate the transactions contemplated by this Agreement.
4.3 Financing. BUYER has internal resources and will secure financing
commitments from responsible financial institutions in connection with the
Merger that are in an aggregate amount sufficient to consummate the transactions
contemplated hereby.
4.4 Sophisticated Purchaser; Access to Information; No Oral
Representations. BUYER represents and acknowledges that it is a sophisticated
purchaser; that it is aware of TARGET's business affairs and financial
condition; that BUYER, together with its representatives, has had the
opportunity to conduct an independent due diligence review of TARGET, and in
connection therewith BUYER has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to enter into this Agreement;
that it is familiar with the industry in which TARGET conducts its business;
that it is relying only on its due diligence review of TARGET and the
representations and warranties contained herein; and that BUYER has formed its
own opinions with respect to TARGET's future results and has not relied on any
projections provided by TARGET.
ARTICLE 5.
CONDUCT OF BUSINESS
5.1 Covenants of TARGET. During the period from the date of this
Agreement and
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continuing until the earlier of the termination of this Agreement or the
Effective Time, TARGET agrees as to itself and its Subsidiaries (except to the
extent that noncompliance with these covenants occurs because BUYER has declined
to advance funds to TARGET or because Wexford has declined to advance funds to
TARGET in excess of the Interim Funding Cap and only to the extent that such
actions are in the control of TARGET), to carry on its business in the Ordinary
Course of Business, to pay its debts and taxes when due, subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations when
due, and, to the extent consistent with such business, to use all reasonable
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and key employees, (iii) maintain its properties, (iv) keep its
insurance in force, (v) preserve its relationships with clients, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
and (vi) pay its accounts payable in the Ordinary Course of Business without
material increase in average days outstanding. TARGET shall promptly notify
BUYER of any event or occurrence not in the Ordinary Course of Business of
TARGET or its Subsidiaries, where such event or occurrence would result in a
breach of any covenant of TARGET or its Subsidiaries, set forth in this
Agreement or cause any representation or warranty of TARGET, set forth in this
Agreement to be untrue as of the date of, or giving effect to, such event or
occurrence. Except as expressly contemplated by this Agreement, TARGET shall
not, without the prior written consent of BUYER which shall not be unreasonably
withheld:
(a) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock;
(b) Acquire or agree to acquire by merging or consolidating with,
or by purchasing any equity interest in or assets of, or by any other manner,
any business or any corporation, partnership or other business organization or
division, or otherwise acquire or agree to acquire any assets;
(c) Sell, lease, license or otherwise dispose of any of its
properties or assets which are material, individually or in the aggregate, to
its business and that of its Subsidiaries, taken as a whole, except for
transactions entered into in the Ordinary Course of Business;
(d) Transfer or license to any Person or otherwise extend, amend
or modify any material rights to the TARGET Intellectual Property Rights, other
than the grant of non-exclusive licenses in the Ordinary Course of Business
substantially consistent with past practices; issue any shares of TARGET capital
stock or capital stock of any Subsidiary, or any securities which may be
exchanged or exercised for or converted into TARGET capital stock or the capital
stock of any Subsidiary (including, without limitation, any options or warrants)
other than shares of TARGET Common Stock issuable upon exercise of existing
options;
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(e) (i) Increase or agree to increase the compensation payable or
to become payable to its officers or employees, except for increases in salary
or wages of employees in the Ordinary Course of Business, (ii) grant any
additional severance or termination pay to, or enter into any employment or
severance agreements with, officers, (iii) grant any severance or termination
pay to, or enter into any employment or severance agreement with, any employee,
except in settlement of dispute with terminated employees, (iv) enter into any
collective bargaining agreement, or (v) establish, adopt, enter into or amend in
any material respect any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(f) Revalue any material amount of its assets, including writing
down the value of inventory or discounting or writing off notes or accounts
receivable other than the Mannesmann Receivable, the LIM Funds, and other than
in the Ordinary Course of Business;
(g) Except with the approval of the Executive Committee, incur
any Indebtedness for borrowed money or guarantee any such Indebtedness or issue
or sell any debt securities or warrants or rights to acquire any debt securities
or guarantee any debt securities of others, other than Indebtedness incurred
under outstanding lines of credit in the Ordinary Course of Business;
(h) Change any policy or take any action with respect to the
payment of accounts payable, and other than in the Ordinary Course of Business;
(i) Incur or commit to incur capital expenditures other than in
the Ordinary Course of Business;
(j) Make any material change or take any material action with
respect to the amortization, capitalization or other accounting policies or
procedures, other than actions in the Ordinary Course of Business;
(k) Other than with respect to the Designated Amounts and the
Puerto Rico Tax Liability, waive, release, assign, settle or compromise any
material claims or litigation;
(l) Except as described on the TARGET Disclosure Schedule, make
any tax election or settle or compromise any material federal, state, local or
foreign tax liability; or
(m) Take, or agree in writing or otherwise to take, any of the
actions described in Sections (a) through (l) above, or any action that
individually or in the aggregate could reasonably be expected to (x) have a
TARGET Material Adverse Effect, (y) materially impair the ability of TARGET to
perform its obligations under this Agreement or (z) prevent or materially delay
the consummation of the transactions contemplated by this Agreement.
