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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 SEPTEMBER 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 (I.R.S. Identification No.)
of 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 September 30, 1998, there were 16,323,074 shares of the registrant's common
stock outstanding.
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Exhibit Index at Page 18
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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,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 7,040 $ 8,922 $ 21,864 $ 32,730
Rental, service and other 2,311 1,830 7,027 4,818
-------------- ------------ ------------- -----------
9,351 10,752 28,891 37,548
COSTS AND EXPENSES:
Cost of revenues:
Product sales 5,009 7,250 15,607 26,313
Rental, service and other 2,232 1,444 6,439 3,359
Selling, general and administrative 3,092 3,054 9,222 9,023
-------------- ------------ ------------- -----------
10,333 11,748 31,268 38,695
-------------- ------------ ------------- -----------
Operating loss (982) (996) (2,377) (1,147)
OTHER INCOME (EXPENSE):
Interest income 70 31 108 79
Interest expense (183) (471) (1,110) (1,366)
Other income (expense) 33 (15) 28 (11)
-------------- ------------ ------------- -----------
(80) (455) (974) (1,298)
-------------- ------------ ------------- -----------
Net Loss (1,062) (1,451) (3,351) (2,445)
-------------- ------------ ------------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 62 (94) 176 6
-------------- ------------ ------------- -----------
Comprehensive loss $ (1,000) $ (1,545) $ (3,175) $ (2,439)
-------------- ------------ ------------- -----------
-------------- ------------ ------------- -----------
Basic and diluted loss per common share $ (0.07) $ (0.82) $ (0.37) $ (1.38)
-------------- ------------ ------------- -----------
-------------- ------------ ------------- -----------
Weighted average common shares outstanding 16,323 1,765 9,124 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>
SEPTEMBER 30, December 31,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 280 $ 1,645
Restricted cash 865 1,219
Accounts receivable 10,343 10,322
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,373 2,357
Inventories 3,294 2,899
Other current assets 1,488 1,149
------------- -------------
TOTAL CURRENT ASSETS 17,643 19,591
Property, plant and equipment, net 4,190 4,601
Other assets 863 999
------------- -------------
$ 22,696 $ 25,191
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 3,662 $ 2,978
Accounts payable 5,123 6,801
Accrued payroll and payroll related liabilities 1,258 1,591
Billings in excess of costs and estimated earnings
on uncompleted contracts 763 1,068
Current portion of long-term debt 301 273
Taxes payable 198 204
Other accrued liabilities 4,773 5,202
------------- -------------
TOTAL CURRENT LIABILITIES 16,078 18,117
Long-term debt 1,825 13,304
Other liabilities 2,270 2,118
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 163 176
Capital in excess of par value 104,914 90,855
Accumulated deficit (100,454) (97,103)
Foreign currency translation adjustment
(and accumulated other comprehensive income) (2,100) (2,276)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,523 (8,348)
------------- -------------
$ 22,696 $ 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>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,351) $ (2,445)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 696 947
Deferred compensation 89 99
(Gain) loss on sale of fixed assets (9) 22
Changes in operating assets and operating liabilities:
Accounts receivable 156 1,906
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,034 (1,717)
Inventories (361) (90)
Other current assets (318) 340
Accounts payable and accrued liabilities (2,570) (722)
Billings in excess of costs and estimated earnings
on uncompleted contracts (326) (575)
Income taxes payable (4) (114)
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (4,964) (2,349)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (237) (382)
Proceeds from dispositions of property, plant and equipment 91 40
Change in other assets 52 82
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (94) (260)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC and the Wexford 1996 Funds - 999
Proceeds from rights offering 2,711 -
Borrowings on notes payable 684 1,266
Payments on notes payable - (521)
Borrowings on long-term debt - 55
Payments on long-term debt (2,316) (168)
Borrowing on Wexford notes 2,644 -
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,723 1,631
--------- --------
Effect of exchange rate changes on cash (384) 89
--------- --------
Net decrease in cash and cash equivalents (1,719) (889)
Cash and cash equivalents, beginning of period 2,864 2,903
--------- --------
Cash and cash equivalents, end of period $ 1,145 $ 2,014
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 431 $ 350
--------- --------
--------- --------
</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 (consisting
principally of normal, recurring adjustments) necessary for a fair
presentation of the consolidated financial position of the Company as of
September 30, 1998 and the consolidated results of its operations for the
three and nine month periods ended September 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 interim periods are not necessarily indicative of results to be expected
for a 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 81.5% owned by investment partnerships managed by Wexford
Management LLC ("Wexford"), a Connecticut limited liability company.
