<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, 1998
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 1, 1998 was 17,649,000
shares.
Page 1 of 16
Exhibit Index at Page 16
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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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Product sales $ 7,198 $ 11,357
Rental and service 2,018 1,377
-------- ---------
9,216 12,734
-------- ---------
COSTS AND EXPENSES:
Cost of revenues:
Product sales 5,619 9,116
Rental and service 1,575 867
Selling, general and administrative 3,001 2,977
-------- ---------
10,195 12,960
-------- ---------
Operating loss (979) (226)
-------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 47 48
Interest and other expense (567) (426)
-------- ---------
(520) (378)
-------- ---------
Net loss $ (1,499) $ (604)
-------- ---------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation
adjustment 80 70
-------- ---------
Comprehensive loss (1,419) (534)
-------- ---------
-------- ---------
Basic and diluted loss per common share $ (0.08) $ (0.03)
-------- ---------
-------- ---------
Weighted average common shares outstanding 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>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 614 $ 1,645
Restricted cash and cash equivalents 993 1,219
Accounts receivable 9,508 10,322
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,649 2,357
Inventories 3,287 2,899
Other current assets 1,862 1,149
--------- ---------
TOTAL CURRENT ASSETS 17,913 19,591
Property, plant and equipment, net 4,491 4,601
Other assets 972 999
--------- ---------
$ 23,376 $ 25,191
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 3,391 $ 2,978
Accounts payable 5,136 6,801
Accrued payroll and payroll related
liabilities 1,329 1,591
Billings in excess of costs and estimated
earnings on uncompleted contracts 580 1,068
Current portion of long-term debt 305 273
Taxes payable 203 204
Other accrued liabilities 4,983 5,202
--------- ---------
TOTAL CURRENT LIABILITIES 15,927 18,117
Long-term debt 15,142 13,304
Other liabilities 2,055 2,118
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 176 176
Capital in excess of par value 90,874 90,855
Accumulated deficit (98,602) (97,103)
Foreign currency translation adjustment
(and accumulated other comprehensive
income) (2,196) (2,276)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (9,748) (8,348)
--------- ---------
$ 23,376 $ 25,191
--------- ---------
--------- ---------
</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>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,499) $ (604)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 296 326
Deferred income taxes - -
Deferred compensation 21 48
(Gain) loss on sale of fixed assets (4) 14
Changes in operating assets and operating liabilities:
Accounts receivable 910 (2,571)
Costs and estimated earnings in excess of
billings on uncompleted contracts 735 604
Inventories (370) 414
Other current assets (702) (229)
Accounts payable and accrued liabilities (2,364) (240)
Billings in excess of costs and estimated
earnings on uncompleted contracts (500) 887
Income taxes payable - (1)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (3,477) (1,352)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (136) (111)
Proceeds from dispositions of property, plant and equipment 7 19
Change in other assets - 131
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (129) 39
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC and the Wexford 1996 Funds 1,892 319
Borrowings on notes payable 459 283
Payments on notes payable (47) (11)
Borrowings on long-term debt 29 -
Payments on long-term debt (58) (56)
Decrease/(Increase) in restricted cash 226 (467)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,501 68
------- -------
Effect of exchange rate changes on cash 74 136
------- -------
Net decrease in cash and cash equivalents (1,031) (1,109)
Cash and cash equivalents, beginning of period 1,645 1,853
------- -------
Cash and cash equivalents, end of period $ 614 $ 744
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 166 $ 90
------- -------
------- -------
</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 as
of March 31, 1998 and the consolidated results of its operations for the
three month periods ended March 31, 1998 and 1997. 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,
1998 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, 1997.
The Company is 81% owned by WES Acquisition Corp. ("WESAC"), an affiliate
of Wexford Management LLC.
Certain prior year amounts have been reclassified to conform to the
March 31, 1998 presentation. These changes had no impact on previously
reported results of operations or stockholders' equity.
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 Statement of Financial
Accounting Standards (SFAS) No. 109.
