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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
3600 West Segerstrom Avenue
Santa Ana, California 92704
(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: (714) 979-7300
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
-------- --------
The number of shares of common stock outstanding at August 9, 1996 was
17,649,000 shares.
Page 1 of __
Exhibit Index at Page 16
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PART I. Financial Information
ITEM 1. Financial Statements
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 7,870 $ 11,561 $ 19,504 $ 25,199
Rental, service and other 2,249 2,898 4,003 5,168
-------- -------- -------- ---------
10,119 14,459 23,507 30,367
COSTS AND EXPENSES:
Cost of revenues:
Product sales 7,745 9,495 16,956 19,864
Rental, service and other 2,363 2,377 3,728 4,205
Selling, general and administrative 4,964 5,793 8,799 9,317
Goodwill amortization -- 32 -- 65
-------- -------- -------- ---------
15,072 17,697 29,483 33,451
-------- -------- -------- ---------
Operating loss (4,953) (3,238) (5,976) (3,084)
OTHER INCOME (EXPENSE):
Interest income 22 128 56 159
Interest expense (398) (351) (751) (954)
Other income (expense) (30) (308) 28 (382)
-------- -------- -------- ---------
(406) (531) (667) (1,177)
-------- -------- -------- ---------
Loss before income taxes (5,359) (3,769) (6,643) (4,261)
Benefit for income taxes (1,301) (959) (1,774) (934)
-------- -------- -------- ---------
Net loss $ (4,058) $ (2,810) $ (4,869) $ (3,327)
-------- -------- -------- ---------
-------- -------- -------- ---------
Net loss per share $ (0.23) $ (0.16) $ (0.28) $ (0.19)
-------- -------- -------- ---------
-------- -------- -------- ---------
Average common shares outstanding 17,649 17,649 17,649 17,649
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,067 $ 3,840
Restricted cash and cash equivalents 697 1,307
Accounts receivable 11,292 15,935
Costs and estimated earnings in excess of
billings on uncompleted contracts 6,315 6,839
Inventories 7,808 8,711
Other current assets 1,802 1,580
------- --------
TOTAL CURRENT ASSETS 29,981 38,212
Property, plant and equipment, net 5,268 5,921
Other assets 2,449 2,386
------- --------
$37,698 $46,519
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,000 $ 2,744
Accounts payable 6,610 8,932
Accrued payroll and payroll related liabilities 1,960 1,944
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,567 2,376
Current portion of long-term debt 220 204
Taxes payable 180 391
Other accrued liabilities 9,645 8,908
------- --------
TOTAL CURRENT LIABILITIES 23,182 25,499
Long-term debt 8,263 7,948
Other liabilities 3,645 3,689
Deferred income taxes 249 2,016
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock 176 176
Capital in excess of par value 90,712 90,534
Accumulated deficit (85,744) (80,875)
Foreign currency translation adjustment (2,785) (2,468)
------- --------
TOTAL STOCKHOLDERS' EQUITY 2,359 7,367
------- --------
$37,698 $46,519
------- --------
------- --------
</TABLE>
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,869) $(3,327)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 738 903
Deferred income taxes (1,768) (989)
Loss on sale of fixed assets 132 365
Deferred compensation 177 448
Changes in operating assets and operating liabilities:
Accounts receivable 4,747 935
Refundable income taxes -- 882
Costs and estimated earnings in excess of
billings on uncompleted contracts 570 (3,030)
Inventories 978 (1,963)
Other current assets (214) 373
Accounts payable and accrued liabilities (1,791) 1,104
Billings in excess of costs and estimated earnings
on uncompleted contracts (818) (1,314)
Income taxes payable (213) 376
------- -------
NET CASH USED IN OPERATING ACTIVITIES (2,331) (5,237)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (168) (419)
Proceeds from dispositions of property, plant and equipment 37 800
Change in other assets (135) 768
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (266) 1,149
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WES Acquisition Corp. 446 --
Borrowings on notes payable 360 --
Payments on notes payables (107) --
Borrowings on long-term debt 29 1,372
Payments on long-term debt (148) (123)
Advances from Pacific Diversified Capital Company -- 1,267
Payments to Pacific Diversified Capital Company -- (372)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 580 2,144
------- -------
Effect of exchange rate changes on cash (366) (137)
------- -------
Net decrease in cash and cash equivalents (2,383) (2,081)
Cash and cash equivalents, beginning of period 5,147 7,121
------- -------
Cash and cash equivalents, end of period $ 2,764 $ 5,040
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for (received from) income taxes $ 107 $(1,231)
------- -------
------- -------
Cash paid for interest $ 269 $ 481
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments necessary for a
fair presentation of the consolidated financial position of the Company and
the consolidated results of its operations for the six month periods ended
June 30, 1996 and 1995. Although the Company believes that the disclosures
in these financial statements are adequate to make the information
presented not misleading, certain information and footnote information
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for the period ended June 30, 1996 are
not necessarily indicative of results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
The Company is 81 % owned by WES Acquisition Corp. ("WESAC"), an affiliate
of Wexford Capital Corporation. On May 15, 1995, WESAC entered into a
purchase agreement with Pacific Diversified Capital Company ("PDC"), a
wholly-owned subsidiary of San Diego Gas & Electric Company, providing for
the purchase of PDC's 81 % stock interest in the Company. The share
acquisition received approval under the Hart-Scott-Rodino Antitrust Act on
June 2, 1995 and the purchase of the stock interest was completed on
June 6, 1995.
Certain amounts in the 1995 condensed consolidated financial statements
have been reclassified to conform with the 1996 presentation.
2. INCOME TAXES
The provision for income taxes during the interim periods reflects
estimated effective tax rates for the full year. The effective rates are
different than the Federal statutory rate principally due to losses from
the Company's operations which cannot be utilized and from certain state
taxes provided.
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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.
With respect to WESAC's acquisition of PDC's shares, 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 tax code. Under this
election, the allocation of the purchase price to the assets deemed
purchased resulted in the recording of deferred tax liabilities. Buyer and
seller agreed to cooperate in determining the allocation of the purchase
price. Pending such agreement, the Company recorded deferred tax
liabilities of $5.0 million, of which approximately $700 thousand was
recorded in current liabilities. Such amounts are subject to adjustment
following later agreement between the buyer and the seller.
In connection with the WESAC acquisition, PDC contributed $20 million in
debt to the capital of the Company. This resulted in an increase to
stockholders' equity, net of deferred tax liabilities which were recorded,
of approximately $14.9 million. In addition, the acquisition resulted in
the write-off to equity of previously existing deferred tax assets of
approximately $3.2 million.
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.
3. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
Raw materials $1,662 $1,910
Work in process 5,980 6,579
Finished goods 166 222
----------- ------------
$7,808 $8,711
----------- ------------
----------- ------------
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4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
7.9525% note payable, due in forty-seven
monthly installments of $19
(principal and interest) through June
2000, secured by related lease payments $ 789 $ 874
Secured term loan from WESAC,
bearing interest at 13.0% and
due May, 1998. 5,378 5,061
Secured term loan from WESAC,
bearing interest at 13.0% and
due June, 1998. 2,216 2,087
Other credit agreements 100 130
----------- ------------
8,483 8,152
Less current portion (220) (204)
----------- ------------
$ 8,263 $ 7,948
----------- ------------
----------- ------------
On May 15, 1995, PDC entered into a purchase agreement with WESAC, pursuant
to which WESAC purchased $4.9 million of the Company's outstanding debt to
PDC, and PDC contributed to the capital of the Company the remaining
approximately $20 million the Company owed to it. Pursuant to the same
agreement, WESAC agreed to purchase PDC's 81 % stock interest in the
Company. The purchase of the stock interest was completed on June 6,
1995. (See note 1)
Subsequent to the completion of the stock purchase, the Company and WESAC
entered into a loan agreement under which WESAC provided the Company with a
$2 million secured loan for ongoing working capital.
