<PAGE>
[CONSUMAT LOGO]
Simply Better...By Design
1995 Annual Report
<PAGE>
TO OUR SHAREHOLDERS:
The top priority of Consumat Systems' management for 1995 was to
attract capital to strengthen the Company's financial position and
to provide the resources vital to its future success. Although the
Company had operated profitably for the last two quarters of 1994
and continued to operate profitably during 1995, the possibility of
litigation related to discontinued operations concerned potential
investors.
As a result of this situation, on October 6, 1995, the Company
filed for protection under Chapter 11 of the United States
Bankruptcy Code. The bankruptcy filing was precipitated by a
continuing working capital deficiency and protracted litigation
related to the 1994 sale of the stock in the Company's landfill
subsidiary in New Hampshire.
The Company negotiated an agreement with Sirrom Capital
Corporation (Sirrom) to provide "debtor in possession" financing
during the bankruptcy proceeding and to provide post bankruptcy
working capital. The Bankruptcy Court confirmed Consumat Systems'
reorganization plan on February 28, 1996 and the plan became
effective on March 12, 1996. The Company operated profitably during
1995 despite inadequate working capital and significant professional
fees associated with litigation and the bankruptcy proceeding. Net
income was $89,238 on revenues of $4,399,309. Subsequently, the
Company reported a profitable First Quarter of 1996, its seventh
consecutive quarter of profitable operations. The Sirrom loans have
provided the Company with working capital to improve its operations
and to increase its sales and marketing efforts. While uncertainties
related to governmental regulations continue to limit sales
potential in the United States, sales opportunities in other
countries are increasing and special emphasis will be placed on
international sales in 1996. Management's top priority in 1996 is to
strengthen and expand its sales and marketing capability which is
essential to the Company's future.
To the shareholders, employees, customers and suppliers who
supported us through the difficulties of 1995, we express our
sincere appreciation. Your support helped make a New Beginning
possible, providing us an opportunity to work together for future
success.
/s/ ROBERT L. MASSEY
Robert L. Massey
CHAIRMAN OF THE BOARD,
PRESIDENT & CEO
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION Consumat Systems, Inc., now known as Reorganized
Consumat Systems, Inc. (the Company) ended fiscal year 1995 operating as a
debtor-in-possession in its Chapter 11 bankruptcy proceeding. The Company's
Chapter 11 reorganization plan was confirmed on February 28, 1996, and the
Effective Date of the Plan was March 12, 1996. As is detailed further in Note 3
to the Audited Consolidated Financial Statements the Company accounted for its
reorganization using fresh start reporting. This reporting allowed the Company
to eliminate the retained deficit of the Company as of the Effective Date and to
restate the balance sheet at that time.
The effect of this reporting allowed the Company to emerge from its Chapter
11 bankruptcy proceeding in a financial position stronger than its financial
position prior to the commencement of its Chapter 11 bankruptcy proceeding.
In addition, the Company was able to obtain a loan in the amount of
$1,500,000 from Sirrom Capital Corporation. The loan proceeds, received both
during and subsequent to the Chapter 11 bankruptcy proceeding, were used to
provide working capital for operations and to consummate the Plan.
The effects of the consummation of the Plan and the fresh-start reporting
allows the Company to emerge from its Chapter 11 bankruptcy proceeding with a
working capital surplus of approximately $1,074,000 and a net capital surplus of
$1,010,000.
This stronger financial position should allow the Company to improve its
operations and to improve its credit worthiness and stature with both vendors
and potential customers.
RESULTS OF OPERATIONS An increase in revenues, an improved gross margin on
the core manufacturing operation, and the further reduction of general and
administrative expenses allowed the Company to generate income from operations
in 1995.
In 1995, the Company had income from continuing operations of $89,238, as
compared with a loss from continuing operations of $356,756 in 1994. The 1995
results are based on revenues of $4,399,309, as compared to 1994 revenues of
$4,310,143. In 1994, the Company reported income of $1,183,071, which income was
principally the result of the gains on the Company's sale of the stock of its
wholly-owned subsidiary, Consumat Sanco, Inc.
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
REVENUES Total revenues from continuing operation increased 2.1%, from $4.3
million in 1994 to $4.4 million in 1995 primarily due to increased manufacturing
revenues.
GROSS MARGINS Gross margins increased to 26.2% in 1995 compared to 20.5% in
1994 principally due to greater cost control and the effects of cost reductions
from previous years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses decreased by $3,900 as the result of significant cost
reductions in previous years.