3. INVENTORIES
Inventories consist of the following (in thousands):
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<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 1,327 $ 1,189
Work in process 1,696 1,441
Finished goods 264 269
------ ------
$ 3,287 $ 2,899
------ ------
------ ------
</TABLE>
4. CAPITAL RESTRUCTURING PLAN
On September 18, 1997, the Company announced plans to make a rights offering
to its public stockholders. A total of 27,112,000 rights were offered to the
holders of the 3,389,000 common shares publicly traded to purchase shares of
the Company's common stock before giving effect to a 1 for 10 reverse stock
split described below. Each right entitled the holder to purchase one share
of the Company's common stock at $0.10 per share. The Company filed a
registration statement relating to the rights offering on February 3, 1998,
which became effective on Februrary 26, 1998, and the rights offering
received stockholder approval on March 2, 1998.
The rights offering expired on May 6, 1998. Approximately 75% of the
27,112,000 rights were exercised by public stockholders, raising
approximately $2.0 million. The remaining $700 thousand was provided by
Wexford Capital Partners II, L. P., a Delaware limited partnership, and
Wexford Overseas Partners I, L. P., a Delaware limited partnership (the
"Wexford 1995 Funds"), both of which are affiliates of Wexford Management LLC
("Wexford"), which had agreed to serve as stand-by underwriters and to
purchase all shares not subscribed for at the subscription price.
The Company will receive net proceeds from the rights offering estimated at
approximately $2.0 million, after deduction of cash expenses which are
estimated at approximately $700 thousand. The Company plans to utilize $1.7
million of these net proceeds to pay off the Silicon Valley Bank facility
(See Note 5).
The Company's rights offering is part of a plan of financial restructuring.
At April 30, 1998, the Company owed WESAC approximately $11.7 million for
loans made by WESAC at various times to the Company in 1995 and 1996.
Subsequent to the rights offering, on or about May 15, 1998, the Company
intends to effect a one-for-ten reverse stock split. At the completion of
the rights offering and the reverse stock split, the WESAC debt will be
converted into common stock of the Company at the rate of $1.00 of converted
debt for each share of post-split common stock. After giving effect to the
rights offering, the reverse stock split and the WESAC debt conversion, there
will be approximately 16,261,000 shares of common stock of the Company issued
and outstanding.
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In connection with the restructuring plan, the Wexford 1995 Funds and the
Wexford 1996 Funds (as defined below, and the Wexford 1995 Funds together
with the Wexford 1996 Funds, the "Wexford Funds") agreed, pursuant to an
Amended and Restated Credit Agreement dated as of January 30, 1998 (the "1998
Credit Agreement") to make available to the Company a line of credit of up to
$3.0 million (the "Tranche A Line") until the closing of the rights
offering. As used herein, the term "Wexford 1996 Funds" means: Wexford
Special Situations 1996, L. P., a Delaware limited partnership, Wexford
Special Situations 1996 Institutional, L. P., a Delaware limited partnership,
Wexford Special Situations 1996 Limited, a Cayman Islands exempted company,
and Wexford-Euris Special Situations 1996, L. P., a Delaware limited
partnership.
The Company borrowed $1.5 million under the Tranche A Line prior to the
closing of the rights offering. Those borrowings will have a maturity date of
December 31, 2000. The Company does not plan to repay Tranche A advances from
the net proceeds of the rights offering.
On or about May 15, 1998, the Wexford Funds under the 1998 Credit Agreement
will make available to the Company an additional line of credit of up to $2.5
million (the "Tranche B Line"), which will expire December 31, 2000. All
loans pursuant to the 1998 Credit Agreement will bear interest at the rate of
13% per annum and will be secured by a first priority perfected lien on the
assets of the Company. If and to the extent that the Company borrows under
the Chase Facility, described below, on or after January 30, 1998, the
Company's availability under the Tranche A Line, through the closing date of
the rights offering, or the Tranche B Line, from and after the closing of the
rights offering, will be reduced dollar for dollar by the amount of such
borrowings.
In February 1997, the Wexford 1995 Funds established and guaranteed a credit
facility (the "Chase Facility") at the Chase Manhattan Bank to provide
short-term financing for companies in which the Wexford 1995 Funds have
invested, including the Company.