5.2 SEC Filings; Financial Statements.
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(a) Between the date hereof and the Effective Time, TARGET will
make all filings and amendments thereto with the SEC in a timely manner as
required by law. All such TARGET SEC Reports shall comply as to form in all
material respects with the applicable published rules and regulations of the SEC
with respect thereto.
(b) Each of the consolidated financial statements (including, in
each case, any related notes) contained in any TARGET SEC Reports filed between
the date hereof and the Effective Time, shall comply as to form in all material
respects with the applicable published rules and regulations of the SEC with
respect thereto, shall be prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted for presentation in Quarterly Reports on Form 10-Q), and shall
fairly present the consolidated financial position of TARGET and its
Subsidiaries as of the respective dates and the consolidated results of their
operations and cash flows for the periods indicated.
5.3 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of BUYER and TARGET shall confer on a
regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party or its counsel with copies
of all filings made by such party with any Governmental Entity in connection
with this Agreement, the Merger and the transactions contemplated hereby.
5.4 Board of Directors. On the date hereof, the TARGET Board of
Directors shall by resolution, (i) fix the number of directors at five, (ii)
appoint John T. Schofield to fill the existing vacancy on the TARGET Board of
Directors, (iii) designate an Executive Committee of the TARGET Board of
Directors consisting of John T. Schofield, Mark Plaumann and C. Stephen Beal and
(iv) delegate to such committee the authority to oversee the day to day
operations of TARGET to the fullest extent permitted by the DGCL. The Chief
Executive Officer of TARGET shall report directly to the Executive Committee
with respect to such matters.
ARTICLE 6.
ADDITIONAL AGREEMENTS
6.1 No Solicitation.
(a) TARGET shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, through any officer, director,
employee, representative, agent or affiliate, (i) solicit, initiate, or
encourage (including by way of furnishing information) any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transactions involving TARGET,
other than the
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transactions contemplated or permitted by this Agreement (any of the foregoing
inquiries or proposals being referred to in this Agreement as a "COMPETING
OFFER"), (ii) engage in negotiations or discussions concerning, or provide any
non-public information to any Person relating to, any Competing Offer; provided,
that TARGET may contact parties with whom it had been having discussions to
terminate such discussions, or (iii) agree to, approve or recommend any
Competing Offer. Neither the Board of Directors of TARGET, nor any committee
thereof, shall (a) withdraw or modify, or propose to withdraw or modify, in any
manner adverse to BUYER, the approval or recommendation of the Board of
Directors of TARGET of the Merger or this Agreement, or (b) approve or
recommend, or propose to approve or recommend, any Competing Offer or any other
acquisition of outstanding shares of TARGET, other than pursuant to the Merger
or this Agreement. Notwithstanding the foregoing, nothing contained in this
Agreement shall prevent TARGET or its Board of Directors from (A) furnishing
non-public information to, or entering into discussions or negotiations with,
any Person in connection with an unsolicited bona fide written Competing Offer
by such Person (including a new and unsolicited Competing Offer received by
TARGET after the execution of this Agreement from a Person whose initial contact
with TARGET may have been solicited by such party prior to the execution of this
Agreement) or recommending such an unsolicited bona fide written Competing Offer
to its stockholders, if and only to the extent that (1) (x) the TARGET Board of
Directors determines in good faith that such Competing Offer would, if
consummated, result in a transaction more favorable to TARGET's stockholders
than the transaction contemplated by this Agreement and that the Person making
such Preferred Proposal has the financial means, or the ability to obtain the
necessary financing, to conclude such transaction, and (y) the Board of
Directors of TARGET determines in good faith that the failure to take such
action would be inconsistent with the fiduciary duties of the Board of Directors
to its stockholders under applicable law (any such more favorable Competing
Offer being referred to in this Agreement as a "PREFERRED PROPOSAL"); and (2)
prior to furnishing such non-public information to, or entering into discussions
or negotiations with, such Person, the Board of Directors receives from such
Person an executed confidentiality agreement with confidentiality provisions not
materially less favorable to such Person than those contained in the
Confidentiality Agreement dated as of June 30, 1998 between BUYER and TARGET
(the "CONFIDENTIALITY AGREEMENT") or (B) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to a Competing Offer. TARGET shall take no
action with respect to the Competing Offer until 48 hours after notice is
received by BUYER as required under Section 6.1(b) below.
(b) TARGET shall notify BUYER orally and in writing no later than
24 hours after receipt by TARGET (or its advisors) of any Competing Offer or any
request for nonpublic information in connection with a Competing Offer or for
access to the properties, books or records of such party by any Person that
informs such party that it is considering making, or has made, a Competing
Offer. Such notice to BUYER shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact.