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Under an agreement reached between the Company and WESAC on March 22, 1996,
interest due and payable from WESAC is capitalized into the debt. This
agreement commenced with interest due and payable for the fourth quarter of
1995 and extends through December 31, 1996. The above secured loan
balances with WESAC include capitalized interest of $694 thousand as of
June 30, 1996, under this agreement.
5. CONTINGENCIES
BESSEY VS. WAHLER LITIGATION:
Since filing the Company's Form 10-K for the period ended December 31,
1995, the following material events have occurred with regard to the above-
referenced litigation.
On June 10, 1996, the Court of Appeal filed its decision. The Court of
Appeal affirmed the judgment rendered by the trial court in favor of
defendants. The Court of Appeal also reversed the trial court order
denying attorneys' fees to the defendants, and remanded the case for a
determination of the amount of fees. July 22, 1996 was the latest day
plaintiffs could petition the California Supreme Court for review.
SHARON STEEL CORPORATION VS. WAHLCO POWER PRODUCTS, INC.:
Since filing the Company's Form 10-K for the period ended December 31,
1995, the following material events have occurred with regard to the above-
referenced litigation.
The parties have reached a verbal agreement to settle, which is expected to
be documented and finalized by the end of August 1996. Pursuant to the
settlement, which is subject to bankruptcy court review, WPPI is to pay $20
thousand to Sharon Steel in exchange for a release and dismissal of the
case with prejudice.
6. STOCKHOLDERS' EQUITY
Capital in excess of par value increased $11.5 million in June 1995,
primarily reflecting the contribution by PDC of $20 million of debt to the
capital of the Company and the recording of approximately $5 million in
deferred tax liabilities in connection with the purchase by Wexford of
PDC's 81% stock interest in the Company and the purchase of $4.9 million of
the Company's outstanding debt to PDC.
Capital in excess of par value decreased $3.2 million in the second quarter
of 1995 due to the reduction in the carrying amount of net deferred tax
assets (see note 2).
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7. GOODWILL AND OTHER INTANGIBLE WRITE-DOWNS
During 1995 and 1994, the Company evaluated the value of goodwill and
intangibles, in light of intensifying competition and declining margins.
As a result of this analysis, the Company wrote off goodwill totaling $2.4
million during the fourth quarter of 1995, which represented the remaining
goodwill on the books of Wahlco, Inc. and Pentney of $1.8 million and $634
thousand, respectively. As of December 31, 1995, the Company had no
goodwill remaining on the balance sheet.
In March, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("FAS 121") which changed the
method of valuing long-lived assets, whereby long-lived assets that are
expected to be held and used in operations should be carried at the lower
of costs or the fair value of the asset and long-lived assets to be
disposed of should be reported at the lower of carrying amount or fair
value less cost to sell. 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 1995 or in the first six months of 1996. It is
possible that the estimates used to determine the fair value of certain
long-lived assets will change in the future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
From time to time the information provided by the Company or statements made by
its employees may contain so-called "forward looking" information that involves
risks and uncertainties. In particular, statements contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are not historical facts are forward looking statements. The Company's actual
future results may differ significantly from those stated in any forward looking
statements. Factors that may cause such differences include, but are not
limited to the factors discussed herein as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels. Each of these
factors and others are discussed from time to time in the Company's Securities
and Exchange Commission filings.
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto included in this Quarterly Report,
and with the audited Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Form 10-K.
The Company operates through several distinct subsidiaries which focus on
specific products and/or geographical regions. These entities are
coordinated through a common corporate management. The entities include:
Wahlco, Inc., which designs, manufactures and services equipment for the
reduction and control of air pollution; Wahlco Engineered Products, Inc.,
which designs and manufactures diverters, dampers and expansion joints;
Wahlco Engineered Products, Ltd. (U. K.), which designs and sells dampers
and diverters. Wahlco Engineered Products, Pty. Ltd. (Australia), which
sells dampers and expansion joints; Pentney Engineering Ltd. (U. K.), which
provides precipitator refurbishment, mechanical plant installation,
hydraulic equipment manufacturing, pipework and general fabrication;
Teddington Bellows, which designs and manufactures metallic expansion
joints; and Treste Plant Hire Ltd. which rents equipment to the mechanical
construction industry.
The Company is 81 % owned by WES Acquisition Corp. ("WESAC"), an affiliate of
Wexford Capital Corporation. On May 15, 1995, WESAC entered into a purchase
agreement with Pacific Diversified Capital Company (PDC), a wholly-owned
subsidiary of San Diego Gas & Electric Company, providing for the purchase of
PDC's 81 percent stock interest in the Company. The share acquisition received
approval under the Hart-Scott-Rodino Antitrust Act on June 2, 1995 and the
purchase of the stock interest was completed on June 6, 1995.
In June 1995, the Company formed a division under Wahlco, Inc. to identify and
develop products designed for the destruction of volatile organic compounds
("VOCs"). In November 1995, the division signed a license agreement with LTG
Lufttechnische GmbH ("LTG") to sell
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and manufacture a line of products for the reduction and control of VOCs in the
United States, Canada and Mexico. LTG is located in Stuttgart, Germany and
designs, manufactures and sells a broad line of catalytic and thermal VOC and
odorant oxidizers. No orders had been taken for these products as of June 1996.
In January 1996, the Company signed an agreement with Viking Water Systems,
Inc., to license the design, manufacture, sale and installation of water
purification systems including pre-treatment systems, reverse osmosis systems,
and bottle washing, filling and capping equipment. In July 1996, this agreement
was terminated by both parties.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 VS. 1995
REVENUES -- Revenues of $10.1 million for the second quarter were $4.4 million,
or 30%, lower than revenues of $14.5 million reported in the second quarter of
1995. Revenues from the WEP Group totaled $7.6 million in the second quarter of
1996, down $3.1 million from revenues of $10.7 million in the comparable quarter
of 1995, due to the completion of several large contracts in 1995 and the timing
of orders in international markets. Revenues from the sale, rental and service
of FGC systems totaled $1.7 million in the second quarter of 1996, down $1.2
million from FGC system revenues generated in the second quarter of last year.
The domestic electric utility industry continues to be impacted by increased
competition, due to continuous federal and state deregulation and, as a result,
order activity for domestic FGC systems is low.
COST OF REVENUES -- Cost of revenues totaled $10.1 million, or 100% of revenues,
for the quarter just ended, compared to $11.9 million, or 82% of revenues, for
the second quarter of 1995. Cost of revenues were significantly higher as a
percent of revenues in the second quarter of 1996 as the second quarter of 1996
included provisions for contract charges totaling approximately $1.7 million, of
which $1.0 million related to products manufactured under subcontract in foreign
countries by the WEP Group, and $0.7 million related to domestic contract
disputes at Wahlco, Inc.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) -- Second quarter SG&A expense of
$5.0 million was $0.8 million below SG&A expense of $5.8 million reported in
the second quarter of 1995. SG&A expense in the second quarter of 1996
included $0.7 million of bad debt reserves for domestic receivables in the
WEP Group and one-time charges totaling approximately $350 thousand related
to executive severance expenses and option programs. SG&A expense in the
second quarter of 1995 included one-time charges totaling $1.8 million for
legal and closing fees related to WESAC's purchase of PDCC's 81% stock
interest in the Company and $200 thousand associated with closing the
facility in Puerto Rico. Before one-time charges, SG&A expense in the
second quarter of 1996 was $3.8 million, essentially identical to SG&A
expense in the same period in 1995. SG&A expense in 1996 did, however,
include approximately $0.4 million of expenses related to the marketing and
sale of VOC products and the Company's license agreement with Viking Water
Systems, Inc. These businesses were not in operation in the second quarter
of 1995.
