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UNITED STATES
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 QUARTER ENDED JUNE 30, 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. Identification No.)
incorporation or organization)
3600 WEST SEGERSTROM AVENUE
SANTA ANA, CALIFORNIA 92704
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 979-7300
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
----- -----
At August 1, 1998, there were 16,323,074 shares of the registrant's common stock
outstanding.
Page 1 of 17
Exhibit Index at Page 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 7,626 $12,451 $14,824 $23,808
Rental, service and other 2,698 1,611 4,716 2,988
------- ------- ------- -------
10,324 14,062 19,540 26,796
COSTS AND EXPENSES:
Cost of revenues:
Product sales 4,978 9,947 10,597 19,063
Rental, service and other 2,632 1,048 4,207 1,915
Selling, general and administrative 3,129 2,992 6,130 5,969
------- ------- ------- -------
10,739 13,987 20,934 26,947
------- ------- ------- -------
Operating profit/(loss) (415) 75 (1,394) (151)
OTHER INCOME (EXPENSE):
Interest income 19 16 39 48
Interest expense (361) (485) (927) (895)
Other income (expense) (33) 4 (7) 4
------- ------- ------- -------
(375) (465) (895) (843)
------- ------- ------- -------
Net Loss $ (790) $ (390) $(2,289) $ (994)
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 34 30 114 100
------- ------- ------- -------
Comprehensive loss (756) (360) (2,175) (894)
------- ------- ------- -------
Basic and diluted loss per common share $ (0.09) $ (0.22) $ (0.42) $ (0.56)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares outstanding 9,124 1,765 5,465 1,765
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See notes to condensed consolidated financial statements.
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WAHLCO ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1998 1997
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 366 $ 1,645
Restricted cash and cash equivalents 889 1,219
Accounts receivable 9,689 10,322
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,415 2,357
Inventories 3,328 2,899
Other current assets 1,458 1,149
--------- ---------
TOTAL CURRENT ASSETS 18,145 19,591
Property, plant and equipment, net 4,290 4,601
Other assets 1,054 999
--------- ---------
$ 23,489 $ 25,191
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 3,272 $ 2,978
Accounts payable 5,233 6,801
Accrued payroll and payroll related liabilities 1,243 1,591
Billings in excess of costs and estimated
earnings on uncompleted contracts 601 1,068
Current portion of long-term debt 282 273
Taxes payable 203 204
Other accrued liabilities 4,907 5,202
--------- ---------
TOTAL CURRENT LIABILITIES 15,741 18,117
Long-term debt 2,282 13,304
Other liabilities 1,962 2,118
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 163 176
Capital in excess of par value 104,895 90,855
Accumulated deficit (99,392) (97,103)
Foreign currency translation adjustment
(and accumulated other comprehensive income) (2,162) (2,276)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 3,504 (8,348)
--------- ---------
$ 23,489 $ 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>
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,289) $ (994)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 614 641
Deferred compensation 71 78
(Gain) loss on sale of fixed assets (9) 28
Changes in operating assets and operating liabilities:
Accounts receivable 708 (249)
Costs and estimated earnings in excess of
billings on uncompleted contracts (36) (928)
Inventories (414) 317
Other current assets (301) 395
Accounts payable and accrued liabilities (2,486) (54)
Billings in excess of costs and estimated earnings
on uncompleted contracts (476) (496)
Income taxes payable (1) (9)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (4,619) (1,271)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (224) (247)
Proceeds from dispositions of property, plant
and equipment 10 26
Change in other assets (115) 39
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (329) (182)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC and the Wexford 1996 Funds 585 652
Net proceeds from rights offering 2,196 -
Borrowings on notes payable 327 283
Payments on notes payable (33) (429)
Borrowings on long-term debt - 55
Payments on long-term debt (1,837) (102)
Borrowing from Wexford funds 2,030 -
Decrease (increase) in restricted cash 330 (159)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,598 300
-------- --------
Effect of exchange rate changes on cash 71 140
-------- --------
Net decrease in cash and cash equivalents (1,279) (1,013)
Cash and cash equivalents, beginning of period 1,645 1,853
-------- --------
Cash and cash equivalents, end of period $ 366 $ 840
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 297 $ 186
-------- --------
-------- --------
</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 June 30, 1998 and the consolidated results of its operations for the six
month periods ended June 30, 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 June 30,
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 Wexford Management LLC, a Connecticut limited
liability company.