6.2 Proxy Statement.
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(a) As promptly as practicable after the execution of this
Agreement, TARGET shall prepare and file with the SEC a proxy statement (the
"PROXY STATEMENT") to be sent to the stockholders of TARGET in connection with
the meeting of its stockholders to consider this Agreement and the Merger (the
"TARGET STOCKHOLDERS MEETING"). The Proxy Statement (i) shall comply in form and
content with the DGCL and all applicable published rules and regulations of the
SEC with respect thereto, (ii) shall not, on the date the Proxy Statement is
first mailed to stockholders of TARGET, at the time of the TARGET Stockholders
Meeting, or at the Effective Time, contain any statement which, at such time and
in light of the circumstances under which it was made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement not false or
misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the TARGET Stockholders Meeting which has become false or
misleading, and (iii) shall contain the unanimous recommendations of Directors
of TARGET in favor of the Merger and this Agreement except Mark L. Plaumann, a
representative of Wexford on the Board, who shall have abstained from voting.
(b) BUYER and BUYER's counsel shall be given three (3) days to
review and comment on the preliminary Proxy Statement prior to filing with the
SEC and shall be given a reasonable period to review and comment on any
subsequent changes to the Proxy Statement. TARGET will notify BUYER promptly of
any comments received from the SEC or its staff and will provide BUYER with
copies of all correspondence with the SEC pertaining to the Proxy Statement or
the Merger. The final Proxy Statement shall be subject to BUYER's reasonable
approval which shall not be unreasonably withheld and shall be given within two
days after the date on which such document is provided to BUYER.
(c) If at any time prior to the Effective Time any event relating
to TARGET or any of its Affiliates, officers or directors should be discovered
by TARGET which should be set forth in a supplement to the Proxy Statement,
TARGET shall promptly inform BUYER.
6.3 Stockholders' Meeting. TARGET shall call a meeting of its
stockholders to be held as promptly as practicable for the purpose of voting
upon this Agreement and the Merger. Subject to Sections 6.1 and 6.2, TARGET
will, through its Board of Directors, recommend to its stockholders approval of
such matters.
6.4 Consents. Each of BUYER and TARGET shall use all reasonable efforts
to obtain all necessary consents, waivers and approvals under their respective
material agreements, contracts, licenses or leases as may be necessary or
advisable to consummate the Merger and the other transactions contemplated by
this Agreement.
6.5 Access to Information. Upon reasonable notice and subject to
applicable law and other legal obligations, TARGET shall in good faith afford to
the officers, employees, accountants, counsel and other representatives of
BUYER, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments, personnel
and
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records and, during such period, TARGET shall furnish promptly to BUYER (a) a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of federal
securities laws and (b) all other information concerning its business,
properties and personnel as BUYER may reasonably request. Unless otherwise
required by law, the parties will hold any such information which is nonpublic
in confidence in accordance with the Confidentiality Agreement. No information
or knowledge obtained in any investigation pursuant to this Section 6.5 shall
affect or be deemed to modify any representation or warranty contained in this
Agreement or the conditions to the obligations of the parties to consummate the
Merger.
6.6 Legal Conditions to Merger. Each of BUYER and TARGET will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required in connection
with approvals of or filings with any Governmental Entity) and will promptly
cooperate with and will use their best efforts to furnish information to each
other in connection with any such requirements imposed upon any of them in
connection with the Merger. Each of BUYER and TARGET will: (i) take all
reasonable actions necessary to obtain (and will cooperate with each other in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any Governmental Entity or other third party, required to be obtained or
made by TARGET or BUYER in connection with the Merger (any of the foregoing an
"APPROVAL") or the taking of any action contemplated thereby or by this
Agreement; (ii) diligently oppose or pursue any rehearing, appeal or other
challenge which may be available to it of any refusal to issue any Approval or
of any order or ruling of any Governmental Entity which may adversely affect the
ability of the parties hereto to consummate the Merger or to take any action
contemplated by any Approval or by this Agreement until such time as such
refusal to issue any Approval or any order or ruling has become final and
non-appealable; and (iii) diligently oppose any objections to, appeals from or
petitions to reconsider or reopen any Approval or the taking of any action
contemplated thereby or by this Agreement.
6.7 Update Disclosure; Breaches; Opportunity to Cure. From and after the
date of this Agreement until the Effective Time, each party hereto shall
promptly notify the other party in writing, by written update to its respective
Disclosure Schedule or otherwise, as appropriate, of (i) the occurrence or
non-occurrence of any event which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied, or (ii) the failure of BUYER
or TARGET to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Merger and the other transactions contemplated by this Agreement not to be
satisfied. Upon such written notification pursuant to this Section 6.7, the
party responsible for such occurrence, non-occurrence, non-compliance or
non-satisfaction (each, an "EVENT") shall have the opportunity, for a period of
20 calendar days from the date of such written notice, to cure such Event. If
any Event is so cured, such Event shall not be a breach, notwithstanding
anything to the contrary set forth herein.
6.8 Trading Prohibitions. Each of BUYER, SUB and TARGET hereby
acknowledges that as a result of disclosures by BUYER, SUB and TARGET
contemplated under this Agreement,
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BUYER, Sub, TARGET and its Subsidiaries and their respective affiliates may,
from time to time, have material, non-public information concerning each other.