Certain prior year amounts have been reclassified to conform to the
September 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>
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $ 926 $ 1,189
Work in process 2,002 1,441
Finished goods 366 269
------- -------
$ 3,294 $ 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,
an affiliate of Wexford.
The rights offering raised $2.7 million, of which $500 thousand was used to
pay expenses associated with the offering and $1.8 million was used to
terminate 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
obligations of 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.
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%.
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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"). Borrowings under the Tranche A Line totaled $1.5 million as of
September 30, 1998.
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"). There were no borrowings under
the Tranche B line at September 30, 1998, but borrowing availability under
the Tranche B Line totaled $2.3 million (see below).
All loans pursuant to the 1998 Credit Agreement are secured by a first
priority lien on all the assets of the Company, bear interest at the rate of
13% per annum and have a maturity date of December 31, 2000.
As of September 30, 1998, the Company owed approximately $121 thousand of
interest on borrowings made under the 1998 Credit Agreement. Per a letter
agreement dated August 11, 1998, this amount has been added to the principal
balance of the Tranche A loan (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 September 30, 1998, the Chase Facility had a funding capacity of
approximately $2.85 million and the Company's total cash borrowings under the
Chase Facility totaled $2.85 million. There were no letters of credit issued
and outstanding under the Chase Facility on September 30, 1998. 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 borrowed $200 thousand under the Chase facility subsequent to the
completion of the restructuring plan in May, 1998. Under terms of the 1998
Credit Agreement, any amounts borrowed on the Chase facility, after the
restructuring, reduce funding availability under the Tranche B Line dollar
for dollar by any amounts borrowed. Letters of credit issued under the
Chase Facility do not reduce funding availability under the Tranche B Line.
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
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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 exposure 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 $1.8 million secured exposure to SVB was terminated from the proceeds
of the rights offering. As a result, the Company had $5.8 million of notes
payable and total debt, and $2.8 million of stockholders' equity on September
30, 1998. Total borrowings consisted of $1.6 million outstanding under the
Tranche A Line, $2.85 million borrowed under the Chase Facility, and $1.3
million for short-term loans and certain equipment leases. The $2.85 million
borrowed under the Chase facility and approximately $800 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>
September December 31,
30, 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. $ 366 $ 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
managed funds, bearing interest at 13.0%
and due December 2000 1,621 -
Other credit agreements 139 305
----------- ------------
2,126 13,577
Less current portion (301) (273)
----------- ------------
$ 1,825 $ 13,304
----------- ------------
----------- ------------
</TABLE>
The amount due under the secured term loan Tranche A includes $121 thousand
of accrued interest as of September 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, 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.
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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
September 30, 1998, the Company is contingently liable for approximately
$3.0 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.
The Company does not believe that any settlement will have a material effect
on earnings.
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 superseded 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.
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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. 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. 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 81.5% owned by investment partnerships managed by Wexford
Management LLC ("Wexford"), a Connecticut limited liability company.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES - Revenues of $9.4 million for the third quarter were $1.4 million,
or 14%, below revenues of $10.8 million in the third quarter of 1997.
Revenues at WEP Ltd., primarily dampers and diverters, totaled $0.8 million
in the third quarter of 1998, down $1.1 million from revenues reported in the
third quarter of 1997. This reflects the impact on this product line of the
economic slowdown in Southeast Asia. Revenues at Pentney and Teddington in
the third quarter were down $0.2 million and $0.1 million, respectively, from
revenues reported in the third quarter of 1997, due to lower order activity
in the U. K. WEP Inc. reported revenues of $3.0 million in the third quarter
of 1998, essentially unchanged from revenues in the comparable quarter.
Revenues from the sale, rental and service of FGC systems and related equipment
totaled $2.2 million in the third quarter of 1998, down $0.2 million compared
to the third 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 $8.7 million for the third quarter of 1997, 77% and 81% of
revenues, respectively. Cost of revenues decreased in the third quarter of
1998, compared to the third quarter of 1997, in line with the reduction in
revenues. Cost of revenues decreased as a percent of revenues in the third
quarter of 1998 compared to 1997 due to improved profit margins on several
FGC system contracts.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - Third quarter SG&A expense of
$3.1 million was essentially unchanged from SG&A expense in the third quarter
of 1997. SG&A expenses in the third quarter of 1998 included $300 thousand
of additional reserve for tollgate taxes and $220 thousand of costs related
to a service and installation operation in the U.K., which is now
discontinued. Absent these expenses, SG&A expenses in the third quarter
would have been $2.6 million. The decrease in SG&A expense in 1998 over 1997
reflects the impact of cost reduction programs implemented over the past year.