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INCOME TAXES -- The income tax benefit of $1.3 million in the second quarter of
1996 represents tax benefits derived from taxable domestic losses in the
quarter. The Company had previously recorded deferred tax liabilities which
enabled the Company to take tax benefits subsequent to the purchase of the stock
interest by WESAC. (See note 2)
In the second quarter of 1995, the Company booked a tax benefit of $959 thousand
against losses from domestic operations subsequent to the purchase of the stock
interest by WESAC. The Company was unable to provide a tax benefit against
prior losses since an amendment to the tax sharing agreement between the Company
and PDC restricted reimbursement of tax benefits effective December 31, 1994.
This agreement terminated on the closing of the equity sale to WESAC on June 6,
1995.
NET LOSS -- The net loss of $4.1 million for the second quarter of 1996 was
$1.3 million greater than the net loss of $2.8 million reported for the
second quarter of 1995. The increased loss was the result of the above
mentioned factors. Excluding the contract and bad debt provisions mentioned
above, the net loss for the quarter was $2.1 million.
SIX MONTHS ENDED JUNE 30, 1996 VS. 1995
REVENUES -- Revenues of $23.5 million for the six months ended June 30, 1996,
were $6.9 million, or 23%, below revenues of $30.4 million reported for the same
period in 1995. Approximately $1.7 million, or 25%, of the revenue decrease was
due to the absence of revenues from discontinued businesses. FGC system
revenues totaled $3.8 million during the first six months of 1996, down $4.1
million from revenues of $7.9 million from the sale of these systems in the
first half of 1995. Domestic utilities continue to implement facility and
organization changes as a result of restructuring, and have delayed orders for
pollution control equipment as they contend with de-regulation issues. Revenues
from the WEP Group totaled $17.8 million for the six months ended June 30, 1996,
down $1.6 million from revenues reported in the comparable period of 1995,
primarily due to the absence of several significant contracts which were
completed in late 1995.
COST OF REVENUES -- Cost of revenues for the six months ended June 30, 1996
totaled $20.7 million, representing 88% of revenues, compared to cost of
revenues of $24.1 million, or 79% of revenues, for the comparable period of
1995. Cost of revenues represented a relatively high percentage of revenues in
1996 due to the contract charges of $1.7 million taken in the second quarter of
1996, primarily related to jobs subcontracted by the WEP Group in foreign
locations. In addition, the increase reflects lower margins on new FGC
contracts, as a result of continuing weakness in the air pollution control
industry, as well as increased levels of under absorbed factory overhead
resulting from reduced production activity.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) -- SG&A expense totaled $8.8 million
for the six months ended June 30, 1996, down $0.5 million, or 6%, from SG&A
expense of $9.3 million for the six months ended June 30, 1995. SG&A expense
for the first six months of 1996 contained one-time
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charges totaling approximately $1.1 million, including $0.7 million of reserves
for bad debts and $350 thousand for executive severance and option costs. SG&A
expense for the first six months of 1995 contained one-time charges totaling
$2.0 million for legal and closing costs related to the purchase by WESAC of 81%
interest in the Company and a decision to close the production facility in
Puerto Rico. SG&A expense for the first six months of 1996 also included $541
thousand of expenses related to the Company's VOC and Viking Water operations,
which were not incurred in 1995. Before one-time charges and expenses related
to the new operations, SG&A for the first six months of 1995 was $7.2 million,
compared to $7.3 million for the same period in 1995.
INCOME TAXES -- The income tax benefit of $1.8 million for the six months ended
June 30, 1996 represents tax benefits available on taxable domestic losses. The
tax benefit of $934 thousand in the initial six months of 1995 represents tax
benefits on taxable losses subsequent to the purchase of the stock interest by
Wexford, which occurred on June 6, 1995.
NET LOSS -- The net loss for the six month period in 1996 totaled $4.9 million,
$1.6 million greater than the net loss of $3.3 million reported in the same
period of 1995. 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 $21.3 million
at June 30, 1996, compared to $30.6 million at June 30, 1995 and $20.6 million
at December 31, 1995. Approximately $7.2 million of the backlog at June 30,
1996 is scheduled for delivery after December 31, 1996. FGC equipment orders
represented $3.0 million of the backlog at June 30, 1996, compared to
approximately $5.2 million at June 30, 1995. FGC orders accounted for $4.9
million of the backlog at December 31, 1995.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred recurring operating losses, and has been dependent on
advances from its parent as well as proceeds from the sale of fixed assets to
fund its cash flow requirements. As a result, the reports of the Company's
independent auditors, in the 1995 Form 10-K, raised doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classifications of assets, including intangibles, or the
amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
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The Company had a positive working capital position of $6.8 million at June 30,
1996, compared to a working capital position of $12.7 million at December 31,
1995. The decrease in working capital primarily reflects a $2.4 million
reduction in cash and a $4.6 million decrease in accounts receivable, due to
contract adjustments and operating losses throughout the year.
In connection with the transaction between PDC and WESAC, WESAC provided the
Company with a working capital commitment pursuant to which WESAC agreed to
provide a secured three-year loan. On July 28, 1995, the Company and WESAC
finalized the loan agreement under which WESAC provided a $3 million secured
three-year loan to satisfy the Company's immediate working capital requirements.
The Company had drawn $1.9 million against this loan as of December 31, 1995 and
June 30, 1996.
On October 26, 1995, the Company entered into a loan and security agreement with
Silicon Valley Bank ("SVB") under which SVB provided the Company with a $4.0
million working capital loan through September 1996. Working capital draws by
the Company under this facility are guaranteed by WESAC, up to the limit of the
line. Borrowings under the loan totaled $1.9 million at June 30, 1996, which
included $1.7 million of cash borrowings and $0.2 million of cash collateral for
letters of credit under this loan arrangement.
On May 9, 1996, the Company announced that it had completed negotiations
with SVB to revise the terms of its credit line. Under the renegotiated
terms, SVB agreed to provide a $3.0 million line of credit, without
covenants, to the Company through October 25, 1996. The Company's majority
stockholder, WESAC, agreed to collateralize its guarantee of the Company's
outstanding loan balance of $1.9 million.
The terms of the line require that any additional principal and interest
borrowings, up to the maximum of $3.0 million, also be collateralized by cash.
WESAC stated that it will take steps to enable the Company to draw down the
remaining funds available on the line if the Company's activities to restructure
and refinance the business are proceeding in accordance with WESAC's
expectations.
In response to continuing weakness in its major markets and a deteriorating
working capital position, the Company has initiated programs to conserve cash.
A salary reduction program has been implemented for the majority of the
executives at Wahlco, Inc., and all discretionary spending programs have been
suspended or are under review.