Each of BUYER, SUB and TARGET confirms that it and its respective Affiliates are
aware, and that it has advised such persons that, (i) the United States
securities laws may prohibit a person who has material, non-public information
from purchasing or selling securities of any company to which such information
relates, and (ii) material non-public information shall not be communicated to
any other Person except as permitted herein.
6.9 Voting Agreement. Contemporaneously with the execution of this
Agreement, each of Wexford Management LLC on behalf of 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., Wexford Overseas Partners I, L.P., Wexford Capital Partners I, L.P., and
Wexford Capital Partners II, L.P. (collectively, "WEXFORD"), and C. Stephen Beal
shall have executed a voting agreement in the form attached hereto as EXHIBIT A
(the "VOTING AGREEMENT") whereby each party to such agreement has agreed to vote
in favor of the Merger. TARGET shall use all commercially reasonable efforts to
obtain the signature of Henry Huta to the Voting Agreement.
6.10 Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of the stockholders of TARGET
described in Section 7.1(a), including cooperating fully with the other party.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of the Constituent Corporations, the proper
officers and directors of each party to this Agreement shall take all such
necessary action.
6.11 Security Interest. TARGET, Pentney, WEP, Wexford, in its capacity
as principal stockholder of TARGET and in its capacity as the Shareholder
Representative, and BUYER, shall execute on or before the Closing Date, a
Security Agreement creating a valid and enforceable security interest, or
comparable interest under the laws of the relevant jurisdiction, in each of the
Mannesmann Receivable and all of WEP's right, title and interest in the LIM
Funds in favor of the Shareholders (the "SECURITY AGREEMENT"). Prior to the
Effective Time, TARGET and BUYER shall cooperate with the Shareholder
Representative to take all actions necessary to allow the Shareholder
Representative, on behalf of the Shareholders, to perfect the Security Interest,
or take such other actions under the laws of the relevant jurisdiction as are
necessary to give the Shareholders the same protections they would receive from
the perfection of the Security Interest in the United States. From and after the
Effective Time, BUYER shall, and shall cause the Surviving Corporation to, take
any action which may be necessary to allow the Shareholders to maintain such
perfection of the Security Interest.
6.12 Collection and Payment of the Net Proceeds.
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(a) The LIM Funds.
(i) BUYER shall cause the Surviving Corporation and WEP
to use commercially reasonable efforts to maximize the recovery of the LIM Funds
as quickly as possible.
(ii) Unless the LIM Funds have been repaid in full, BUYER
shall not, and shall cause the Surviving Corporation and WEP not to, use LIM as
the guarantor of any additional warrantee obligations of WEP, the Surviving
Corporation or any other affiliate of BUYER, and shall not amend the terms of
any LIM guarantee of WEP's warrantee obligations without the prior written
approval of the Shareholder Representative.
(iii) In the event that the LIM Funds are reduced because
any portion of such funds have been paid by LIM from and after the Effective
Time to the holder of a LIM guarantee of an obligation of the Surviving
Corporation or WEP in satisfaction of a claim by such holder, BUYER shall, or
shall cause the Surviving Corporation or WEP to, deposit an amount equal to the
amount by which the LIM Funds were reduced as a result of such payment, with the
Exchange Agent in accordance with Section 2.2 hereof, as if such amount were a
portion of the Net Proceeds recovered from the LIM Funds.
(b) The Mannesmann Receivable. BUYER shall cause the Surviving
Corporation and Pentney to use commercially reasonable efforts to maximize
recovery of the Mannesmann Receivable and to recover the Mannesmann Receivable
as quickly as possible.
(c) The Puerto Rico Tax Liability. BUYER shall cause the
Surviving Corporation and any of its Subsidiaries, as appropriate, to use
commercially reasonable efforts to maximize the PR Surplus and to determine the
final amount of the Puerto Rico Tax Liability as quickly as possible.
(d) Collection Fee. BUYER shall be entitled to payment of a
collection fee equal to (i) 20% of the funds collected in respect of the
Mannesmann Receivable plus (ii) 20% of the amount by which the Puerto Rico Tax
Liability is less than $1.5 million; and (iii) 10% of the funds collected in
respect of the LIM Funds; provided, however, that such collection fee shall be
calculated after the deduction from such collected amounts of the costs and
expenses associated with such collection.
(e) Approval with Respect to Litigation. BUYER shall not
undertake any litigation, or incur any material collection costs related
thereto, in connection the Net Proceeds without the prior written consent of the
Shareholder Representative.
(f) Assumption of Responsibility. At anytime, the Shareholder
Representative may elect to assume responsibility, at its cost subject to
reimbursement out of Designated Amounts collected, for collection of the
Designated Amounts.
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(g) Notwithstanding anything to the contrary, the Initial Payment
shall be increased by the amount of any Net Proceeds collected by BUYER from the
date hereof to the Closing Date.