The Chase Facility had a funding capacity of approximately $5.5 million at
December 31, 1997 and March 31, 1998, and the Company's total cash borrowings
under the Chase Facility totaled $2.65 million at December 31, 1997 and March
31, 1998. Under the Chase Facility, the Company may also request that Chase
issue letters of credit for the benefit of the Company, which Chase may issue
in its sole discretion. At March 31, 1998, Chase had issued Letters of
Credit under the Chase Facility that total approximately $2.8 million.
Letters of Credit issued under the Chase Facility do not reduce availability
under the Tranche A Line or the Tranche B Line. Before making each loan or
issuing each letter of credit, Chase advises the Company of the terms
applicable to such loan or letter of credit. The current Chase borrowings
are reported as Notes payable and bear interest at an average annual rate of
9.5%.
The Company plans to use the Chase Facility for Letters of Credit and off-shore
bank guarantees, as well as loans to the extent the terms offered are
advantageous to the Company.
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Because the proceeds of the rights offering will be utilized to pay down a
$1.7 million secured loan from Silicon Valley Bank (see Note 5), and WESAC
will convert approximately $11.7 million of secured debt into equity, the
Company will then have approximately $6.0 million of total debt, and
stockholders' equity will total approximately $4.0 million. The total debt
will consist of $1.5 million outstanding under the Tranche A Line, $2.65
million borrowed under the Chase facility, $0.5 million of short-term
borrowings in the U.K., $0.5 million for a short-term loan, and certain
equipment leases.
The Company believes that the 1998 Credit Agreement and the net cash
available from the rights offering will be adequate to fund the Company's
operations during 1998. Although borrowings will be made pursuant to the
1998 Credit Agreement or the Chase Facility, which are either collateralized
or funded by the Wexford Funds, there can be no assurance that (i) loans will
be available under the 1998 Credit Agreement or the Chase Facility, or if
made, will not be called for repayment, or (ii) such sources of liquidity
will be sufficient to meet the Company's needs. Significant changes in the
Company's anticipated level of business and other events could substantially
increase the Company's cash requirements above those now anticipated.
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 New York Stock
Exchange (NYSE) listing standards for some time. In connection with the
restructuring plan, the Company will issue additional shares of common stock
which the NYSE has indicated it will accept for listing. While the Company
intends to address the compliance issues, there is no assurance that the
restructuring plan will lead the Company to ultimately complying with the
NYSE listing criteria.
5. LONG-TERM DEBT
In October 1995, the Company entered into a loan and security agreement with
Silicon Valley Bank ("SVB") under which SVB provided the Company with a $4.0
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.
In May 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, to the Company 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 a 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.
In October 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
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reduced from approximately 11% to about 5.5%, since WESAC had deposited with
SVB cash collateral equivalent to the funds borrowed. 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. The warrants expire on October 26,
2000.
In December 1997, SVB agreed to extend the stated maturity of the SVB Loan to
December 31, 2000. Outstanding borrowings under the SVB Loan at March 31,
1997, totaled $1.8 million, including $1.7 million of cash borrowings and $109
thousand of cash collateral for letters of credit.
In August 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. Interest and a commitment fee of $32
thousand payable to WESAC are compounded. The Company had drawn $1.5 million
against this loan as of December 31, 1997. As of March 31, 1998, the Company
owed to WESAC approximately $11.6 million including interest for loans made
by WESAC at various times in 1995 and 1996. On March 13, 1998, the maturity
of all of the loans with WESAC was extended to December 31, 1999. See Note 4
for the effects on the Company's credit facilities of its recent
restructuring plan.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
7.9525% note payable, due in monthly
installments of $19 to Sanwa Business Credit Corp.
(principal and interest) through June 2000, secured
by related lease payments. $ 467 $ 516
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. 6,771 6,559
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. 2,783 2,696
Secured loan from Silicon Valley Bank, bearing interest
at 5.5% and due December 1999. 1,700 1,700
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. 1,859 1,801
Secured term loan Tranche 'A' from WESAC,
bearing interest at 13.0% and due December 2000 1,500 -
Other credit agreements 367 305
-------- --------
</TABLE>
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<TABLE>
<S> <C> <C>
15,447 13,577
Less current portion (305) (273)
-------- --------
$ 15,142 $ 13,304
-------- --------
-------- --------
</TABLE>
The fair value of each of the long-term debt instruments discussed above,
as well as the notes payable discussed in this Note 5, approximate the
carrying amounts based on current market interest rates for similar
instruments.