On August 16, 1996, the Company reached an agreement in principle with its
majority shareholder, WES Acquisition Corp ("WESAC"), pursuant to which WESAC
will lend to the Company up to $1.6 million. The loan will bear interest at an
annual rate of 13%; will mature on January 1, 1997 and will be secured by all
of the assets of the Company. The draw-down of funds under the loan is
limited to a maximum of $400,000 in any one month beginning with the
execution of a definitive loan agreement and is also conditioned on the
Company meeting certain defined minimum performance goals and the absence of
material adverse change in the company's financial condition. Interest will be
capitalized as will a commitment fee of $32,000 payable to WESAC or its
designee. In further consideration of making the loan, the Company will issue
to WESAC, five year warrants to purchase the Company's common stock as the funds
are drawn down. Each warrant will cover the number of shares of common stock
equal to the quotient of (i) the dollar amount of the draw down divided by (ii)
$0.47, the approximate closing price of the common stock as of August 16, 1996.
The warrants become exercisable on issuance at the closing price used to compute
the number of warrant shares.
The Company believes that the $1.6 million commitment with the monthly
borrowing limits is adequate to fund the Company's operations for the balance
of 1996, however, there can be no assurances that this will be the case.
Significant changes in the Company's anticipated level of business or other
events could increase the Company's cash requirements above those now
anticipated.
The Company does not anticipate that internally generated funds will be
sufficient to repay the loan at maturity on January 1, 1997. Accordingly,
the Company must secure an extension of the financing, or another form of
restructuring, by that date or, if the loan is to be repaid, the Company must
obtain replacement financing or raise funds through the sale of assets.
Furthermore, it is expected that additional funds will be required to
finance the Company's operations after January 1, 1997.
The Company is continuing its efforts to restructure its assets and businesses,
and the Board of Directors has directed the Company to consider various
financing alternatives and other options, including among others, possible sales
of assets or subsidiaries. While the Company is hopeful that its efforts will
be successful, there can be no assurances that they will be; and if they are
not, there would be a material adverse effect on the Company.
14 of 17
<PAGE>
Part II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Except as described in Note 5 ("Contingencies") to the consolidated
Financial Statements included in Item 1 of Part I, no material
changes have occurred in the status of the Company's litigation since
the issuance of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits set forth in the following Index of Exhibits are filed as
part of this report.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
15 of 17
<PAGE>
Pursuant to the requirements 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.
Wahlco Environmental Systems, Inc.
(Registrant)
Date: August 9, 1996 /s/Mark L. Plaumann
------------------------------
Mark L. Plaumann
President
Date: August 9, 1996 /s/Theodore E. Lavoie
------------------------------
Theodore E. Lavoie
Vice President & Chief Financial Officer
16 of 17
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description
- ------ -----------
10. Amendment and Forbearance Agreement between Silicon Valley Bank
and Wahlco, Inc., dated May 9, 1996.
27. Financial Data Schedule (EDGAR filing only)
17 of 17
<PAGE>
AMENDMENT AND FORBEARANCE AGREEMENT
THIS AMENDMENT AND FORBEARANCE AGREEMENT ("Agreement") is dated as of May
9, 1996 between Silicon Valley Bank ("Silicon"), on the one side, and Wahlco,
Inc. ("Borrower"), on the other side.
RECITALS
A. Silicon and Borrower are parties to (1) the Loan and Security Agreement
(the "Silicon Agreement") dated October 26,1995, as amended from time to time;
(2) the Loan and Security Agreement (Exim) (the "Exim Agreement") dated October
26, 1995, as amended from time to time; (3) the Loan and Security Agreement
(CEFO) (the "CEFO Agreement") dated September 8, 1996, as amended from time to
time; the Silicon agreement, the Exim Agreement and the CEFO Agreement are
collectively referred to as the "Loan Agreements"). Terms defined in the Loan
Agreements are used herein as therein defined. The Loan Agreements and all
other agreements, documents and instruments relating thereto or executed in
connection with therewith are referred to collectively as the "Loan Documents".
B. Wahlco Environmental Systems, Inc. entered into a Continuing Guaranty
dated September 8, 1995 in favor of Silicon regarding the Obligations, as
reaffirmed by that Reaffirmation of Continuing Guaranty dated October 26, 1995;
and Wexford Capital Corporation, WES Acquisition Corp., Wexford Capital Partners
II, L.P. and Wexford Overseas Partners I, L.P. entered into a Continuing
Guaranty dated October 26, 1995 in favor of Silicon regarding the Obligations.
C. Borrower and Wahlco Environmental Systems, Inc. have failed to comply
with various financial covenants applicable to such parties as set forth in the
Loan Agreements as specified in a letter dated March 4, 1996 from Silicon to
Borrower; and on and about February 29, 1996 Borrower reported insufficient
collateral to support its then outstanding Obligations under the Silicon
Agreement, thus creating an overadvance in the approximate amount of $314,000
(collectively, the foregoing occurrences are collectively referred to as the
"Violations").
D. Due to the Violations, Events of Defaults exist under the Loan
Documents. Borrower has requested that (1) Silicon forbear from exercising its
rights and remedies under the Loan Documents regarding such Events of Defaults
and (2) that certain amendments be made to the Loan Documents in order to
provide for the possibility of additional borrowings under the Loan Agreements.
As an accommodation to the Borrower, Silicon has agreed to the foregoing
requests, subject in all respects, however, to the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. ACCURACY OF RECITALS. The parties hereto acknowledge and agree that
the foregoing Recitals are true and accurate.
2. ACKNOWLEDGMENT OF INDEBTEDNESS. The Borrower acknowledges and agrees
that as of the date hereof it is indebted to Silicon in the aggregate principal
amount of $560,250 under the CEFO Agreement, $1,400,000 under the Exim Agreement
and $527,485.35 under the Silicon Agreement (including letter of credit
obligations in the approximate amount of $227,485 having a maturity of December
31, 1996), plus, in each case, interest, costs, expenses and charges due under
the Loan Documents relating thereto.
3. AMENDMENT FEE. Concurrently herewith, Borrower shall pay to Silicon a
fee in the amount of $7,500, which shall be in addition to all interest and all
other amounts payable hereunder and which shall not be refundable.
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<PAGE>
4. AMENDMENT TO CREDIT LIMIT OF SILICON AGREEMENT. The section of the
Schedule to the Silicon Agreement entitled "Credit Limit (Section 1.1)" is
hereby deleted and replaced with the following:
"CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i)
$3,000,000 at any one time outstanding LESS
the Exim Obligations (as defined below),
PROVIDED that Credit Limit and the Loans
outstanding hereunder shall in no event be
greater than the Adjusted Cash Collateral
Amount (as defined below).
It is understood and agreed that the Obligations
under the CEFO Agreement shall not be considered
to be Obligations for purposes of this Agreement
or the Exim Agreement.
The term "EXIM OBLIGATIONS" means the aggregate
amount of the Obligations under the Exim Agreement
from time to time outstanding.
The term "CASH COLLATERAL AMOUNT" shall mean the
amount of the cash collateral pledged to Silicon
under the Pledge Agreement dated May 9, 1996 by
WES Acquisition Corp. in favor of Silicon.
The term "ADJUSTED CASH COLLATERAL AMOUNT" shall
mean the Cash Collateral Amount LESS the amount
thereof that Silicon has determined represents the
appropriate reserve for interest, which shall be
in the reasonable discretion of Silicon.