INTEREST EXPENSE - third quarter interest expense totaled $183 thousand, down
from interest expense of $471 thousand reported in the third quarter of 1997.
The decline in interest expense is primarily due to the elimination of
interest costs on the approximately $11.8 million of debt, owed by the
Company to WESAC, which was converted to equity as part of the Restructuring
Plan. (See Note 4).
INCOME TAXES - Due to the existence of net operating losses, the Company has
not recorded an income tax provision in the accompanying financial
statements. In addition, the Company has established a 100 percent valuation
allowance against deferred tax assets (consisting principally of net
operating loss carryforwards). These operating losses expire on various dates
through 2013.
NET LOSS - The 1998 third quarter net loss of $1.1 million compares to a net
loss of $1.5 million for the third quarter of 1997. The reduced loss was the
result of the above mentioned factors.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES - Revenues for the nine months ended September 30, 1998 of $28.9
million were $8.6 million, or 23%, below revenues of $37.5 million reported
for the same nine month period of 1997. Revenues from the sale of dampers
and expansion joints at WEP, Inc. in Maine totaled $8.1 million for the nine
months just ended, down $4.1 million from revenues of $12.2 million reported
in the comparable nine months of last year. Revenues at WEP, Inc. in 1997
benefitted from a $10.5 million backlog at December 31, 1996. Backlog at
December 31, 1997 declined to $4.5 million, reflecting a low order
replacement rate at WEP, Inc. in 1998. Revenues at WEP Limited declined $2.2
million in the nine months ended September 30, 1998 compared to the first
nine months of last year. Activity at WEP, Inc. and WEP Limited declined as a
result of the weakness in Southeast Asian markets. Revenues from the sale and
servicing of FGC and related systems totaled $7.3 million during the first
nine months of 1998, down $1.7 million from revenues of $9.0 million from the
sales of these systems in the first half of 1997. Demand continues to be weak
for the Company's air pollution control products. Revenues at Pentney and
Teddington were down due to lower activity in the U.K. market.
COST OF REVENUES - Cost of revenues for the nine months ended September 30,
1998 totaled $22.0 million, representing 76% of revenues, compared to cost of
revenues of $29.7 million, representing 79% of revenues for the same period
last year. Cost of revenues represented a lower percentage of revenues in 1998
due to sales of products with higher margins, particularly FGC Systems, in
1998 than those sold in 1997.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) - SG&A expense totaled $9.2
million for the nine months ended September 30, 1998, up $0.2 million from
SG&A expense of $9.0 million for the nine months ended September 30, 1997.
SG&A expenses for the first nine months of this year included approximately
$0.6 million of expenses related to the operations and wind-down of an
installation and service operation in the United Kingdom and $0.3 million for
additional tollgate tax reserves. Absent these expenses, SG&A expense in the
first nine months of this year would have totaled $8.3 million, favorable to
SG&A expense of $9.0 million for the first nine months of last year by
approximately $0.7 million. SG&A expenses, and related staffing levels,
continue to be reviewed and reduced.
INTEREST EXPENSE - interest expense totaled $1.1 million for the nine months
ended September 1998, down from interest expense of $1.4 million reported in
the comparable nine months of 1997. The decline in interest expense is
primarily due to the elimination of interest costs on the approximately $11.8
million of debt which was converted to equity as part of the Restructuring
Plan. (See Note 4).
INCOME TAXES - Due to the existence of net operating losses, the Company has
not recorded an income tax provision in the accompanying financial
statements. In addition, the Company has established a 100 percent valuation
allowance against deferred tax assets (consisting principally of net
operating loss carryforwards). These operating losses expire on various dates
through 2013.
NET LOSS - The net loss for the nine month period in 1998 totaled $3.4
million, $0.9 million worse than the net loss of $2.5 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 $10.9
million at September 30, 1998, compared to $17.7 million at September 30,
1997 and $12.4 million at December 31, 1997. Approximately $3.4 million of
the backlog at September 30, 1998 is scheduled for delivery after December
31, 1998.
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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.
YEAR 2000 CONVERSION
The Company uses fully integrated operational and accounting software
packages which are commercially available in all of its major facilities.
