<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 SEPTEMBER 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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
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The number of shares of common stock outstanding at November 1, 1997 was
17,649,000 shares.
Page 1 of 17
Exhibit Index at Page 17
Page 1 of 17
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 8,922 $ 7,376 $ 32,730 $ 26,880
Rental, service and other 1,830 1,747 4,818 5,750
---------- --------- --------- ---------
10,752 9,123 37,548 32,630
COSTS AND EXPENSES:
Cost of revenues:
Product sales 7,250 6,330 26,313 23,286
Rental, service and other 1,444 1,550 3,359 5,278
Selling, general and administrative 3,054 3,005 9,023 11,804
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11,748 10,885 38,695 40,368
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Operating loss (996) (1,762) (1,147) (7,738)
OTHER INCOME (EXPENSE):
Interest income 31 8 79 64
Interest expense (471) (352) (1,366) (1,103)
Other income (expense) (15) (13) (11) 15
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(455) (357) (1,298) (1,024)
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Loss before income taxes (1,451) (2,119) (2,445) (8,762)
Benefit for income taxes - (702) - (2,476)
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Net loss $ (1,451) $ (1,417) $ (2,445) $ (6,286)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net loss per share $ (0.08) $ (0.08) $ (0.14) $ (0.36)
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Average common shares outstanding 17,649 17,649 17,649 17,649
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</TABLE>
See notes to condensed consolidated financial statements.
Page 2 of 17
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 438 $ 1,853
Restricted cash and cash equivalents 1,576 1,050
Accounts receivable 9,749 12,069
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,821 2,148
Inventories 4,731 4,738
Other current assets 971 1,365
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TOTAL CURRENT ASSETS 21,286 23,223
Property, plant and equipment, net 4,601 5,190
Other assets 1,208 1,407
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$ 27,095 $ 29,820
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LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 1,102 $ 373
Accounts payable 7,442 9,622
Accrued payroll and payroll related liabilities 1,362 1,589
Billings in excess of costs and estimated earnings
on uncompleted contracts 736 1,356
Current portion of long-term debt 252 228
Taxes payable 206 317
Other accrued liabilities 6,066 4,575
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TOTAL CURRENT LIABILITIES 17,166 18,060
Long-term debt 13,003 12,145
Other liabilities 2,086 2,435
Commitments and contingencies - -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 176 176
Capital in excess of par value 90,834 90,735
Accumulated deficit (94,129) (91,684)
Foreign currency translation adjustment (2,041) (2,047)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (5,160) (2,820)
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$ 27,095 $ 29,820
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</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 17
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,445) $ (6,286)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 947 1,084
Deferred income taxes - (2,020)
Deferred compensation 99 248
Loss on sale of fixed assets 22 135
Changes in operating assets and operating liabilities:
Accounts receivable 1,906 4,992
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,717) 1,042
Inventories (90) 2,439
Other current assets 340 244
Accounts payable and accrued liabilities (722) (5,907)
Billings in excess of costs and estimated earnings
on uncompleted contracts (575) 929
Income taxes payable (114) (173)
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NET CASH USED IN OPERATING ACTIVITIES (2,349) (3,273)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (382) (270)
Proceeds from dispositions of property, plant and equipment 40 43
Change in other assets 82 (117)
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NET CASH USED IN INVESTING ACTIVITIES (260) (344)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC 999 1,479
Borrowings on notes payable 1,266 28
Payments on notes payable (521) (756)
Borrowings on long-term debt 55 29
Payments on long-term debt (168) (202)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,631 578
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Effect of exchange rate changes on cash 89 11
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Net decrease in cash and cash equivalents (889) (3,028)
Cash and cash equivalents, beginning of period 2,903 5,147
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Cash and cash equivalents, end of period $ 2,014 $ 2,119
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ 107
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Cash paid for interest $ 350 $ 400
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</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 17
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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 as
of September 30, 1997 and the consolidated results of its operations for
the nine month periods ended September 30, 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 September 30, 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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.