Certain prior year amounts have been reclassified to conform to the June
30, 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.
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3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -------------
(Unaudited)
<S> <C> <C>
Raw materials $ 1,639 $ 1,189
Work in process 1,651 1,441
Finished goods 38 269
-------- --------
$ 3,328 $ 2,899
-------- --------
-------- --------
</TABLE>
4. CAPITAL RESTRUCTURING PLAN
On May 15, 1998, the Company completed the financial restructuring plan (the
"Restructuring Plan") described in the Company's Prospectus dated February 4,
1998 and the Prospectus Supplement dated March 24, 1998. The plan included a
rights offering, a one-for-ten reverse stock split, and the conversion to equity
of approximately $11.8 million of debt owed by the Company to WESAC.
In the rights offering, stockholders of record on March 3, 1998 were issued
rights to purchase shares of the Company's common stock at $0.10 per share.
Each stockholder received eight rights per share of stock held, totaling
27,112,000 rights. Public stockholders exercised 20,773,310 rights, raising
approximately $2.1 million. The remaining 6,338,690 rights were exercised for
approximately $634 thousand 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.
The rights offering raised $2.7 million, of which $500 thousand was used to pay
expenses associated with the offering and $1.7 million was used to pay off the
Silicon Valley Bank facility (see Note 6.).
At the close of the rights offering on May 15, 1998, the Company effected a
one-for-ten reverse stock split.
At May 15, 1998, the Company owed WESAC approximately $11.8 million for loans
made during 1995 and 1996. As part of the Restructuring Plan, and after the
reverse stock split, the $11.8 million of debt was converted into approximately
11.8 million shares of the Company's common stock at the rate of one share of
post-split common stock for each $1.00 of converted debt.
The value of $1.00 assigned to each share of common stock in the conversion
of debt was essentially equivalent to the market value of the stock at the
time of the conversion. Consequently, there was no gain or loss on the
conversion.
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At the completion of the Restructuring Plan, there were 16,323,074 shares issued
and outstanding. Wexford managed funds held 13,306,875 shares, or 81.5%. The
public stockholders held 3,016,199 shares, or 18.5%.
5. LIQUIDITY AND LINES OF CREDIT
As part of the Restructuring Plan, Wexford, as agent for the Wexford 1995 Funds
and the Wexford 1996 Funds (the "two funds"), agreed, pursuant to an Amended
and Restated Credit Agreement dated January 30, 1998 (the "1998 Credit
Agreement"), to make available to the Company, until the closing of the rights
offering, a line of credit of up to $3.0 million (the "Tranche A Line"). The
Company borrowed $1.5 million under the Tranche A Line which terminated on the
closing of the rights offering. Those borrowings have a maturity date of
December 31, 2000.
At the closing of the rights offering on May 15, 1998, the two funds, under the
1998 Credit Agreement, made available to the Company a new line of credit of up
to $2.5 million (the "Tranche B Line"), which will also expire December 31,
2000. The Company borrowed $450 thousand under the Tranche "B" Line in May,
1998, leaving approximately $2.0 million of borrowing availability under the
Tranche "B" Line on June 30, 1998.
All loans pursuant to the 1998 Credit Agreement bear interest at the rate of 13%
per annum and are secured by a first priority lien on all the assets of the
Company. Under terms of the 1998 Credit Agreement, interest on Tranche A and
Tranche B loans is due and payable semi-annually in arrears.
On June 30, 1998, the Company owed $80 thousand of interest on Tranche A and
Tranche B loans which was due and payable. Per a letter agreement dated
August 11, 1998, the payment of this interest as scheduled was waived and the
amount was added to the principal balance of the Tranche B loan as of that
date (see Note 6).
In February 1997, the Wexford 1995 Funds established, guaranteed and
collateralized 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. Under the Chase Facility, the
Company may also request that Chase issue letters of credit for the benefit of
the Company, which Chase may elect to issue in its sole discretion.
