<PAGE>
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 MARCH 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 (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 May 5, 1997 was 17,649,000
shares.
Page 1 of 16
Exhibit Index at Page 16
1 of 14
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PART I. Financial Information
ITEM I. Financial Statements
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
REVENUES:
Product sales $ 11,357 $ 11,634
Rental and service 1,377 1,754
--------- ---------
12,734 13,388
--------- ---------
COSTS AND EXPENSES:
Cost of revenues:
Product sales 9,116 9,210
Rental and service 867 1,366
Selling, general and administrative 2,977 3,835
--------- ---------
12,960 14,411
--------- ---------
Operating loss (226) (1,023)
--------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 48 114
Interest and other expense (426) (375)
--------- ---------
(378) (261)
--------- ---------
Loss before income taxes (604) (1,284)
Benefit from income taxes - (474)
--------- ---------
Net loss $ (604) $ (810)
--------- ---------
--------- ---------
Net loss per share $ (0.03) $ (0.05)
--------- ---------
--------- ---------
Average common shares outstanding 17,649 17,649
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, December 31,
1997 1996
---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 744 $ 1,853
Restricted cash and cash equivalents 1,517 1,050
Accounts receivable 14,345 12,069
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,511 2,148
Inventories 4,254 4,738
Other current assets 1,555 1,365
--------- ---------
TOTAL CURRENT ASSETS 23,926 23,223
Property, plant and equipment, net 4,933 5,190
Other assets 1,229 1,407
--------- ---------
$ 30,088 $ 29,820
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 633 $ 373
Accounts payable 9,081 9,622
Accrued payroll and payroll related
liabilities 1,543 1,589
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,210 1,356
Current portion of long-term debt 230 228
Taxes payable 319 317
Other accrued liabilities 4,667 4,575
--------- ---------
TOTAL CURRENT LIABILITIES 18,683 18,060
Long-term debt 12,404 12,145
Other liabilities 2,307 2,435
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 176 176
Capital in excess of par value 90,783 90,735
Accumulated deficit (92,288) (91,684)
Foreign currency translation adjustment (1,977) (2,047)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,306) (2,820)
--------- ---------
$ 30,088 $ 29,820
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (604) $ (810)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 326 379
Deferred income taxes - (472)
Deferred compensation 48 -
(Gain) loss on sale of fixed assets 14 (16)
Changes in operating assets and operating liabilities:
Accounts receivable (2,571) 2,589
Costs and estimated earnings in excess of
billings on uncompleted contracts 604 897
Inventories 414 257
Other current assets (229) (17)
Accounts payable and accrued liabilities (240) (3,903)
Billings in excess of costs and estimated earnings
on uncompleted contracts 887 (479)
Income taxes payable (1) (105)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,352) (1,680)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (111) (100)
Proceeds from dispositions of property,
plant and equipment 19 26
Change in other assets 131 7
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 39 (67)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC 319 223
Borrowings on notes payable 283 115
Payments on notes payable (11) -
Payments on long-term debt (56) (52)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 535 286
------- -------
Effect of exchange rate changes on cash 136 (48)
------- -------
Net decrease in cash and cash equivalents (642) (1,509)
Cash and cash equivalents, beginning of period 2,903 5,147
------- -------
Cash and cash equivalents, end of period $ 2,261 $ 3,638
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ 107
------- -------
------- -------
Cash paid for interest $ 90 $ 122
------- -------
------- -------
See notes to condensed consolidated financial statements.
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<PAGE>
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
as of March 31, 1997 and the consolidated results of its operations for
the three month periods ended March 31, 1997 and 1996. 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 has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of
operations for the period ended March 31, 1997 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, 1996.
The Company is 81% owned by WES Acquisition Corp. ("WESAC"), an affiliate
of Wexford Management LLC.
Certain amounts in the 1996 condensed consolidated financial statements
have been reclassified to conform with the 1997 presentation.
2. INCOME TAXES
The Company prepares a consolidated Federal income tax return. The Company
files separate state and foreign income tax returns. The Company accounts
for income taxes under the method prescribed by FAS No. 109.
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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3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1997 1996
--------- -----------
(Unaudited)
Raw materials $ 1,329 $ 1,375
Work in process 2,655 3,152
Finished goods 270 211
-------- --------
$ 4,254 $ 4,738
-------- --------
-------- --------
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- -----------
<S> <C> <C>
7.9525% note payable, due in monthly
installments of $19 (principal and interest) through
June 2000, secured by related lease payments $ 657 $ 702
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 5,950 5,763
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 2,448 2,372
Secured loan from Silicon Valley Bank, bearing interest 1,700 1,700
at 5.5% and due May 1998.