Page 5 of 17
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3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
1997 1996
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(Unaudited)
Raw materials $ 1,372 $ 1,375
Work in process 3,044 3,152
Finished goods 315 211
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Total inventories $ 4,731 $ 4,738
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------- -------
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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<S> <C> <C>
7.9525% note payable, due in monthly
installments of $20 (principal and interest) through
June 2000, secured by related lease payments $ 563 $ 702
Secured term loan from WESAC, bearing interest at
13.0% and due March 1999. 6,348 5,763
Secured term loan from WESAC, bearing interest at
13.0% and due March 1999. 2,611 2,372
Secured loan from Silicon Valley Bank, bearing
interest at 5.5% and due March 1999. 1,700 1,700
Secured term loan from WESAC, bearing interest at
13.0% and due March 1999. 1,744 1,585
Other credit agreements 289 251
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13,255 12,373
Less current portion (252) (228)
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$ 13,003 $ 12,145
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</TABLE>
Under agreements reached between the Company and WESAC on April 12, 1996
and March 12, 1997, interest due and payable from WESAC is compounded into
the debt. These agreements commenced with respect to interest due and
payable for the fourth quarter of 1995. The secured loan balances with
WESAC include compounded interest of $2.3 million as of September 30, 1997.
Page 6 of 17
<PAGE>
On September 18, 1997, the Company announced a rights offering for its
public shareholders, more fully described in the Management's Discussion
and Analysis of Financial Condition and Results of Operations. Once the
rights offering is consummated, the $1.7 million secured loan with
Silicon Valley Bank would be paid off and $10.7 million of debt to WESAC,
at September 30, 1997, would be converted to stockholders' equity.
5. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts at
September 30, 1997, the Company is contingently liable for approximately
$3.1 million under standby letters of credit and bank guarantees.
As of September 30, 1997, the Company was not subject to any material
legal proceedings.
6. EARNINGS PER SHARE
Earnings per share for the three and nine month periods ended September 30,
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 and nine month periods ended September 30, 1997
and 1996, respectively.
Page 7 of 17
<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 diverters,
dampers and expansion joints; 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, along with the
manufacture of heaters and thermocouples; 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.
Page 8 of 17
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES - Third quarter revenues of $10.8 million were $1.7 million, or
18%, higher than revenues of $9.1 million reported in the third quarter of
1996. Revenues at WEP, Inc. and WEP, Ltd., primarily from sales of diverters
and dampers, totaled $6.3 million in the third quarter of 1997, up $1.4
million from revenues reported in the third quarter of 1996. The increase
was the result of completing several significant large orders which were
booked in late 1996. Revenues from the sales, rental and service of flue gas
conditioning (FGC) systems and related air pollution control products totaled
$2.4 million in the third quarter of 1997, up $0.4 million from revenues
generated from such systems in the third quarter of 1996. The third quarter
of 1997 benefited from the recognition of significant revenues on two large
FGC contracts which were booked late in 1996. Revenues in the third quarter
of 1996 reflected a series of smaller domestic contracts. The absence of
revenues in 1997 from WEP Italiana, which was closed at the end of 1996,
represented a revenue decrease of $0.2 million in the third quarter of 1997
compared to the third quarter of 1996.
COST OF REVENUES - Cost of revenues totaled $8.7 million, or 81% of revenues,
for the quarter just ended, compared to $7.9 million, or 86% of revenues, for
the third quarter of 1996. Cost of revenues was lower as a percent of
revenues in the third quarter of 1997 compared to the third quarter of 1996,
as the third quarter last year included provisions for contract charges
totaling approximately $0.7 million, primarily related to products
manufactured under subcontract in foreign countries by the WEP Group.
SALES, GENERAL AND ADMINISTRATIVE (SG&A) - SG&A expense of $3.1 million in
the third quarter of 1997 was $0.1 million above SG&A expense of $3.0 million
reported in the third quarter of 1996 as a result of additional bad debt
reserves on certain U. K. contracts. SG&A expense in the third quarter of
1996 included a $50 thousand reserve for bad debts related to the water
purification systems business, which was closed in July 1996.