INTEREST EXPENSE Interest expenses for 1995 decreased by 58.8% as the
effects of the debt settled from the sale of the Sanco stock in 1994 took its
full effect.
BACKLOG The Company manufactures only pursuant to purchase orders or
contracts. At December 31, 1995, the Company had backlog of $3,155,000. Backlog
levels indicate the expected near-term manufacturing and related sales. Total
backlog as of December 31, 1995, is expected to be filled during the first six
months of 1996. Obtaining more orders is essential to maintaining manufacturing
operations at levels necessary to permit continued operations.
Since the Company's sales are generally composed of a relatively small
number of large contracts, backlog levels have varied widely. Backlog levels are
not necessarily indicative of the continued success or failure of the Company in
obtaining further orders. Economic circumstances as they relate to capital
expenditures in general and sales negotiations in progress are a better
indicator for probable new business.
GOVERNMENTAL REGULATION Tighter government regulations on incineration in
some cases work in the Company's favor because the Company generally uses the
latest technology developed by the Company and others. However, the Company has
experienced and may experience in the future significant periods of inactivity
in the industry because of significant pending legislation. Potential customers
of the Company's products tend to delay purchases when significant environmental
regulations or legislation are proposed or known to be under consideration in
order to assure that any equipment purchased will satisfy all government
regulations.
Many waste processing entities have experienced some public opposition.
Public opposition to waste processing is usually localized to the site where the
processing will occur and is focused on the location of the facility.
BONDING In the Company's principal business of manufacturing controlled air
incineration systems, supply bonds may be required. Bonds and retainage are used
to protect the customer in the event of non-delivery. The Company at various
times in the past has arranged surety bonds through certain affiliated entities
and others who have demonstrated an interest and capability to bond projects for
the Company. The Company will be required to seek outside help for bonding as
long as its capital remains limited and will seek such help from affiliated
entities and others as long as management believes it is in the best interests
of the Company and its shareholders. The Company's limited bonding capacity may
hinder its development of major projects.
INFLATION It is the Company's policy to increase sales prices as costs
increase over time. The Company also attempts to offset these increases with
efficiencies which allow the Company to be more competitive. Inflation affects
inventories, labor and services throughout the Company.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting
Standards Board has issued several standards which the Company will adopt in
future years. As discussed in Note 21 to the Audited Consolidated Financial
Statements,
1
<PAGE>
management does not currently expect the adoption of the standards to affect
materially the Company's financial condition.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As previously reported, the Board of Directors of the Company accepted the
resignation of Coopers & Lybrand as the Company's auditors effective December 1,
1994. Effective December 1, 1994, the Board of Directors approved the engagement
of Parham, P.C. as independent auditors of the Company for the fiscal years
ended December 31, 1995, and December 31, 1994. The shareholders of the Company
ratified the Company's engagement of Parham, P.C., at the Company's annual
meeting held on June 14, 1995.
The financial statements of the Company include the audit report of Parham,
P.C., on the financial statements of the fiscal years ended December 31, 1995,
and December 31, 1994.
Parham, P.C.'s report on the financial statements of the Company for the
years ended December 31, 1995, and December 31, 1994, did not contain an adverse
opinion, disclaimer of opinion or a qualification or modification as to
certainty, audit scope or accounting principals, except that the report
contained an explanatory paragraph which questioned the ability of the Company
to continue as a going concern.
There were no disagreements between the Company and Parham, P.C., on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Parham, P.C., would have caused Parham, P.C. to make reference
to the subject matter of the disagreement(s) in connection with its reports, and
there have been no "reportable events" during such period as such term is
defined in Item 304(a) of Regulation S-B promulgated by the Securities and
Exchange Commission.
The Company furnished Parham, P.C., with a copy of the disclosure contained
in this Form 10-KSB, and advised Parham, P.C., that if it believed that the
statements made by the Company in response to Item 304(a) of Regulation S-B were
incomplete or incorrect, the accountant could present its views in a brief
statement to be included in this Form 10-KSB. Parham, P.C., did not submit such
statement of views to the Company.