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 1,636 1,585
Other credit agreements 243 251
---------- ---------
12,634 12,373
Less current portion (230) (228)
---------- ---------
$ 12,404 $ 12,145
---------- ---------
---------- ---------
</TABLE>
Under an agreement reached between the Company and WESAC on March 22, 1996,
interest due and payable from WESAC is compounded into the debt. This
agreement commenced with respect to interest due and payable for the
fourth quarter of 1995. The secured loan balances with WESAC include
compounded interest of $1.6 million as of March 31, 1997.
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On July 28, 1995, the Company finalized a 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 $2.0 million
against this loan as of March 31, 1997.
On October 25, 1995, the Company entered into a loan and security agreement
with Silicon Valley Bank ("SVB") under which SVB provided the Company with
a $4.0 million working capital loan through September 1996. Working capital
draws by the Company under this facility were guaranteed by WESAC, up to
the limit of the line.
On May 9, 1996, the Company revised the terms of the credit line with SVB.
Under the renegotiated terms, SVB agreed to provide a $3.0 million line of
credit, without covenants, through October 25, 1996. WESAC agreed to
collateralize its guarantee of the Company's outstanding loan balance of
$1.9 million with cash, and to similarly collateralize any additional
principal and interest borrowings up to the maximum of $3.0 million. As
consideration for posting the collateral, the Company agreed to pay
WESAC a fee in the form of a note for $150 thousand payable in two years
at 15% interest.
On October 25, 1996, the Silicon Valley Bank agreement was further
modified, so that (i) the maturity date was extended to May 1998, and (ii)
the interest rate on funds borrowed by the Company was reduced from about
11% to about 5.5%, since WESAC deposited cash collateral equivalent to the
funds borrowed with SVB. Borrowings under the loan totaled $1.9 million at
March 31, 1997, which included $1.7 million of cash borrowings and $0.2
million of cash collateral for letters of credit issued under this loan
arrangement. As part of the loan and security agreement in October 1995
and the renegotiation in October 1996, the Company issued warrants to SVB
to purchase 175,000 shares of the Company's Common Stock at $2.29 per
share, which expire on October 26, 2000.
On August 28, 1996, WESAC agreed to lend the Company up to $1.6 million.
The loan bears interest at an annual rate of 13%, and is secured by all of
the assets of the Company. Interest and a commitment fee of $32 thousand
payable to WESAC are compounded. In further consideration for making the
loan, the Company agreed to issue to WESAC or its designee five year
warrants to purchase the Company's common stock as the funds are drawn
down. Each warrant covers the number of shares of common stock equal to
the quotient of (i) the dollar amount of the draw down divided by (ii)
$0.47, the approximate closing price of the common stock on August 16,
1996. The warrants become exercisable on issuance at $0.47 per share. The
Company had drawn $1.5 million against this loan as of December 31, 1996,
and issued warrants covering 3,404,255 shares of common stock to four WESAC
partnerships which provided the funds. As of April 30, 1997, the Company
had not drawn the remaining $100 thousand available under the August 1996
term loan. The loan's maturity of January 1, 1997 was extended to May 1998
in October 1996.
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In October 1996, WESAC provided the Company with a new $2.4 million standby
line of credit. As of April 30, 1997, the Company had not drawn any funds
on this line.
The warrants described above have been determined to have nominal value and
have not been separately recorded in equity.
5. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts, at March
31, 1997, the Company is contingently liable for approximately $1.7 million
under standby letters of credit and bank guarantees.
As of March 31, 1997, the Company was not subject to any material legal
proceedings.
6. EARNINGS PER SHARE
Earnings per share for the three month periods ended March 31, 1997 and
1996 were calculated based on the weighted average number of common and
equivalent shares outstanding during the periods. Equivalent shares were
determined by using the treasury stock method, which assumes that all
dilutive securities were exercised and that the proceeds received were
applied to repurchase outstanding shares at the average market price
during the period.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted
by the Company on December 31, 1997. At that time, the Company will be
required to change the method used to compute earnings per share and to
restate all prior periods presented. Under the new requirements primary
earnings per share will be replaced with basic earnings per share. Basic
earnings per share excludes the dilutive effect of common stock
equivalents, including stock options. Had earnings per share been
calculated under the provisions of the new standard, both basic and
diluted earnings per share would be the same as net income per share as
reflected in the accompanying condensed consolidated statements of
operations for the three month periods ended March 31, 1997 and 1996,
respectively.
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<PAGE>
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
this "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 for the year ended December 31, 1996.
THE COMPANY
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 Engineered
Products, Inc. ("WEP, Inc."), which designs, manufactures and markets
diverters, dampers and expansion joints; Wahlco Engineered Products, Ltd.
("WEP Ltd."), which designs, manufactures and sells dampers and diverters;
Pentney Engineering Ltd., which provides pipework and general fabrication,
mechanical plant installation and hydraulic equipment manufacturing;
Teddington Bellows Ltd., which designs and manufactures metallic expansion
joints; Wahlco, Inc., which designs, manufactures and services equipment to
control air pollution; 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 Management LLC.