OPERATING LOSS - Operating loss of $1.0 million in the third quarter of 1997
was $0.8 million less than the operating loss of $1.8 million reported in the
third quarter of 1996. The reduction in operating loss was due to an 18%
increase in revenues compared to the third quarter of 1996, and improvements
in cost of revenues which were five percentage points lower in the third
quarter of 1997 compared to the third quarter of 1996. SG&A expense was
essentially unchanged from the third quarter of 1996.
INCOME TAXES - Due to the absence of any remaining deferred tax liabilities,
the Company did not book a tax benefit against domestic losses in the third
quarter of 1997. The income tax benefit of $702 thousand in the third
quarter of 1996 represented tax benefits derived from taxable domestic losses
in that quarter.
NET LOSS - The net loss of $1.5 million for the third quarter of 1997 was
$34 thousand larger than the net loss of $1.4 million in the third quarter of
1996 due to the above mentioned factors.
Page 9 of 17
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES - Revenues for the nine months ended September 30, 1997 of $37.5
million were $4.9 million, or 15%, higher than revenues of $32.6 million
reported for the same nine month period of 1996. Since revenues for the
first nine months of last year included approximately $3.3 million of
revenues from discontinued businesses, revenues from continuing operations
increased $8.2 million. Revenues from the sale of dampers, diverters and
expansion joints at WEP Inc. and WEP Ltd. represented $7.2 million of the
increase for the nine months ended September 1997 compared to the comparable
nine months of 1996. Revenues from the sale and servicing of FGC and related
air pollution control products increased $1.9 million in the nine months
just ended compared to the nine months ended September 1996. Revenues from
Teddington Bellows Ltd. decreased approximately $0.5 million in the nine
months ended September 1997 compared to the nine months ended 1996.
COST OF REVENUES - Cost of revenues for the nine months ended September 30,
1997 totaled $29.7 million, representing 79% of revenues, compared to cost of
revenues of $28.6 million, representing 88% of revenues, for the same period
last year. Cost of revenues represented a lower percentage of revenues in
1997 due primarily to the fact that cost of revenues in 1996 included
contract charges of $2.4 million taken in the second and third quarters of
1996, primarily related to jobs subcontracted by the WEP Group in foreign
locations.
SALES, GENERAL AND ADMINISTRATIVE (SG&A) - SG&A expense totaled $9.0 million
for the nine months ended September 30, 1997, down $2.8 million from SG&A
expense of $11.8 million for the nine months ended September 30, 1996.
Adjusted to eliminate one-time charges totaling approximately $0.8 million,
SG&A expense for the first nine months of 1996 totaled $11.0 million. The
decrease in SG&A expense in 1997, from adjusted 1996 levels, reflects a
reduction in administrative personnel, increased purchasing efficiencies and
cost controls.
OPERATING LOSS - The operating loss of $1.1 million reported for the nine
months ended September 30, 1997 was $6.6 million less than the operating loss
of $7.7 million reported for the nine months ended September 30, 1996. The
reduction in operating loss reflects (a) a $4.9 million increase in revenues
for the nine months just ended, compared to the nine months ended September
30, 1996, (b) a nine percentage point reduction in cost of revenues as a
percent of revenues, and (c) a $2.8 million reduction of SG&A expense in the
nine months just ended compared to the nine months ended September 30, 1996.
INCOME TAXES - The Company did not book a tax benefit against domestic losses
in the first nine months of 1997 due to the absence of any remaining deferred
tax liabilities. The income tax benefit of $2.5 million recorded for the
nine months ended September 30, 1996 represented tax benefits available on
taxable domestic losses.
NET LOSS - The net loss for the nine month period in 1997 totaled $2.4
million. This represents a $3.9 million improvement from the net loss of $6.3
million reported in the same period of 1996. The loss this year was caused
by the factors mentioned above.
Page 10 of 17
<PAGE>
BACKLOG
Backlog, defined as work for which the Company has entered into a signed
agreement or has received a requisition or purchase order, totaled $17.7
million at September 30, 1997, compared to $21.0 million at September 30,
1996 and $23.9 million at December 31, 1996. Approximately $6.1 million of
the backlog at September 30, 1997 is scheduled for delivery after December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had positive working capital of $4.1 million at September 30,
1997, which was $1.1 million less than the working capital of $5.2 million at
December 31, 1996.