Additionally, the Company has developed various proprietary software packages
which are integrated into several of its final products to monitor and control
the processes at customer locations. All of the commercially available
products and the proprietary software could potentially be affected by the
date change in the year 2000.
The Company continues to assess the impact of the year 2000 issue on its
operations, and has received assurances from the vendors of the licensed
operational and accounting software that all date-sensitive issues related to
the year 2000 conversions have been resolved. The Company has identified the
programming changes which are required to configure its proprietary software
and has implemented a corporate-wide corrective program.
Based upon representations from the vendors of the Company's licensed
software, the Company believes it will be able to achieve year 2000
compliance with regard to its operational programs. Regarding the proprietary
software installations, the required programming and software modifications
have been identified and the Company is taking steps to implement a
compliance program. A schedule is in place to achieve compliance with the
remaining systems by the year 2000 deadline. The Company is also
communicating with suppliers, financial institutions and others to coordinate
year 2000 conversions.
Based on present information, the Company believes that it will be able to
achieve year 2000 compliance through a combination of modifying certain
existing programs and systems and the replacement of other programs with new
systems that are already compliant.
The Company expects that expenses and capital expenditures associated with
achieving year 2000 compliance will not have a material effect on its
financial statements in 1998 and 1999. However, there can be no guarantee
that full compliance will be achieved and actual results could differ
materially from those planned.
SUBSEQUENT EVENT
On November 9, 1998, the Company entered into an Agreement and Plan of Merger
with Thermatrix Inc., (NASDAQ: TMXT) which provides for Wahlco to become a
wholly-owned subsidiary of Thermatrix, subject to shareholder approval.
Shareholders holding more than 83% of the shares have agreed to vote their
shares for the merger at a meeting of shareholders to be held for that
purpose.
Under the terms of the merger agreement, shareholders will receive an initial
payment of approximately $1.6 million, or $0.09 per share. In addition,
shareholders will be entitled to further consideration of up to $2 million
depending on the resolution of certain transactions. The merger agreement
also provides that at the closing, Thermatrix will replace debt and debt
guarantees that have been provided to the Company by certain investment
partnerships managed by Wexford Management LLC.
Pursuant to the terms of the merger agreement, the Board of Directors of the
Company has elected John Schofield, President and Chief Executive Officer of
Thermatrix, a director of the Company and a member of the Executive Committee
of the Board of Directors. Also pursuant to the merger agreement, the Board
has given the Executive Committee, which consists of Messrs. Beal, Plaumann
and Schofield, the authority to approve or disapprove borrowings by the
Company during the period prior to the closing and the authority to conduct
the day-to-day operations of the Company subject to normal Board supervision.
It is anticipated that the merger will be completed by the end of 1998 based
on a special shareholders meeting to approve the merger expected to be held
in December.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital position of $1.6 million at September 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 Wexford to fund cash
requirements. As a result, the report 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 funding facilities and the consequent inability
of the Company to continue as a going concern.
In order to fund its operations, the Company would either have to continue to
borrow money or eliminate its cash flow deficits. The Merger Agreement
permits either or both of Wexford and Thermatrix to make loans to the Company
during the period prior to the closing of the merger. However, neither
Wexford nor Thermatrix is obligated to advance any such loans.The Merger
Agreement also provides that any loans provided by Wexford that are approved
by the Executive Committee will be refinanced by Thermatrix at the closing of
the merger. The Merger Agreement also provides that any loans provided by
Wexford during this period in excess of $200 thousand per month, or in excess
of $500 thousand in the aggregate, would cause an equivalent reduction in the
purchase price payable to the shareholders by Thermatrix under the Merger
Agreement. If loan capital is not available, the Company would have to
eliminate operating cash flow deficits in order to meet its obligations as
they become due. The Company continues to make efforts to reduce its cash
flow deficits by improving the collection of accounts receivable and
exploring cost-cutting measures, but there is no assurance such measures will
be successful. However, if the Company remains independent, management
believes that it will need to obtain a consistent source of financing.
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<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.
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<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, 1998 /s/ C. Stephen Beal
-------------------
C. Stephen Beal
President and Chief Executive Officer
Date: November 19, 1998 /s/ A. Noel DeWinter
--------------------
A. Noel DeWinter
Vice President, Chief Financial Officer
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
27. Financial Data Schedule (EDGAR filing only) 19
18 of 18
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,145
<SECURITIES> 0
<RECEIVABLES> 10,343
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0
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<TOTAL-LIABILITY-AND-EQUITY> 22,696
<SALES> 21,864
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