(h) On the third anniversary of the Closing Date, BUYER and the
Shareholder Representative shall reasonably determine whether LIM is current on
payments on the principal amount the LIM Funds no longer required to be held as
collateral by LIM as of such date. If BUYER and the Shareholder Representative
determine that LIM is current on such payments, BUYER shall deposit in the
Exchange Fund an amount equal to the remaining LIM Funds then held by LIM. If
BUYER and the Shareholder Representative shall determine that LIM is not current
on such payments, then, notwithstanding anything to the contrary in Section
2.2(d) hereof, the Exchange Fund shall not terminate and BUYER shall continue to
be bound by its post closing covenants regarding recovery and deposit of any Net
Proceeds recovered from the LIM Funds.
6.13 Payment of Wexford Debts and Replacement of Wexford Guarantees.
From the date hereof through the Closing Date, BUYER shall use its best efforts
to take all actions necessary to enable BUYER, on the Closing Date to comply
with its obligations under Sections 7.3(b) and 7.3(c) hereof.
6.14 Working Capital. From the date hereof to the Closing Date, upon the
determination of the Executive Committee that TARGET is in need of working
capital, BUYER shall have the option to advance such funds to TARGET, and if
BUYER shall elect not to advance such funds, Wexford shall have the option to
advance such funds.
6.15 Subsidiaries. As promptly as possible, TARGET shall either provide
to BUYER's counsel true, correct and complete copies of the current Certificate
of Incorporation and By-laws (or other constitutive documents) of each of TARGET
and its Subsidiaries or shall have made applications to the relevant
governmental authorities to obtain such documents.
6.16 Fees and Expenses. On or before the Closing Date, TARGET shall
submit to BUYER, or cause its service providers to submit to BUYER, a detailed
listing of reasonable expenses actually incurred by TARGET in connection with
this transaction including, without limitation, reasonable fees and expenses of
counsel, reasonable fees and expenses of accountants, the cost of directors and
officers liability insurance, funding of a reserve account for payment of the
expected fees and expenses of the Exchange Agent, and mailing and photocopying
costs incurred in connection with the Proxy Statement. At the Closing, BUYER
shall pay all such expenses of TARGET; provided however, that if such expenses
exceed $100,000, exclusive of the fee owing to Hera, LLC, which shall not exceed
$50,000, the Initial Payment shall be reduced by the amount of such excess.
ARTICLE 7.
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CONDITIONS TO MERGER
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved
by the affirmative vote of the holders of a majority of the outstanding shares
of TARGET Common Stock entitled to vote thereon, present at a meeting at which a
quorum is present in person or by proxy.
(b) Approvals. Other than the filing provided for by Section 1.1,
all authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity the
absence or nonoccurrence of which would be reasonably likely to have a TARGET
Material Adverse Effect shall have been filed, occurred or been obtained.
(c) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger or limiting or restricting
the conduct or operation by BUYER of the business of BUYER or the Surviving
Corporation after the Merger shall have been issued, except for any such order,
injunction restraint or prohibition which would not be reasonably likely to have
a material adverse effect on BUYER; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger by any Governmental Entity which makes the consummation
of the Merger illegal.
7.2 Additional Conditions to Obligations of BUYER. The obligations of
BUYER to effect the Merger are subject to the satisfaction of each of the
following conditions, any of which may be waived in writing exclusively by
BUYER:
(a) Performance of Obligations of TARGET. TARGET shall have
performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Closing Date; provided,
however; that TARGET's performance of the obligations set forth in Sections 6.5,
6.6, 6.7, 6.10, 6.11, and 6.15 hereof, shall not be a condition to the
obligation of BUYER to effect the Merger; provided, however, that if any party
having knowledge of an Event shall have failed to provide written notice of such
Event to the party responsible therefor, then such Event shall not prevent such
party from being deemed to have performed its obligations in all material
respects in accordance with this Section 7.2(a). BUYER shall have received a
certificate signed on behalf of TARGET by the chief executive officer and the
chief financial officer of TARGET to such effect.
(b) Opinion of TARGET's Counsel. BUYER and SUB shall have
received an opinion of counsel for TARGET covering such matters as is customary
in a transaction of this type
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and in form and substance reasonably satisfactory to BUYER.
7.3 Additional Conditions to Obligations of TARGET. The obligation of
TARGET to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
TARGET:
(a) Performance of Obligations of BUYER. BUYER shall have
performed in all material respects all material obligations required to be
performed by them under this Agreement at or prior to the Closing Date; and
TARGET shall have received a certificate signed on behalf of BUYER by the chief
executive officer and the chief financial officer of BUYER to such effect.
(b) Refinancing of Wexford Debts. At the Effective Time, the
Wexford Debts shall be paid in full.
(c) Replacement of the Wexford Guarantees. On or prior to the
Closing Date, BUYER shall have replaced, or shall have arranged for a third
party to replace, Wexford as guarantor on the Wexford Guarantees.
(d) Security Agreement. TARGET, Pentney, WEP and BUYER shall have
executed and delivered the Security Agreement.
(e) Opinion of BUYER's Counsel. TARGET shall have received an
opinion of counsel for BUYER and SUB covering such matters as is customary in a
transaction of this type and in form and substance reasonably satisfactory to
TARGET.
ARTICLE 8.