LETTER OF CREDIT SUBLIMIT: Silicon, in its reasonable discretion, will from
time to time during the term of this Agreement
issue letters of credit for the account of the
Borrower ("Letters of Credit"), in an aggregate
amount at any one time outstanding not to exceed
$1,000,000, upon the request of the Borrower,
provided that, on the date the Letters of Credit
are to be issued, Borrower has available to it
Loans hereunder in an amount equal to or greater
than the face amount of the Letters of Credit to
be issued. Prior to the issuance of any Letters
of Credit, Borrower shall execute and deliver to
Silicon Applications for Letters of Credit and
such other documentation as Silicon shall specify
(the "Letter of Credit Documentation"). Fees for
the Letters of Credit shall be as provided in the
Letter of Credit Documentation. Letters of Credit
may not have a maturity date beyond the October 7,
1996, provided that if on the Maturity Date, or on
any earlier effective date of termination, there
are any outstanding letters of credit issued by
Silicon or issued by another institution based
upon an application, guarantee, indemnity or
similar agreement on the part of Silicon, then on
such date Borrower shall provide to Silicon cash
collateral in an amount equal to the face amount
of all such letters of credit plus all interest,
fees and cost due or to become due in connection
therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to
Silicon's then standard form cash pledge
agreement, which shall include, among other
things, a provision to the effect that any cash so
pledged shall continue to be held by
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<PAGE>
Silicon for a period not less than 30 days after
the expiration and termination of any such letters
of credit.
The Credit Limit set forth above and the Loans
available under this Agreement at any time shall
be reduced by the face amount of Letters of Credit
from time to time outstanding. The letters of
credit issued and outstanding as of the date
hereof shall be 100% collateralized under the
Pledge Agreement dated as of even date herewith by
WES Acquisition Corp. in favor of Silicon."
5. MODIFICATIONS TO FINANCIAL COVENANTS; REPORTING REQUIREMENTS. Each of
the Loan Agreements is hereby amended by deleting all financial covenants as set
forth in the section of the Schedule to each of the Loan Agreements entitled
"Financial Covenants (Section 4.1)". Further, the only financial reporting that
is required under the Loan Agreements is that each of the Borrower and Wahlco
Environmental Systems, Inc. shall within 30 days after the end of each month,
provide to Silicon a monthly financial statement relating to, and prepared by,
each of Borrower and Wahlco Environmental Systems, Inc. together such other
information as Silicon may reasonably request.
6. EXIM AGREEMENT; CEFO AGREEMENT. Silicon and Borrower hereby agree and
acknowledge that there shall be no further Loans under the Exim Agreement.
Prior to the date hereof, Borrower hereby acknowledges that it has reduced the
Obligations under the CEFO Agreement by the sum of $107,083.
7. PLEDGE AGREEMENT; ADDITIONAL EVENT OF DEFAULT; PAYMENT ON MATURITY
DATE. As a condition to the effectiveness of this Agreement, WES Acquisition
Corp. shall enter into a cash pledge agreement (the "Pledge Agreement") in form
and substance satisfactory to Silicon and shall deposit with Silicon the initial
sum of $2,027,500. The termination or attempted termination by WES Acquisition
Corp. of the Pledge Agreement, other than in accordance thereof, shall
constitute an immediate Event of Default under the Loan Agreements and a
Termination Event as set forth herein. Borrower understands and agrees that WES
Acquisition Corp. has agreed to pay the Obligations on its behalf upon the
Maturity Date as set forth in the Pledge Agreement, and Borrower agrees to
permit WES Acquisition Corp. to make such a payment on its behalf at such time,
PROVIDED nothing herein shall diminish or otherwise affect the Borrower's
obligations to pay the Obligations when due or any of its other duties under the
Loan Documents regardless of the actions or agreements of WES Acquisition Corp.
8. ADDITIONAL PERMITTED INDEBTEDNESS. Borrower intends to borrow the sum
of $400,000 from Ragle Financial, a California limited partnership (the "Ragle
Loan"). Payments relating to the Ragle Loan are as follows: (a) an initial fee
of $24,000 payable upon the making of the Ragle Loan, (b) a fee of $42,000
payable on the first anniversary date of the making of the Ragle Loan and (c)
payment in full of the Ragle Loan 20 months after the making thereof. Silicon
hereby agrees that the Ragle Loan as described herein shall constitute permitted
indebtedness under the Loan Documents.
9. ACKNOWLEDGMENT REGARDING OBLIGATIONS; ACKNOWLEDGMENT OF DEFAULT UNDER
THE LOAN DOCUMENTS. Borrower acknowledges and agrees that the amounts set forth
in Section 2 above are owed to Silicon without offset, claim or defense in
connection therewith, all of which Borrower hereby waives. The Borrower
acknowledges and agrees that (i) the existing default under the Loan Documents
constitutes a material default under the Loan Documents, (ii) any notices which
must be given and any grace periods or cure periods which must expire, prior to
Silicon exercising any of its rights and remedies in connection with the Loan
Documents, have been given, complied with and expired and, in any event, are
hereby waived by Borrower, and (iii) as a consequence, Silicon is now
entitled to immediately exercise all of its rights and remedies under the Loan
Documents, at law or in equity, including, without limitation, its right
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<PAGE>
to declare all "Obligations" (as defined in each of the Loan Agreements) to be
immediately due, payable and performable, except to the extent that Silicon
agrees to forbear from exercising those rights and remedies in this Agreement.
10. FORBEARANCE; NEW DEFAULT. All rights and remedies of Silicon in
connection with the existing default under the Loan Documents are hereby
reserved, but, except as otherwise specifically provided herein, Silicon agrees
to forbear from exercising its rights and remedies in connection with the
existing default under the Loan Documents until the earlier to occur of the
following (a "Termination Event"): (i) October 25, 1996 or (ii) the occurrence
of a "New Default" (as defined below). For purposes of this Agreement, the term
"New Default" shall mean any failure of the Borrower in the performance of any
of the terms or conditions of, or any breach of any representation or warranty
under, or any other default, event of default or Event of Default, under this
Agreement, the Loan Documents, any other agreements, instruments or documents
entered into in connection therewith, and as amended hereby, except that "New
Default" shall not include any of the foregoing which have occurred prior to the
date hereof, and of which Silicon has actual knowledge, prior to the date
hereof. Upon a Termination Event, Silicon's agreement hereunder to forbear from
exercising its rights or remedies shall immediately terminate, without the
requirement of any demand, presentment, protest or notice of any kind, all of
which Borrower hereby waives, and Silicon may at any time thereafter proceed to
exercise any and all of its rights and remedies, including without limitation,
its rights and remedies in connection with the existing defaults under the Loan
Documents, all of which are hereby reserved.
11. ENFORCEABILITY OF OBLIGATIONS; WAIVER AND CONSENTS. Borrower
agrees that (i) the Obligations are secured by the collateral described in
the Loan Documents, (ii) the Loan Documents are in full force and effect,
and enforceable against Borrower in accordance with their respective terms,
as amended hereby, (iii) the Borrower has no offsets, claims or defenses to
or in connection with the Obligations, or the terms of the Loan Documents,
all of which offsets, claims or defenses are hereby waived. Borrower hereby
waives and affirmatively agrees not to allege or otherwise pursue any and
all defenses, affirmative defenses, counterclaims, claims, causes of
actions, setoffs or other rights that it may have as of the date hereof
relating to the Obligations, the Loan Documents, or the collateral therefor,
including, but not limited to, any right to contest the existing defaults
under the Loan Documents, the liens and security interests in favor of
Silicon, or the conduct of Silicon in administering any such indebtedness or
agreements.
12. COVENANTS, REPRESENTATIONS AND WARRANTIES. The Borrower hereby makes
the following covenants, representations and warranties:
12.1 AUTHORITY. The Borrower is duly authorized to enter into, and
perform its obligations under, this Agreement and the agreements, instruments
and documents contemplated hereby. The execution, delivery and performance by
Borrower of this Agreement will not violate any law or any provision of, nor are
there any grounds for acceleration under, any agreement, note, or instrument
which is binding upon Borrower.