The Company has incurred recurring operating losses and has been dependent on
advances from WESAC, its 81% majority stockholder 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.
On July 28, 1995, the Company entered into a loan agreement under which WESAC
provided a $2.0 million three-year loan to satisfy the Company's immediate
working capital requirements. This loan is secured by substantially all of
the assets of the Company. The Company had drawn $2.0 million against this
loan as of September 30, 1997. The maturity date of this loan has been
extended to March 31, 1999.
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. 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 and WESAC agreed to collateralize
its guarantee of the Company's outstanding loan balance of $1.7 million and
$0.2 million in letters of credit issued by SVB with $1.9 million in cash.
On October 25, 1996, the SVB 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. In
October 1997, the SVB Agreement was further extended to a maturity date in
March 1999.
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 substantially
all of the assets of the Company. The maturity date of this loan has been
extended to March 31, 1999. Interest and
Page 11 of 17
<PAGE>
a commitment fee of $32 thousand payable to WESAC are compounded. The
Company had drawn $1.5 million against this loan as of September 30, 1997.
In October 1996, WESAC agreed to provide the Company with an additional $2.4
million standby line of credit. As of September 30, 1997, the Company had
not drawn any funds on this line.
In February 1997, certain investment partnerships managed by Wexford
Management LLC ("Wexford") and affiliated with WESAC established and
guaranteed a credit facility at Chase Manhattan Bank (the "Wexford/Chase
Line") to provide short-term financing for companies owned by the investment
partnerships, including the Company. The facility had a funding capacity of
approximately $3.8 million at September 30, 1997, against which the Company
had issued letters of credit totaling approximately $2.3 million and drawn
$750 thousand for working capital. In October, the facility was increased to
a total of $5.0 million and the Company drew an additional $1.0 million from
the line as a short-term loan and issued a letter of credit in the amount of
$500 thousand. Prior to the completion of the rights offering described
below, the Company anticipates that an additional $500 thousand will be
required under this facility, totaling approximately $2.2 million in working
capital draws and $2.8 million in letters of credit from this facility in
1997. The Wexford/Chase Line expires on June 30, 1998. If Wexford provides
Chase Manhattan Bank with collateral, Chase Manhattan Bank will make loans to
the Company under the Wexford/Chase Line. Each loan has a maturity of 90
days, but may be called on demand by Chase Manhattan Bank.
On September 18, 1997, the Company announced plans to make a rights offering
to its public stockholders. Holders of the 3,389,000 common shares publicly
traded will be issued eight rights for each share of stock owned. Each right
will entitle the holder to purchase one share of the Company's common stock
at $0.10 per share. The rights will be freely tradeable, and a market for
them may develop. The rights offering requires stockholder approval. The
Company intends to file a registration statement relating to the rights
offering in December, 1997.
On October 24, 1997, the Company announced that investment partnerships
managed by Wexford which own substantially all of the stock of WESAC have
agreed to act as stand-by underwriters for the rights offering. As stand-by
underwriters, such investment partnerships have agreed to purchase any of the
common shares that are not purchased in the rights offering. The commitment
by such investment partnerships to serve as stand-by underwriters ensures
the Company of gross proceeds from the rights offering of approximately $2.7
million. The Company intends to utilize the net proceeds to pay down the
$1.7 million secured loan from Silicon Valley Bank. The balance of the
proceeds would be available to invest in working capital and higher margin
service businesses. (See Note 4 to Notes to Condensed Consolidated Financial
Statements.)
Upon completion of the rights offering, the Company will have approximately
45,000,000 common shares outstanding. To reduce the number of shares
outstanding and increase the stock price to attract a broader range of
investors, the Company intends to effect a reverse stock split after the
closing of the offering, subject to the approval of the New York Stock
Exchange.