On June 30, 1998, the Chase Facility had a funding capacity of approximately
$3.4 million and the Company's total cash borrowings under the Chase Facility
totaled $2.65 million. Also at June 30, 1998, Chase had issued Letters of
Credit for the benefit of the Company totaling approximately $760 thousand,
fully utilizing the Chase facility. 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%.
If, and to the extent, that the Company borrows additional amounts under an
expanded, guaranteed and collateralized Chase Facility, funding availability
under the Tranche B Line will be reduced dollar for dollar by the amount of such
borrowings. Letters of credit issued under the Chase Facility do not reduce
funding availability under the Tranche "B" Line.
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6. LONG-TERM DEBT
At May 15, 1998, the Company owed to WESAC approximately $11.8 million
for loans made in 1995 and 1996. Under agreements reached between the
Company and WESAC in 1996 and 1997, interest due and payable to WESAC had
been added to principal. As a result, the balance due WESAC on May 15, 1998
included $8.6 million of principal and $3.2 million of accrued interest.
Additionally, the Company owed $1.8 million to Silicon Valley Bank
("SVB") under a loan and security agreement originally entered into with SVB
in October 1995. The outstanding borrowings under the SVB loan at May 15,
1998 totaled $1.8 million, including $1.7 million of cash borrowings and
approximately $100 thousand of restricted cash collateral for outstanding
letters of credit.
As noted above, the WESAC secured debt of approximately $11.8 million
was converted to equity at the closing of the Restructuring Plan on May 15,
1998, and the $1.7 million secured loan from SVB was fully paid off from the
proceeds of the rights offering. As a result, the Company had $5.8 million
of notes payable and total debt, and $3.5 million of stockholders' equity on
June 30, 1998. Total borrowings consisted of $1.5 million outstanding under
the Tranche A Line, $530 thousand under the Tranche B Line, $2.65 million
borrowed under the Chase Facility, and $1.1 million for short-term loans and
certain equipment leases. The $2.65 million borrowed under the Chase facility
and approximately $600 thousand of short-term loans are reported as Notes
Payable.
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Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- --------------
<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. $ 417 $ 516
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. - 6,559
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. - 2,696
Secured loan from Silicon Valley Bank, bearing interest
at 5.5% and due December 1999. - 1,700
Secured term loan from WESAC, bearing interest at
13.0% and due December, 1999. - 1,801
Secured term loan Tranche 'A' from Wexford,
bearing interest at 13.0% and due December 2000 1,500 -
Secured term loan Tranche 'B' from Wexford,
bearing interest at 13.0% and due December 2000 530 -
Other credit agreements 117 305
------ -------
2,564 13,577
Less current portion (282) (273)
------ -------
$2,282 $13,304
------ -------
------ -------
</TABLE>
The amount due under the secured term loan Tranche B includes $80
thousand of accrued interest as of June 30, 1998.
The fair value of each of the long-term debt instruments discussed
above, as well as the notes payable discussed in Note 5, approximate the
carrying amounts based on current market interest rates for similar
instruments.
7. NYSE DELISTING
As previously reported, the Company had been out of compliance with
certain of the New York Stock Exchange ( NYSE) listing standards for some
time. The Company met with the NYSE in August 1997 to address these
compliance issues and outline the financial restructuring plan completed in
May 1998. The NYSE indicated that it would accept for listing the additional
shares of common stock which the Company would issue as part of the
Restructuring Plan, and listed the newly issued shares in late May 1998.
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On June 30, 1998, the NYSE announced that the Company's common stock
would be delisted no later than the market opening on Wednesday, July 15,
1998. The action by the NYSE was taken due to the fact that the Company's
net tangible assets, average after-tax income over three years and aggregate
market value remained below the Exchange's continued listing criteria.
On July 15, 1998, the Company's common stock commenced trading on the
over the counter (otc) market under the symbol "WALO".
8. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term contracts, at June
30, 1998, the Company is contingently liable for approximately $2.5 million
under standby letters of credit and bank guarantees, issued by Chase, SVB and
London International Mercantile.
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.
9. 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.
Average shares outstanding for the prior periods have been adjusted to
reflect the one-for-ten reverse stock split which was effected as part of the
capital restructuring plan (see Note 4.)