12.2 NO MISREPRESENTATIONS. Without limiting any rights or remedies
Silicon may have under law or in equity, Borrower agrees that all written
statements and information provided by Borrower to Silicon pursuant to, or in
connection with, this Agreement or the negotiations leading to this Agreement,
have been true, complete and prepared in good faith by management with the best
information available in all material respects, and none of the same contain any
material omissions of any fact or matter necessary to keep the statements and
information therein from being misleading.
12.3 INDEMNITY. The Borrower agrees to indemnify and hold Silicon
harmless from and against any and all losses, debts, damages, liabilities,
claims, demands, actions, causes of actions, lawsuits, penalties, judgments,
costs and expenses (including, without limitation, attorneys' fees of counsel of
Silicon's choice), of every nature and description, which Silicon may
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<PAGE>
sustain or incur, based upon, arising out of, or in any way relating to any
representations or warranties of Borrower being untrue or misleading, or this
Agreement.
13. RELEASE. In consideration for Silicon entering into this Agreement,
Borrower hereby releases and forever discharges Silicon, and its successors,
assigns, agents, shareholders, directors, officers, employees, agents,
attorneys, parent corporations, subsidiary corporations, affiliated
corporations, affiliates, and each of them, from any and all claims, debts,
liabilities, demands, obligations, costs, expenses, actions and causes of
action, of every nature and description, known and unknown, whether or not
related to the subject matter of this Agreement, which Borrower now has or at
any time may hold, by reason of any matter, cause or thing occurred, done,
omitted or suffered to be done prior to the date of this Agreement. BORROWER
WAIVES THE BENEFITS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES: "A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Borrower understands that the facts which it believes to be true at the time of
making the release provided for herein may later turn out to be different than
it now believes, and that information which is not now known or suspected may
later be discovered. Borrower accepts this possibility, and Borrower assumes
the risk of the facts turning out to be different and new information being
discovered; and Borrower further agrees that the release provided for herein
shall in all respects continue to be effective--and not subject to termination
or rescission because of any difference in such facts or any new information.
This release is fully effective on the date hereof. Silicon is not releasing
Borrower from any claims, debts, liabilities, demands, obligations, costs,
expenses, actions or causes of action.
14. GENERAL PROVISIONS.
14.1 INTEGRATION; AMENDMENT; WAIVERS. This Agreement and the Loan
Documents set forth in full the terms of agreement between the parties and are
intended as the full, complete and exclusive contract governing the relationship
between the parties, superseding all other discussions, promises,
representations, warranties, agreements and understandings between the parties
with respect thereto. No term of the Loan Documents may be modified or amended,
nor may any rights thereunder be waived, except in a writing signed by the party
against whom enforcement of the modification, amendment or waiver is sought.
Any waiver of any condition in, or breach of, any of the foregoing in a
particular instance shall not operate as a waiver of other or subsequent
conditions or breaches of the same or a different kind. Silicon's exercise or
failure to exercise any rights under any of the foregoing in a particular
instance shall not operate as a waiver of its right to exercise the same or
different rights in subsequent instances. Except as expressly provided to the
contrary in this Agreement, or in another written agreement, all the terms,
conditions and provisions of the Loan Documents shall continue in full force and
effect. If in this Agreement's description of an agreement between the parties,
rights and remedies of Silicon or obligations of the Borrower are described
which also exist under the terms of the other Loan Documents, the fact that this
Agreement may omit or contain a briefer description of any rights, remedies and
obligations shall not be deemed to limit any of such rights, remedies and
obligations contained in the other Loan Documents.
14.2 PAYMENT OF EXPENSES. Without limiting the terms of the Loan
Documents, Borrower shall pay all reasonable costs and expenses incurred by or
on behalf of Silicon (including reasonable attorneys' fees) arising under or in
connection with the Loan Documents, including without limitation, in connection
with (i) the negotiation, preparation, execution and delivery of this Agreement
and the Loan Documents, and any and all consents, waivers or other documents or
instruments relating thereto, (ii) the filing and recording of any Loan
Documents and any other documents or instruments or further assurances filed or
recorded in connection with any Loan Document, (iii) any other action reasonably
required in the course of administration hereof, including, but not limited to,
all reasonable out-of-pocket expenses incurred in connection with audits and
inspections, and (iv) the defense or enforcement of the Loan Documents, whether
or not there is any litigation between the parties. All costs and
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<PAGE>
expenses shall be added to the Obligations, as the Silicon shall determine, and
shall earn interest at the highest rate provided for under the Loan Documents.
14.3 NO THIRD PARTY BENEFICIARIES. Except as may be otherwise
expressly provided for herein, this Agreement does not create, and shall not be
construed as creating, any rights enforceable by any person not a party to this
Agreement.
14.4 SEPARABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal or unenforceable, the
remaining provisions of this Agreement shall nevertheless remain in full force
and effect.
14.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, which together shall constitute one and the same agreement.
14.6 TIME OF ESSENCE. Time is of the essence in each of the
Obligations of the Borrower and with respect to all conditions to be satisfied
by the Borrower.
14.7 STATUTE OF LIMITATIONS. The Borrower waives the benefit of all
statute(s) of limitations in any action or proceeding based upon or arising out
of this Agreement or the other Loan Documents.
14.8 CONSTRUCTION; VOLUNTARY AGREEMENT; REPRESENTATION BY COUNSEL.
This Agreement has been prepared through the joint efforts of all the parties.
Neither its provisions nor any alleged ambiguity shall be interpreted or
resolved against any party on the ground that such party's counsel was the
draftsman of this Agreement. Each of the parties hereto represents and declares
that such party has carefully read this Agreement and the agreements, documents
and instruments being entered into in connection herewith and that such party
knows the contents thereof and sign the same freely and voluntarily. The
parties hereto acknowledge that they have been represented in negotiations for
and preparation of this Agreement and the agreements, documents and instruments
being entered into in connection herewith by legal counsel of their own
choosing, and that each of them has read the same and had their contents fully
explained by such counsel and is fully aware of their contents and legal affect.
14.9 GOVERNING LAW; FORUM SELECTION. This Agreement has been entered
into, and shall be governed by the laws of, the State of California. As a
material part of the consideration to the parties for entering into this
Agreement, each party (i) agrees that, at the option of Silicon, all actions and
proceedings based upon, arising out of or relating in any way directly or
indirectly to, this Agreement, or the Loan Documents, shall be litigated
exclusively in courts located in Orange County, California; (ii) consents to the
jurisdiction of any such court and consents to the service of process in any
such action or proceeding (whether or not litigated in courts located in Orange
County, California) by personal delivery or any other method permitted by law;
and (iii) waives any and all rights to transfer or to change the venue of any
such action or proceeding to any court located outside Orange County,
California.
14.10 FURTHER ASSURANCES. Borrower agrees to take all further actions
and execute all further documents as Silicon may from time to time reasonably
request to carry out the transactions contemplated by this Agreement.
14.11 NOTICES. All notices, requests and demands to or upon the
respective parties hereto shall be given in accordance with Section 7.1 of the
Loan Agreements.
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14.12 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. SILICON AND BORROWER EACH
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT, OR ANY OF THE
AGREEMENTS, INSTRUMENTS OR DOCUMENTS REFERRED TO HEREIN; OR (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN OR AMONG THEM; OR (III) ANY
CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
THEM; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
SILICON VALLEY BANK WAHLCO, INC.