Under agreements reached between the Company and WESAC on April 12, 1996
and March 12, 1997, interest due and payable to WESAC is compounded.
These agreements commenced with interest due and payable for the fourth
quarter of 1995 and extend through the maturity date. The above secured
loan balances with WESAC include compounded interest of $2.6 million and
$3.0 million as of December 1997 and March 1998, respectively, under
these agreements.
6. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts, at March
31, 1998, the Company is contingently liable for approximately $4.2 million
under standby letters of credit and bank guarantees.
The Company is a defendant in a lawsuit entitled Ernest W. Krause III
vs. Duke Energy Corporation, Wahlco, Inc. and DIVERSCO, Inc. d/b/a
Spartan Security in the General Court of Justice, Superior Court
Division, North Carolina, Guilford County. The suit is a complaint for
alleged negligence resulting in wrongful death. The Company's insurance
carrier is undertaking the Company's defense.
7. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which was adopted by the Company on December
31, 1997. SFAS 128 superceded APB Opinion No. 15, which had governed the
calculation and presentation of earnings per share for many years. Under
SFAS 128 the Company is 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. The
computation of fully diluted earnings per share, where appropriate, is
still required, but fully diluted earnings per share is called "diluted
earnings per share" under SFAS 128. Since the calculation of diluted
earnings per share under SFAS 128, for entities with losses from continuing
operations, will always result in anti-dilutive per share amounts, the
provisions of SFAS 128 relative to the calculation of diluted earnings per
share have no impact at the present time.
8. COMPREHENSIVE INCOME
Effective for fiscal periods beginning after December 15, 1997, SFAS No.
130 "Reporting Comprehensive Income" requires that comprehensive income and
its components be reported. Comprehensive income is a broad concept of an
enterprise's financial performance, in that it includes all changes in
equity during a period from transactions and events from non-owner sources.
The Company has initially adopted SFAS No. 130 effective January 1, 1998.
Adoption of SFAS No. 130 required a reclassification of comparative
financial statements provided for earlier periods.
9. SEGMENT REPORTING
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" is effective for fiscal years for periods beginning after
December 15, 1997. SFAS No. 131 requires the disclosure of extensive
information about an enterprise's operating segments. The Company will
adopt SFAS No. 131 for the fiscal year ended December 31, 1998 and
anticipates that such adoption will not materially impact the Company's
financial statements.
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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 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, 1997.
THE COMPANY
The Company operates through several subsidiaries which focus on specific
products and/or geographical regions. These entities are coordinated through
a common corporate management. 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, as well as 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1997
REVENUES - Revenues of $9.2 million for the first quarter were $3.5 million, or
28%, below revenues of $12.7 million in the first quarter of 1997. Revenues at
WEP, Inc. in Maine,
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primarily from the sale of dampers and diverters, totaled $2.5 million in the
first quarter of 1998, down $3.1 million from revenues of $5.6 million
reported in the first quarter of 1997. Revenues reported in the first quarter
of 1997 at WEP Inc., resulted from a record backlog of $10.5 million at
December 31, 1996, whereas the lower revenues in the first quarter of 1998
reflected a more normal backlog of $4.5 million at December 31, 1997. Damper
and diverter revenues at WEP Ltd. were $0.7 million below revenues reported
in the comparable quarter of 1997, also due to a decrease in backlog from
December 1996 to December 1997. Damper and diverter revenues in 1998 at WEP
Inc. and WEP Ltd. were negatively impacted by weakness in Southeast Asian
markets.
Revenues from the sale, rental and service of FGC systems and related
equipment totaled $2.1 million in the first quarter of 1998, down $0.3
million compared to the first quarter of 1997. Demand for clean air products
continues to be weak, which the Company believes is a result of on-going
deregulation in the domestic electric utility industry.