Page 12 of 17
<PAGE>
Subsequent to the rights offering and the reverse stock split, WESAC will
purchase, at the same price as the rights exercise price adjusted for the
reverse stock split, shares of common stock through the cancellation of all
of its secured debt, which is estimated to be about $11.3 million. The net
results of the rights offering and the debt conversion will be a balance
sheet with significantly reduced third party debt and with an improvement in
stockholders' equity of approximately $14 million.
Because it is anticipated that the proceeds of the rights offering will be
utilized to pay down the $1.7 million secured loan with Silicon Valley Bank,
and that WESAC will convert approximately $11.3 million of secured debt, the
only funded debt remaining on the balance sheet will be the approximately
$2.2 million of short-term funding provided through the Wexford/Chase Line
through the end of June 1998 and certain equipment leases. The Company
anticipates that the rights offering will provide it with working capital of
approximately $0.6 million, net of the payoff of the Silicon Valley Bank loan
and expenses related to the offering. Additionally, the same investment
partnerships that established the Wexford/Chase Line have agreed to provide
the Company with a $2.5 million loan facility with an expiration date of
December 31, 2000 upon the completion of the rights offering and the debt
conversion. This new $2.5 million facility will replace the $2.4 million
stand-by line of credit that WESAC agreed to provide in October 1996, on
which the Company has not drawn any funds.
The Company believes that the new $2.5 million facility, together with the
Wexford/Chase Line and the net cash available from the rights offering, will
be adequate to fund the Company's operations during 1998, although there can
be no assurance that (i) loans will be available under the Wexford/Chase
Line, or if made, will not be called for repayment, or (ii) such sources of
liquidity will be sufficient to meet the Company's needs. Significant changes
in the Company's anticipated level of business and other events could
substantially increase the Company's cash requirements above those now
anticipated. This could have the effect of requiring that additional cash
resources be obtained. Therefore, the Company is continuing to seek
additional sources of financing, as well as exploring unrelated sources of
new equity capital, although there can be no assurance that the Company will
be successful in doing so or that any such financing or equity capital would
be available on acceptable terms. The Company has been out of compliance with
certain of the NYSE listing standards for some time. In connection with the
proposed recapitalization, the Company anticipates issuing additional shares
of common stock and has met with the NYSE on both of these matters. While the
Company intends to address the compliance issues, there can be no assurance
that the Company will be successful in its recapitalization efforts or that
its shares will continue to be listed on the NYSE.
Page 13 of 17
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128 EARNINGS PER SHARE
and SFAS No. 129 DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE were
issued in February 1997 and are effective for periods ending after December
15, 1997. The Company will adopt SFAS No. 128 and SFAS No. 129 for the
period ending December 31, 1997 and anticipates that such adoption will not
materially impact the Company's financial statements. SFAS No. 130 REPORTING
COMPREHENSIVE INCOME and SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION were issued in June 1997. The Company
will adopt SFAS No. 130 and SFAS No. 131 in 1998 and anticipates that such
adoption will not materially impact the Company's financial statements.
Page 14 of 17
<PAGE>
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.
Page 15 of 17
<PAGE>
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: November 19, 1997 /s/ C. STEPHEN BEAL
---------------------------------------
C. Stephen Beal
President and Chief Executive Officer
Date: November 19, 1997 /s/ A. NOEL DEWINTER
---------------------------------------
A. Noel DeWinter
Vice President, Chief Financial Officer
Page 16 of 17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ------------ ----
27. Financial Data Schedule (EDGAR filing only) 18
Page 17 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,014
<SECURITIES> 0
<RECEIVABLES> 9,749
<ALLOWANCES> 0
<INVENTORY> 4,731
<CURRENT-ASSETS> 21,286
<PP&E> 4,601
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,095
<CURRENT-LIABILITIES> 17,166
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> (5,336)
<TOTAL-LIABILITY-AND-EQUITY> 27,095
<SALES> 32,730
<TOTAL-REVENUES> 37,548
<CGS> 26,313
<TOTAL-COSTS> 29,672
<OTHER-EXPENSES> 9,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,366)
<INCOME-PRETAX> (2,445)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,445)
<EPS-PRIMARY> (.138)
<EPS-DILUTED> (.138)
</TABLE>