By /s/ Judy Sanchez By /s/ Henry N. Huta
----------------------------------- -------------------------------
Judy Sanchez
Its Senior Vice President Name: Henry N. Huta
-------------------------------- ---------------------------
President
By /s/ Theodore E. Lavoie
-------------------------------
Name: Theodore E. Lavoie
---------------------------
Ast. Secretary
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<PAGE>
GUARANTORS' CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and to any
and all other present and future documents and agreements between or among the
foregoing parties. Nothing herein shall in any way limit any of the terms or
provisions of the Continuing Guarantors executed by the undersigned in favor of
Silicon, all of which are hereby ratified and affirmed and shall continue in
full force and effect.
Guarantors:
Wahlco Environmental Systems, Inc.
By /s/ Theodore E. Lavoie
---------------------------------
Title: Chief Financial Officer
Wexford Capital Corporation
By /s/ Robert M. Davies
---------------------------------
Title: Vice President
Wexford Capital Farmers II, L.P.
By /s/ Robert M. Davies
---------------------------------
Title: Vice President
Wexford Overseas Partner I, L.P.
By /s/ Robert M. Davies
---------------------------------
Title: Vice President
WES Acquisition Corp.
By /s/ Robert M. Davies
---------------------------------
Title: Vice President
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<PAGE>
[LOGO] Silicon Valley Bank
PLEDGE AGREEMENT
PLEDGOR: WES ACQUISITION CORP. Initial Dollar Amount to
Be Pledged:
ADDRESS: 411 WEST PUTNAM STREET $2,027,500*
GREENWICH, CT 06830
* plus such additional sums as may
be deposited by Pledgor with
Silicon from time to time
BORROWER: WAHLCO, INC.
DATE: MAY 9, 1996
THIS PLEDGE AGREEMENT is entered into as of the above date between SILICON
VALLEY BANK ("Silicon"), whose address is 3000 Lakeside Drive, Santa Clara,
California 95054-2895, and the pledgor named above ("Pledgor").
1. PLEDGE OF FUNDS. Pledgor shall concurrently deposit with Silicon the
sum set forth above and, may from time to time, deposit additional sums with
Silicon, by wire transfer or cashier's check payable to Silicon, which funds
shall be invested in a certificate of deposit issued by Silicon, at the interest
rate currently offered by Silicon* (which, together with all proceeds thereof is
referred to in this Agreement as the "Certificate of Deposit"). Pledgor hereby
pledges to Silicon and grants Silicon a security interest in such funds and the
Certificate of Deposit to secure the payment and performance of all present and
future debts, duties, obligations, liabilities, representations, warranties and
guaranties of the Pledgor to Silicon, heretofore, now, or hereafter made,
incurred or created, whether primary, secondary, direct, absolute, contingent,
fixed, secured or unsecured, whether as principal, guarantor or otherwise,
whether joint or several, whether evidenced by written instrument or oral,
whether monetary or non-monetary, and regardless of whether or not the
instrument evidencing the same recites that it is secured hereby, including
without limitation any and all of the foregoing arising under the Continuing
Guaranty executed by Pledgor in favor of Silicon with respect to all present and
future indebtedness, liabilities, guarantees and other obligations of the
borrower named above ("Borrower") to Silicon, and all extensions and renewals
and modifications thereof, and including without limitation any and all**
attorneys' fees, court costs and collection charges incurred in endeavoring to
collect or enforce any of the foregoing against Pledgor and any and all costs,
fees and expenses incurred by Silicon in connection with any of the foregoing
(all of the foregoing is hereinafter collectively referred to as the
"indebtedness"). Pledgor acknowledges that the acceptance of the Certificate of
Deposit and execution of this Agreement by Silicon shall not constitute a
commitment of any kind by Silicon to make loans or other financial
accommodations to Borrower or any other person. Unless and until an "Event of
Default" (as defined below) shall occur, interest on the Certificate of Deposit
shall be paid to Pledgor***.
* for investments of a similar size
** reasonable
*** on a monthly basis
2. RENEWAL OF CERTIFICATE OF DEPOSIT. At the maturity of the Certificate
of Deposit, Silicon is hereby authorized to reinvest the proceeds in a new
Certificate of Deposit issued by Silicon having such term as Silicon shall
specify, and bearing interest at the rate then regularly offered by Silicon.
Silicon shall have no liability for any loss of interest on the Certificate of
Deposit, whether resulting from delays in reinvesting the proceeds of the
Certificate of Deposit or from any other cause.
3. REPRESENTATION, WARRANTIES AND COVENANTS. Pledgor hereby represents
and warrants that (i) Pledgor has good title to the Certificate of Deposit, free
and clear of any and all claims, liens, encumbrances and security interests,
(ii) this Agreement has been duly and validly autho-
-1-
<PAGE>
rized, executed and delivered and constitutes the binding obligation of
Pledgor, enforceable in accordance with its terms, and (iii) the execution
and delivery of this Agreement does not violate or constitute a default
under (with or without giving of notice, the passage of time, or both) any
order, judgment, decree, instrument or agreement to which Pledgor is a party
or by which it or its assets are affected or bound.
4. RECOURSE TO CERTIFICATE OF DEPOSIT; EVENTS OF DEFAULT. If any Event
of Default shall occur*, Silicon shall have the right, without notice to or
demand upon Pledgor, to obtain payment of the Certificate of Deposit
(regardless of whether or not it has matured and regardless of any loss of
interest resulting from its payment prior to maturity of any other cause),
and to apply the proceeds thereof to the Indebtedness, regardless of whether
or not the Indebtedness is then due and payable by their terms. An "Event
of Default", as used herein, shall be deemed to occur in the event Pledgor
shall fail to pay or perform when due all or any part of the Indebtedness,
or any other default or event of default occurs under, or as specified in,
any present or future instrument or agreement between Silicon and Borrower
or any other present or future instrument or agreement between Silicon and
Pledgor.
*and otherwise in accordance with section 6 hereof
5. REMEDIES, CUMULATIVE; NO WAIVER. Silicon shall have the right to
recourse to the Certificate of Deposit to the full extent provided for herein
and in any other document or instrument evidencing obligation of Pledgor to
Silicon. No election in one form of action or proceeding, or against any party,
or on any obligation, shall constitute a waiver of Silicon's right to proceed in
any other form of action or proceeding or against any other party. The failure
of Silicon to enforce any of the provisions of this Agreement at any time or for
any period of time shall not be construed to be a waiver of any such provision
or the right thereafter to enforce the same. All remedies hereunder shall be
cumulative and shall be in addition to all rights, powers and remedies given to
Silicon by law.
6. TERM. This Agreement and Silicon's right hereunder shall continue in
full force and effect until after all agreements between Silicon and Borrower
and between Silicon and Pledgor have terminated and all of the Indebtedness has
been fully paid, performed and discharged, PROVIDED that, and without limitation
of the other rights and remedies of Silicon, on the Maturity Date (as defined in
the Loan and Security Agreement dated October 26, 1995 between Silicon and
Borrower, as amended, modified or supplemented from time to time) or on any
earlier date of termination relating to the Indebtedness, Pledgor hereby
authorized Silicon to apply immediately the proceeds of the Certificate of
Deposit to the non-contingent Indebtedness without any further notice of any
kind to Borrower or Pledgor, PROVIDED, FURTHER, Pledgor understands and agrees
that a portion of the Certificate of Deposit will remain pledged to Silicon
hereunder and subject to this Agreement relating to the amount of the then
outstanding letters of credit until two weeks after the earlier of the expiry
date thereof or the date of that the complete draw down of such letters of
credit occurs.