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time (with respect to Sections 8.1(b) through 8.1(g), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of BUYER or the stockholders of TARGET, as follows:
(a) by mutual written consent of BUYER and TARGET; or
(b) by either BUYER or TARGET if the Merger shall not have been
consummated within the later of (x) ninety (90) days of the date of this
Agreement and (y) the expiration of and any additional period pursuant to
Section 6.7 hereof, provided, however, that the right to terminate this
Agreement under this Section 8.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date; and
provided further that if such delay is caused by the SEC, then the Agreement
shall terminate not later than one hundred twenty (120) days after the date of
this Agreement; or
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<PAGE>
(c) by either BUYER or TARGET if a court of competent
jurisdiction or other Governmental Entity shall have issued a final order,
decree or ruling, or taken any other action, having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger, and all appeals with
respect to such order or action have been exhausted or the time for appeal of
such order, decree, ruling or action shall have expired; or
(d) by BUYER if, at the TARGET Stockholders' Meeting (including
any adjournment or postponement thereof), the requisite vote of stockholders of
TARGET in favor of this Agreement shall not have been obtained (provided, that
the right to terminate this Agreement under this Section 8.1(d) shall not be
available to any party which has not complied with its obligations hereunder in
all material respects); or
(e) by BUYER if (i) the Board of Directors of TARGET shall have
withdrawn its recommendation of this Agreement or the Merger; (ii) an
Alternative Transaction (as defined below) involving TARGET shall have taken
place or the Board of Directors of TARGET shall have recommended such an
Alternative Transaction to the stockholders of TARGET or shall have resolved to
engage in such an Alternative Transaction; or (iii) a tender offer or exchange
offer for forty percent (40%) or more of the outstanding shares of TARGET Common
Stock shall have been commenced or a registration statement with respect thereto
shall have been filed (other than by BUYER or an affiliate thereof), and the
Board of Directors of TARGET shall have recommended that the stockholders of
TARGET tender their shares in such tender or exchange offer; or
(f) by BUYER if a breach of any covenant or agreement on the part
of TARGET set forth in this Agreement shall have occurred which would cause the
conditions set forth in Section 7.2(a) not to be satisfied, and, that with
respect to any breach of a covenant or agreement hereunder, such covenant or
agreement is incapable of being cured or, if capable of being cured, shall not
have been cured within twenty (20) Business Days following receipt by BUYER of
written notice of such breach from TARGET; or
(g) by TARGET, if a breach of any covenant or agreement on the
part of BUYER set forth in this Agreement shall have occurred which would cause
the conditions set forth in Section 7.3(a) not to be satisfied, and, with
respect to any breach of a covenant or agreement hereunder, such covenant or
agreement is incapable of being cured or, if capable of being cured, shall not
have been cured within twenty (20) Business Days following receipt by TARGET of
written notice of such breach from BUYER.
For purposes of this Section 8.1, an "ALTERNATIVE TRANSACTION" involving a
specified party to this Agreement means: (i) a transaction or series of
transactions pursuant to which any person or group (as such term is defined
under the Exchange Act) other than BUYER, TARGET or Sub, or any affiliate
thereof, (a "THIRD PARTY") acquires or would acquire (upon completion of such
transaction or series of transactions) shares (or securities exercisable for or
convertible into shares) representing more than forty percent (40%) of the
outstanding shares of TARGET's common stock, pursuant to a
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<PAGE>
tender offer or exchange offer or otherwise; (ii) a merger, consolidation, share
exchange or other business combination involving TARGET or any of its material
Subsidiaries if, upon consummation of such merger, consolidation, share exchange
or other business combination such Third Party owns or would own more than forty
percent (40%) of the outstanding equity securities of TARGET or any of its
material Subsidiaries or the entity surviving such merger or business
combination or resulting from such consolidation; (iii) any other transaction or
series of transactions pursuant to which any Third Party acquires or would
acquire (upon completion of such transaction or series of transactions) control
of assets of TARGET or any of its material Subsidiaries (including, for this
purpose, outstanding equity securities of Subsidiaries of such party) having a
fair market value equal to more than forty percent (40%) of the fair market
value of all the consolidated assets of such party immediately prior to such
transaction or series of transactions; or (iv) any transaction or series of
transactions pursuant to which any Third Party acquires or would acquire (upon
completion of such transaction or series of transactions) control of the Board
of Directors of TARGET or by which nominees of any Third Party are (or would be)
elected or appointed to a majority of the seats on the Board of Directors of
TARGET.
8.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 8.1, there shall be no Liability or obligation on the part
of BUYER, TARGET, or their respective officers, directors, stockholders or
Affiliates, except as set forth in Section 8.3 and further except to the extent
that such termination results from the willful breach by a party of any of its
representations, warranties, covenants or agreements in this Agreement; and
provided, that the provisions of Section 8.3 of this Agreement and the
Confidentiality Agreement shall remain in full force and effect and survive any
termination of this Agreement.
8.3 Fees and Expenses.
(a) If this Agreement is terminated (i) by BUYER pursuant to
Section 8.1(d), 8.1(e), or Section 8.1(f), TARGET shall pay to BUYER all fees
and expenses incurred by BUYER relating to this Agreement and the transactions
contemplated hereby ("BUYER EXPENSES") within five business days after receipt
of such request which shall not exceed $300,000.