COST OF REVENUES - Cost of revenues totaled $7.2 million for the quarter just
ended compared to $10.0 million for the first quarter of 1997, in each case,
78% of revenues. Cost of revenues decreased in the first quarter of 1998,
compared to the first quarter of 1997, in line with the reduction in revenues.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - First quarter SG&A expense of $3.0
million was unchanged compared to the first quarter of 1997. The Company
incurred approximately $150 thousand in SG&A expense in the quarter just ended
related to the start-up of a new operation at Pentney Ltd in the United Kingdom.
Absent these start-up expenses, first quarter SG&A expense would have totaled
$2.9 million.
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 1998 and
1997.
NET LOSS - The 1998 first quarter net loss of $1.5 million compares to a net
loss of $604 thousand for the first quarter of 1997. The higher loss was the
result of the above mentioned factors.
BACKLOG
Backlog, defined as work for which the Company has entered into a signed
agreement or has received a requisition or purchase order, totaled $12.3 million
at March 31, 1998, compared to $26.0 million at March 31, 1997 and $12.4 million
at December 31, 1997. Approximately $2.6 million of the backlog at March 31,
1998 is scheduled for delivery after December 31, 1998.
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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had a positive working capital position of $2.0 million at March
31, 1998, compared to working capital of $1.5 million at December 31, 1997.
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 1997 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 net proceeds from the rights offering and the 1998
Credit Agreement will be adequate to fund the Company's operations
during 1998. However, significant changes in the Company's anticipated level
of business and other events could substantially increase the Company's cash
requirements above those now anticipated, and thereby 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 2, 1998, the Company held a Special Meeting of Stockholders. The
matters considered at the meeting, both of which were approved by stockholders
consisted of the following:
1. Approval of the Company's 1996 Stock Option Plan:
VOTED FOR VOTED AGAINST ABSTAINED BROKER NON-VOTES
15,140,983 273,172 49,765 -0-
3. Approval of Certain Matters Relating to the Company's Restructuring Plan,
including the following, were voted as a single item as provided in the
Company's Proxy statement mailed to stockholders in connection with the
meeting:
(a) An amendment to Article IV of the Certificate of Incorporation in
connection with the Company's proposed rights offering to increase the
number of shares the Company is authorized to issue to 60 million
shares in the aggregate, 58 million shares of common stock and 2
million shares of preferred stock.
(b) The issuance by the Company of additional shares of common stock
needed to effect the rights offering.
(c) A 1 for 10 reverse stock split after the completion of the rights
offering.
(d) A further amendment to Article IV of the Certificate of Incorporation
to decrease the number of shares the Company is authorized to issue
upon the completion of the reverse stock split to 28 million shares of
common stock.
VOTED FOR VOTED AGAINST ABSTAINED BROKER NON-VOTES
15,307,230 115,845 40,845 -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K: No reports on Form 8-K have been filed during
the quarter for which this report is filed.
14 of 16
<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: May 15, 1998 /s/ C. Stephen Beal
----------------------------------
C. Stephen Beal
President and Chief Executive
Officer
Date: May 15, 1998 /s/ A. Noel DeWinter
----------------------------------
A. Noel DeWinter
Vice President, Chief Financial
Officer
15 of 16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------ ----------- ----
<C> <S> <C>
27. Financial Data Schedule (EDGAR filing only) 16
</TABLE>
16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,607
<SECURITIES> 0
<RECEIVABLES> 9,508
<ALLOWANCES> 0
<INVENTORY> 3,287
<CURRENT-ASSETS> 17,913
<PP&E> 4,491
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,376
<CURRENT-LIABILITIES> 15,927
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> (9,924)
<TOTAL-LIABILITY-AND-EQUITY> 23,376
<SALES> 7,198
<TOTAL-REVENUES> 9,216
<CGS> 5,619
<TOTAL-COSTS> 7,194
<OTHER-EXPENSES> 3,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (567)
<INCOME-PRETAX> (1,499)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,499)
<EPS-PRIMARY> (0.080)
<EPS-DILUTED> (0.080)
</TABLE>