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10. 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.
11. 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.
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. Wahlco Engineered
Products, Inc. ("WEP, Inc.") designs, manufactures and markets diverters,
dampers and expansion joints. Wahlco Engineered Products, Ltd. ("WEP Ltd.")
designs, manufactures and sells dampers, diverters and expansion joints.
Pentney Engineering Ltd. installs pipework, provides general fabrication,
mechanical plant installation and manufactures hydraulic equipment.
Teddington Bellows Ltd. designs and manufactures metallic expansion
joints.
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Wahlco, Inc. designs, manufactures and services equipment to control air
pollution, and manufactures and markets heaters and thermocouples. Treste
Plant Hire Ltd. rents equipment to the mechanical construction industry.
On August 5, 1998, the Company and LTG Lufttechnische GmbH (LTG)
mutually agreed to terminate the license agreement for the sale and
manufacturing of products for the reduction and control of volatile organic
compounds. The agreement with LTG was originally signed in November, 1995.
The Company is 81% owned by Wexford Management LLC, a Connecticut
limited liability company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1997
REVENUES - Revenues of $10.3 million for the second quarter were $3.8
million, or 27%, below revenues of $14.1 million in the second quarter of
1997. Revenues at WEP, Inc. in Maine, primarily from the sale of dampers and
diverters, totaled $2.5 million in the second quarter of 1998, down $1.0
million from revenues of $3.5 million reported in the second quarter of 1997.
Revenues reported in the second 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 second quarter of 1998 reflected a more normal backlog of
$4.5 million at December 31, 1997. Damper and diverter revenues at WEP Ltd.
of $1.6 million in the second quarter of 1998 were $1.9 million below
revenues reported in the second quarter of 1997, also due to a decrease in
backlog at December 1997, coupled with a slow order pace. 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 $3.0 million in the second quarter of 1998, down $1.2
million compared to the second 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 $7.6 million for the quarter
just ended compared to $11.0 million for the second quarter of 1997, 74% and
78% of revenues, respectively. Cost of revenues decreased in the second
quarter of 1998, compared to the second quarter of 1997, in line with the
reduction in revenues. Cost of revenues decreased as a percent of revenues
in the second quarter of 1998 compared to 1997 due to several significant
higher margined FGC system contracts in 1998.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - Second quarter SG&A expense
of $3.1 million was $137 thousand above SG&A expense in the second quarter of
1997. The increase in SG&A expense in 1998 over 1997 reflects the impact of
low level inflation coupled with costs associated with an expanded
installation and service operation in the U.K.
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INCOME TAXES - Due to the absence of deferred tax liabilities, the
Company did not book a tax benefit against domestic losses in the second
quarter of 1998 and 1997.
NET LOSS - The 1998 second quarter net loss of $790 thousand compares to
a net loss of $390 thousand for the second quarter of 1997. The higher loss
was the result of the above mentioned factors.
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997
REVENUES - Revenues for the six months ended June 30, 1998 of $19.5
million were $7.3 million, or 27%, below revenues of $26.8 million reported
for the same six month period of 1997. Revenues from the sale of dampers
and expansion joints at WEP, Inc. in Maine totaled $5.0 million for the six
months just ended, down $4.1 million from revenues of $9.2 million reported
in the comparable six months of last year. Revenues from the sale and
servicing of FGC and related systems totaled $5.1 million during the first
six months of 1998, down $1.5 million from revenues of $6.6 million from the
sales of these systems in the first half of 1997. Revenues at WEP Limited
declined $2.5 million in the six months ended June 30, 1998 compared to the
first six months of last year due to the significant effect of the decline in
Southeast Asian markets. Revenues at Pentney and Teddington were down due to
lower activity in the U.K. market.