(b) If this Agreement is terminated by TARGET pursuant to Section
8.1(g) hereunder, BUYER shall pay to TARGET all fees and expenses incurred by
TARGET relating to this Agreement and the transactions contemplated hereby
("TARGET EXPENSES") within five business days after receipt of such request not
to exceed $100,000, exclusive of the fee paid to Hera, LLC.
8.4 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of TARGET, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders, as
applicable, without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
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<PAGE>
8.5 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE 9.
MISCELLANEOUS
9.1 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing and
the Effective Time, except for covenants and agreements which, by their terms,
are to be performed after the Effective Time. The Confidentiality Agreement
shall survive the execution and delivery of this Agreement. However, neither the
Closing, nor this Section, nor anything in this Agreement shall limit in any
manner any legal or equitable rights and reconciliations of BUYER with respect
to claims of actual fraud.
9.2 Notices. All notices, requests and demands, and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested), or sent by Federal Express or similar overnight
delivery service, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to BUYER or SUB, to:
Thermatrix Inc.
308 N. Peters Road, Suite 100
Knoxville, Tennessee 37922
Attention: Edward E. Greene
Telephone: (423) 539-9603
Facsimile: (423) 670-4091
with a copy to
Wilson Sonsini Goodrich & Rosati,
650 Page Mill Road
Palo Alto, CA 94304
Attention: Michael J. Danaher, Esq.
Telephone: (650) 493-9300
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<PAGE>
Facsimile: (650) 493-6811
and
(b) if to TARGET to:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, CA 92704-6495
Attention: C. Stephen Beal
Telephone: (714) 979-7300
Facsimile: (714) 979-0130
with a copy to
Howard, Smith & Levin
1330 Avenue of the Americas
New York, New York 10019
Attention: Leonard Chazen, Esq.
Telephone: (212) 841-1000
Facsimile: (212) 841-1010
(c) and in each case, with a copy to:
Wexford Management LLC
411 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Joseph Jacobs
Telephone: (203) 862-7020
Facsimile: (203) 862-7320
If delivered personally, the date on which a notice, request, instruction or
document is delivered shall be the date on which such delivery is made and, if
delivered by mail or by overnight delivery service, the date on which such
notice, request, instruction or document is received shall be the date of
delivery. In the event any such notice, request, instruction or document is
mailed or shipped by overnight delivery service to a party in accordance with
this Section 9.2 and is returned to the sender as nondeliverable, then such
notice, request, instruction or document shall be deemed to have been delivered
or received on the fifth day following the deposit of such notice, request,
instruction or document in the United States mails or the delivery to the
overnight delivery service. Any party hereto may change its address specified
for notices herein by designating a new address by notice in accordance with
this Section 9.2.
9.3 Interpretation. The parties have jointly participated in the
negotiation and drafting of
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this Agreement. In the event of an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumptions or burdens of proof shall arise favoring any
party by virtue of the authorship of any of the provisions of this Agreement.
Any reference to any Federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. Each defined term used in this Agreement has a
comparable meaning when used in its plural or singular form. Each
gender-specific term used herein has a comparable meaning whether used in a
masculine, feminine or gender-neutral form. The term "INCLUDE" and its
derivatives shall have the same construction as the phrase "INCLUDE, WITHOUT
LIMITATION," and its derivatives. The Section headings contained in this
Agreement are inserted for convenience or reference only and shall not affect in
any way the meaning or interpretation of this Agreement. When a reference is
made in this Agreement to a section, such reference shall be to a Section of
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
9.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement.
9.5 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
9.6 Arbitration. The parties agree that any and all disputes, claims or
controversies arising out of or relating to this Agreement that are not resolved
by their mutual agreement shall be submitted to final and binding arbitration
before J*A*M*S/Endispute, or its successor, pursuant to the United States
Arbitration Act, 9 U.S.C. Sec. 1 et seq. Either party may commence the
arbitration process called for in this Agreement by filing a written demand for
arbitration with J*A*M*S/Endispute, with a copy to the other party. The
arbitration will be conducted in accordance with the provisions of
J*A*M*S/Endispute's Comprehensive Arbitration Rules and Procedures in effect at
the time of filing of the demand for arbitration. The parties will cooperate
with J*A*M*S/Endispute and with one another in selecting an arbitrator from
J*A*M*S/Endispute's panel of neutral arbitrators, and in scheduling the
arbitration proceeding. The parties covenant that they will participate in the
arbitration in good faith. Costs with respect to the arbitration shall be
awarded by the arbitrator. The provisions of this Section 9.6 may be enforced by
any court of competent jurisdiction, and the party seeking enforcement shall be
entitled to an award of all costs, fees and expenses, including attorneys' fees,
to be paid by the party against whom enforcement is ordered.
9.7 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties, and any attempted assignment thereof without such consent shall be null
and void. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors
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and assigns.