In November 1995, the Company signed a license agreement with LTG Lufttechnische
GmbH ("LTG") to sell and manufacture systems to control volatile organic
compounds ("VOCs") in the United States, Canada and Mexico. LTG, located in
Stuttgart, Germany, designs, manufactures and sells a broad line of catalytic
and thermal VOC and odorant oxidizers.
9 of 14
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VS. THREE MONTHS ENDED MARCH 31, 1996
REVENUES - Revenues of $12.7 million for the first quarter were $0.7 million,
or 5%, below revenues of $13.4 million in the first quarter of 1996.
Operations in Italy were closed in late 1996 and provided no revenue in the
first quarter of 1997 compared to $1.7 million in the comparable quarter of
1996. An additional $0.4 million of the revenue decrease was due to
discontinued Australian operations. Damper and diverter revenues at WEP,
Inc. and WEP Ltd. were $2.2 million higher than in the first quarter of 1996,
partially offsetting these decreases.
Revenues from the sale, rental and service of FGC and DeNox systems and
related equipment totaled $1.5 million in the first quarter of 1997, down
$0.7 million compared to the first quarter of 1996. The demand for clean air
products, including FGC systems, was weak in 1996, as a result of continuing
deregulation in the domestic electric utility industry and an apparent
absence of urgency on the part of utilities to comply with Phase II
Amendments of the Clean Air Act, which go into effect at the beginning of
2000.
COST OF REVENUES - Cost of revenues totaled $10.0 million, or 78% of
revenues, for the quarter just ended compared to $10.6 million, or 79% of
revenues, for the first quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - First quarter SG&A expense of
$3.0 million was $0.8 million lower than SG&A expense of $3.8 million in the
first quarter of 1996, principally due to a reduction in administrative
personnel coupled with increased cost control. SG&A expense in 1996 included
approximately $100 thousand related to the water purification systems license
which was terminated in July 1996.
INCOME TAXES - Due to the absence of deferred tax liabilities, the Company
did not book a tax benefit against domestic losses in the first quarter of
1997. The income tax benefit of $474 thousand in the first quarter of 1996
represents tax benefits derived from taxable domestic losses.
NET LOSS - The first quarter net loss of $604 thousand compares to a net loss
of $810 thousand for the first quarter of 1996. The lower loss was the
result of the above mentioned factors.
10 of 14
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BACKLOG
Backlog, defined as work for which the Company has entered into a signed
agreement or has received a requisition or purchase order, totaled $26.0
million at March 31, 1997, compared to $15.1 million at March 31, 1996 and
$23.9 million at December 31, 1996. Approximately $4.3 million of the
backlog at March 31, 1997 is scheduled for delivery after December 31, 1997.
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 had a positive working capital position of $5.2 million at March 31,
1997, equivalent to its position at December 31, 1996.
The Company has incurred recurring operating losses, and has been dependent
on advances from its parent to fund its cash flow requirements. As a result,
the reports of the Company's independent auditors in the 1996 Annual Report
on Form 10-K expressed 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, or the amounts and classification of liabilities
that may result from the possible inability of the Company to continue as a
going concern.
The Company believes that the extension of the existing facilities with WESAC
and Silicon Valley Bank, along with the new line of credit, will be adequate
to fund the Company's operations during 1997. However, significant changes
in the Company's anticipated level of business and other events could
substantially increase the Company's cash requirements above those now
anticipated, and thereby could constrain the Company's results of operations
and financial condition. Therefore, the Company is continuing to seek
additional sources of financing and to evaluate various strategies, including
seeking new equity capital to meet its working capital requirements. There
can be no assurance, however, that the Company will be successful in these
efforts.
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Part II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Data Schedule (EDGAR filing only)
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
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: May 15, 1997 /S/ C. STEPHEN BEAL
--------------------------------------
C. Stephen Beal
President and Chief Executive Officer
Date: May 15, 1997 /S/ A. NOEL DEWINTER
---------------------------------------
A. Noel DeWinter
Vice President, Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION Page
----
27. Financial Data Schedule (EDGAR filing only) 15
14 of 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,261
<SECURITIES> 0
<RECEIVABLES> 14,345
<ALLOWANCES> 0
<INVENTORY> 4,254
<CURRENT-ASSETS> 23,926
<PP&E> 4,933
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,088
<CURRENT-LIABILITIES> 18,683
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> (3,482)
<TOTAL-LIABILITY-AND-EQUITY> 30,088
<SALES> 11,357
<TOTAL-REVENUES> 12,734
<CGS> 9,116
<TOTAL-COSTS> 9,983
<OTHER-EXPENSES> 2,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (426)
<INCOME-PRETAX> (604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (604)
<EPS-PRIMARY> (0.034)
<EPS-DILUTED> (0.034)
</TABLE>