COST OF REVENUES - Cost of revenues for the six months ended June 30,
1998 totaled $14.8 million, representing 76% of revenues, compared to cost of
revenues of $21.0 million, representing 78% of revenues for the same period
last year. Cost of revenues represented a lower percentage of revenues in
1998 due to higher margined FGC contracts in 1998 compared to 1997 and the
absence of several low margined diverter contracts in Southeast Asia in 1998.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - SG&A expense totaled $6.1
million for the six months ended June 30, 1998, up $0.1 million from SG&A
expense of $6.0 million for the six months ended June 30, 1997. SG&A expenses
for the six months of this year included approximately $0.5 million of
expenses related to the expanded installation and service operation in the
United Kingdom. Absent these expenses, SG&A expense in the first six months
of this year would have totaled $5.6 million, favorable to SG&A expense of
$6.0 million for the first six months of last year by approximately $400
thousand. SG&A expenses, and related staffing levels, had been reviewed and
reduced to minimum levels by 1997 and the Company has maintained the low
level of expenditures into 1998.
INCOME TAXES - The Company did not book a tax benefit against domestic
losses in the first half of 1998 due to the absence of any remaining deferred
tax liabilities.
NET LOSS - The net loss for the six month period in 1998 totaled $2.3
million, $1.3 million worse than the net loss of $1.0 million reported in the
same period of 1997. The loss this year was caused by the factors mentioned
above.
BACKLOG
Backlog, defined as work for which the Company has entered into a signed
agreement or has received a requisition or purchase order, totaled $13.2
million at June 30, 1998, compared to $19.0 million at June 30, 1997 and
$12.4 million at December 31, 1997. Approximately $3.0 million of the
backlog at June 30, 1998 is scheduled for delivery after December 31, 1998.
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<PAGE>
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 $2.4 million at
June 30, 1998, compared to working capital of $1.5 million at December 31,
1997.
The Company has sustained recurring operating losses, and has been
dependent on advances from and facilities provided by its parent to fund cash
requirements. As a result, the reports of the Company's independent auditors
in the 1997 Annual Report on Form 10-K expressed concerns about the Company's
ability to continue as a going concern, absent such financial support. The
consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classifications of
assets, or the amounts and classification of liabilities that may result from
the possible termination of the Wexford funding facilities and the consequent
inability of the Company to continue as a going concern.
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. The 1998 Credit Agreement and the Chase Facility
have been provided to the Company, however, both are either collateralized or
funded by the Wexford funds. The Company believes, assuming it is able to
continue to satisfy conditions for borrowing within the 1998 Credit
Agreement, Wexford will continue to provide funds under the Agreement.
Significant changes in the Company's anticipated level of business and
other events, such as the continuing decline in international markets and
delays in scheduled projects, could substantially increase the Company's cash
requirements above those now anticipated, and could affect the Company's
ability to comply with conditions of the 1998 Credit Agreement. As a result,
there can be no assurance that (i) Wexford will make the loans available
under the 1998 Credit Agreement or the Chase Facility, (ii) if the loans are
made, they will not be called for repayment, or (iii) the capacity of the
1998 Credit Facility will be sufficient to satisfy the Company's borrowing
requirements.
Therefore, the Company is continuing to seek additional sources of
financing, as well as exploring unrelated sources of new equity capital, the
sale of assets, and seeking potential business partners, although there can
be no assurance that the Company will be successful in doing so or that any
such financing or equity capital will be available on acceptable terms.
14 of 17
<PAGE>
PART II: OTHER INFORMATION
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.
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: August 14, 1998 /s/ C. Stephen Beal
---------------------------------------
C. Stephen Beal
President and Chief Executive Officer
Date: August 14, 1998 /s/ A. Noel Dewinter
---------------------------------------
A. Noel DeWinter
Vice President, Chief Financial Officer
16 of 17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<S> <C> <C>
27. Financial Data Schedule (EDGAR filing only) 18
</TABLE>
17 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,255
<SECURITIES> 0
<RECEIVABLES> 9,689
<ALLOWANCES> 0
<INVENTORY> 3,328
<CURRENT-ASSETS> 18,145
<PP&E> 4,290
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,489
<CURRENT-LIABILITIES> 15,741
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 3,341
<TOTAL-LIABILITY-AND-EQUITY> 23,489
<SALES> 14,824
<TOTAL-REVENUES> 19,540
<CGS> 10,597
<TOTAL-COSTS> 14,804
<OTHER-EXPENSES> 6,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (927)
<INCOME-PRETAX> (2,289)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,289)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