9.8 Entire Agreement; No Third Party Beneficiaries. This Agreement and
all agreements referenced specifically in this Agreement and executed as
required by this Agreement constitute the entire agreement among the parties
hereto and supersede and cancel any prior agreements, representations,
warranties, or communications, whether oral or written, among the parties hereto
relating to the transactions contemplated hereby or the subject matter herein.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an agreement in writing signed by
the party against whom or which the enforcement of such change, waiver,
discharge or termination is sought. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder,
provided, however, that the Shareholders are beneficiaries of the obligations of
BUYER with respect to the Net Proceeds and the Shareholder Representative shall
be entitled to enforce such obligations of BUYER.
9.9 Severability. In the event that any court or any governmental
authority or agency declares all or any part of any Section of this Agreement to
be unlawful, invalid or unenforceable, (i) such part or Section of this
Agreement shall be modified rather than voided, if possible, in order to achieve
the intent of the parties to the extent possible, (ii) such unlawfulness,
invalidity or unenforceability shall not serve to invalidate any other Section
of this Agreement, and (iii) in the event that only a portion of any Section is
so declared to be unlawful, invalid or unenforceable, such unlawfulness,
invalidity or unenforceability shall not serve to invalidate the balance of such
Section.
9.10 Exhibits and Schedules Incorporated. All Exhibits and Schedules
attached hereto are incorporated by reference herein and are an integral part of
this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on the day and year first written above.
BUYER: THERMATRIX INC.
a Delaware Corporation
By:_______________________________
Name:_____________________________
Its:______________________________
SUB: TMX ACQUISITION SUB I, INC.
a Delaware Corporation
By:_______________________________
Name:_____________________________
Its:______________________________
TARGET: WAHLCO ENVIRONMENTAL SYSTEMS, INC.
a Delaware Corporation
By:_______________________________
Name:_____________________________
Its:______________________________
[Signature Page to Agreement and Plan of Merger]
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<PAGE>
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT OF
LENDER INDEBTEDNESS
- ----------------------------------------------------------------------- ------------
<S> <C>
Chase Manhattan Bank
Note dated March 2, 1998
Principal Balance of ........................................ $ 2,650,000.00
Note dated September 22, 1998
Principal Balance of......................................... $ 200,000.00
Note dated October 8, 1998
Principal Balance of......................................... $ 200,000.00
Note dated October 19, 1998
Principal Balance of......................................... $ 75,000.00
--------------
Total.......................................................... $ 3,125,000.00
==============
Wexford
Tranche A Loan Advanced 2/5/98
Principal Balance of.......................................... $ 1,000,000.00
Tranche A Loan Advanced 3/12/98
Principal Balance of.......................................... $ 500,000.00
Interest on debt due to Wexford for the six months ended
6/30/98, and capitalized pursuant to an agreement by
and between Wexford and Target.................................. $ 79,139.73
--------------
Total........................................................... $ 1,579,139.73
==============
</TABLE>
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<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
BENEFICIARY OF BOND OR AMOUNT OF
LETTER OF CREDIT ISSUED BY AGREEMENT EXPIRATION WEXFORD
GUARANTOR BENEFICIARY GRANTOR BENEFICIARY DATE DATE GUARANTY
--------------------- -------------------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Ulico Casualty Company OC America Construction, Inc. 1/28/97 Unknown 531,300
</TABLE>
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<PAGE>
ANNEX B
DELAWARE GENERAL CORPORATION LAW
SEC. 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec.228 of this title shall be entitled
to an appraisal by the Court of Chancery of the fair value of the
stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the
word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt
or other instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to sec.251 (other than a merger
effected pursuant tosec.251(g) of this title), sec.252, sec.254,
sec.257, sec.258, sec.263 or sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof,
at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders
to act upon the agreement of merger or consolidation, were
either (i) listed on a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec.251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement
of merger or consolidation pursuant to sec.sec.251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts
in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or
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depository receipts at the effective date of the merger
or consolidation will be either listed on a national
securities exchange or designated as a national market
system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under sec.253 of this
title is not owned by the parent corporation immediately prior
to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this
section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not
less than 20 days prior to the meeting, shall notify each of
its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's shares. A proxy or vote
against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so
by a separate written demand as herein provided. Within 10 days
after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228
or sec.253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of
any
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class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on
or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of stock
of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identify of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If
such notice did not notify stockholders of the effective date
of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of
the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice
is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that
shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date
shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record
date shall be the close of business on the day next preceding
the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon
the merger or consolidation. Within 120 days after the effective date
of the merger or consolidation, any stockholder who has complied with
the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the
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merger or resulting from the consolidation a statement setting forth
the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified
list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving
or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the
Court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of
the merger or consolidation, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court
may consider all relevant factors, including the rate of interest which
the surviving or resulting corporation would have had to pay to borrow
money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is
finally determined that such stockholder not entitled to appraisal
rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion
of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged pro
rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on
the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date
of the merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the
right of such stockholder to an appraisal shall cease. Notwithstanding
the foregoing, no appraisal proceeding in the Court of Chancery shall
be dismissed as to any stockholder without the approval of the Court,
and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
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