7. COSTS. Pledgor shall, upon demand, reimburse Silicon for all costs,
fees and expenses, which are incurred by Silicon in connection with or arising
out of this Pledge Agreement or the enforcement hereof (including without
limitation attorneys' fees), whether or not suit be brought.
8. INTEGRATION. This Agreement is the entire and only agreement between
Pledgor and Silicon with respect to the subject matter hereof, and all
representations, warranties, agreements or undertakings with respect to the
subject hereof which are not set forth herein, are superseded hereby. Nothing
herein shall, however, limit or affect any of the terms or provisions of any
other document or agreement between Pledgor and Silicon, and all of the same
shall continue in full force and effect.
9. REVIVOR. If any payment made on any of the Indebtedness or on any of
the indebtedness, liabilities or obligations of the Borrower to Silicon shall
for any reason be required to be returned by Silicon, whether on the ground that
such payment constituted a preference or for any other reason, then for purposes
of this Agreement, and notwithstanding any prior termination of this Agreement,
such payment shall be treated as not having been made, and this Agreement
shall in all respects be effective with respect to the Indebtedness as though
such payment had not been made; and if the Certificate of Deposit or the funds
represented thereby have been released or returned to Pledgor, then Pledgor
shall return the Certificate of Deposit or the funds, as the case may be, to
Silicon, to be held and dealt with in accordance with the terms of this
Agreement.
10. WAIVER; AMENDMENT. The terms and provisions hereof may not be waived,
altered, modified, or amended except in a writing executed by Pledgor and a duly
authorized officer of Silicon.
11. SUCCESSORS. All rights, benefits and privileges hereunder shall inure
to the benefit of and be enforceable by Silicon and its successors and assigns
and shall be binding upon Pledgor and his heirs, executors, administrators,
personal representatives, successors and assigns.
12. HEADINGS. Paragraph headings are used herein for convenience only; the
same may not describe completely the subject matter of the applicable paragraph,
and the same shall not be used in any manner to construe, limit, define or
interpret any term or provision hereof.
13. GOVERNING LAW. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed, and interpreted in accordance with the laws of the State of
California. Pledgor hereby agrees that all actions or proceedings relating
directly or indirectly hereto may, at the option of Silicon, be litigated in
courts located within said State, and Pledgor hereby expressly consents to the
jurisdiction of any such court and consents to the service of
-2-
<PAGE>
process in any such action or proceeding by personal delivery or by
certified or registered mailing directed to Pledgor at his last address
known to Silicon.
14. MUTUAL WAIVER OF JURY TRIAL. Silicon and Pledgor each hereby waive the
right to trail by jury in any action or proceeding based upon, arising out of,
or in any way relating to: (i) this Agreement; or (ii) any other present or
future instrument or agreement between Silicon and Pledgor; or (iii) any
conduct, acts or omissions of Silicon or Pledgor or any of their directors,
officers, employees, agents, attorneys or any other persons affiliated with
Silicon or Pledgor; in each of the foregoing cases, whether sounding in contract
or tort or otherwise.
SILICON:
SILICON VALLEY BANK
BY /S/ JUDY SANCHEZ
------------------------------
Judy Sanchez
Title Senior Vice President
---------------------------------
Pledgor:
WES ACQUISITION CORP.
By /s/ Robert M. Davies
------------------------------
Title Vice President
--------------------------
-3-
<PAGE>
[LOGO] SILICON VALLEY BANK
CERTIFIED RESOLUTION-GUARANTEE
GUARANTOR: WES ACQUISITION CORP.,
A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE
DATE: MAY 9, 1996
I, the undersigned, Secretary or Assistant Secretary of the above-named
corporation, a corporation organized under the laws of the state set forth
above, do hereby certify that the following is a full, true and correct copy of
resolutions duly and regularly adopted by the Board of Directors of said
corporation as required by law, and by the by-laws of said corporation, and that
said resolutions are still in full force and effect and have not been in any way
modified, repealed, rescinded, amended or revoked.
WHEREAS, it is in the direct interest of this corporation to assist the
following person (the "Borrower"):
Wahlco, Inc.
in procuring credit from Silicon Valley Bank ("Lender"), because Borrower
is an affiliate of this corporation, furnishes goods or services to this
corporation, purchases or acquires goods or services from this
corporation, and/or otherwise has a direct or indirect corporate or
business relationship with this corporation;
RESOLVED, that any officer of this corporation is hereby authorized and
directed to; execute and deliver on behalf of this corporation a
guarantee with respect to all indebtedness, liabilities and obligations
of Borrower to Lender, whether now existing or hereafter arising or
acquired; to pledge or assign to Lender, and to grant to Lender a
security interest and lien in, any and all assets and property, real and
personal, of this corporation as security for all indebtedness,
liabilities and obligations of this corporation to Lender, now existing
or hereafter arising, including without limitation the obligations of
this corporation under said guarantee, and to execute and deliver in
connection therewith, one or more pledge agreements, assignments,
security agreements Uniform Commercial Code financing statements, deeds
of trust and mortgages, in form and substance satisfactory to Lender, to
execute and deliver any and all amendments, modifications, extensions,
renewals, replacements and agreements, documents, instruments relating
to the foregoing or requested by Lender, and to execute and deliver any
and all instruments, papers and documents and to do all other acts that
said officers may deem convenient or proper to effectuate the purpose
and intent of these resolutions.
RESOLVED, all actions heretofore taken and all documentation heretofore
executed and delivered by any of said officers, or by any individual who
currently holds or has held any of said offices, in furtherance of the
foregoing is hereby ratified, adopted, approved and confirmed and
declared to be binding and enforceable obligations of this corporation
in accordance with the respective terms and provisions thereof; and that
the authorizations herein set forth shall remain in full force and
effect until written notice of any modification or discontinuance shall
be given to and actually received by Lender, but no such modification or
discontinuance shall effect the validity of the acts of any person,
authorized to so act with these resolutions, before the receipt of any
such notice by Lender.
<PAGE>
The undersigned further hereby certifies that the following persons are the
duly elected and acting officers of this corporation and that the following are
their actual signatures:
NAMES OFFICE(S) ACTUAL SIGNATURES
Charles E. Davidson President /s/ Charles E. Davidson
---------------------- ---------------------- ------------------------
Robert M. Davies Vice President /s/ Robert M. Davies
---------------------- ---------------------- ------------------------
Steven Suss Secretary & Treasurer /s/ Steven Suss
---------------------- ---------------------- ------------------------
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or
Assistant Secretary on the data set forth above.
/s/ S. Suss
--------------------------------
Secretary or Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,764
<SECURITIES> 0
<RECEIVABLES> 11,292
<ALLOWANCES> 0
<INVENTORY> 7,808
<CURRENT-ASSETS> 29,981
<PP&E> 5,268
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,698
<CURRENT-LIABILITIES> 23,182
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 2,183
<TOTAL-LIABILITY-AND-EQUITY> 37,698
<SALES> 19,504
<TOTAL-REVENUES> 23,507
<CGS> 16,956
<TOTAL-COSTS> 20,684
<OTHER-EXPENSES> 8,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 751
<INCOME-PRETAX> (6,643)
<INCOME-TAX> (1,774)
<INCOME-CONTINUING> (4,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,869)
<EPS-PRIMARY> (0.276)
<EPS-DILUTED> (0.276)
</TABLE>