2
<PAGE>
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in
Possession)
AUDITED CONSOLIDATED BALANCE SHEET
December 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 138,748
Accounts receivable (net of allowance for doubtful accounts of $10,000) 528,213
Inventories 222,652
Prepaid expenses and other 87,201
Total Current Assets 976,814
Property, plant and equipment, at cost, net of accumulated depreciation and amortization 630,624
Notes receivable from officer 38,000
Debt issuance costs, net of accumulated amortization 27,244
$ 1,672,682
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current liabilities
Accounts payable $ 56,121
Customer deposits 50,719
Accrued contract and warranty expense 90,856
Other accrued expense 215,836
Current portion of indebtedness 64,611
Total Current Liabilities 478,143
Indebtedness
Senior debt 500,000
Capitalized lease obligation less current portion 576,750
Liabilities subject to compromise 743,862
Total Indebtedness 1,820,612
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $3 par value: authorized 3,333,333 shares: issued 1,564,699 4,694,097
Capital in excess of par value 5,208,958
Retained earnings (deficit) (10,529,128)
Total Stockholders' Equity (Deficit) (626,073)
$ 1,672,682
</TABLE>
SEE ACCOMPANYING NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in Possession)
AUDITED CONSOLIDATED STATEMENTS OF COMMON STOCK, CAPITAL IN EXCESS OF
PAR VALUE, AND RETAINED EARNINGS (DEFICIT)
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
Number $3 Capital in Retained
of Par Excess of Earnings
Shares Value Par Value (Deficit)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 1,094,539 $3,283,618 $4,927,747 ($11,801,437)
Approval of MWA reorganization 450,793 1,352,378 332,687
Net income for 1995 1,183,071
Compensatory stock issued 12,500 37,500 (32,875) 0
Balance at December 31, 1995 1,557,832 4,673,496 5,227,559 (10,618,366)
Adjustment for Stock conversion (133) (399) 399
Net income for 1995 89,238
Compensatory stock issued 7,000 21,000 (19,000) 0
Balance at December 31, 1995 1,564,699 $4,694,097 $5,208,958 ($10,529,128)
</TABLE>
SEE ACCOMPANYING NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in Possession)
AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenues $4,399,309 $4,310,143
Costs of goods sold 3,246,326 3,425,344
Gross Profit 1,152,983 884,799
Selling, general and administrative expenses 992,110 995,976
Operating Income (Loss) 160,873 (111,177)
Other income (expense):
Investment income 5,264 3,978
Interest expense (107,217) (260,669)
Other 30,318 11,112
(71,635) (245,579)
Income (loss) from continuing operations 89,238 (356,756)
Discontinued operations:
Gain on the sale of net assets, net of income taxes $183,468 -- 1994 -- 356,145
Income from discontinued operations, net of income taxes of $91,186 -- 1994 -- 177,009
Income from discontinued operations -- 533,154
Income before extraordinary gain 89,238 176,398
Extraordinary gain on extinguishment of debt, net of taxes $248,886 -- 1994 -- 483,133
Income tax benefit due to loss carryforward -- 523,540
Net income $ 89,238 $1,183,071
Earnings per share:
Income (loss) from continuing operations $ 0.06 $ (0.23)
Income from discontinued operations $ -- $ 0.34
Extraordinary gain on extinguishment of debt $ -- $ 0.31
Income tax benefit due to loss carryforward $ -- $ 0.34
Net income $ 0.06 $ 0.76
</TABLE>
SEE ACCOMPANYING NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in Possession)
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ 89,238 $ (356,756)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization 131,759 168,201
Noncash compensation costs 2,000 4,625
Income tax benefit due to loss carryforward -- 523,540
Changes in operating assets and liabilities, net of noncash transactions:
Accounts receivable (283,893) 581,091
Inventories 4,064 17,202
Prepaid expenses and other 17,767 83,563
Accounts payable (243,666) (1,428,313)
Customer deposits -- (29,659)
Accrued contract and warranty expenses (314,115) (503,943)
Other accrued expenses (8,625) (29,173)
Net cash used in operating activities of continuing operations (605,471) (969,622)
Operating cash flows from reorganized items -- Liabilities subject to compromise:
Accounts payable 76,857
Accrued professional fees 30,000
Accrued interest 49,210
Accrued contract and warranty expenses 132,722 --
288,789 --
Net cash provided by operating activities of discontinued operations -- 689,279
Net cash used in total operating activities (316,682) (280,343)
Cash flows from investing activities:
Proceeds of sale of common stock of Sanco -- 3,502,180
Net cash provided by investing activities of continuing operations -- 3,502,180
Net cash used in investing activities of discontinued operations -- (920,663)
Net cash used in total investing activities -- 2,581,517
Cash flows from financing activities:
Net borrowings under Senior Debt (post petition) 471,818
Repayment on note payable to stockholder -- (1,890,000)
Early extinguishment of debt -- (483,133)
Proceeds from borrowings 4,048
Repayments on borrowings (20,359) (80,471)
Repayments on capital lease obligation (55,212) --
Net cash provided by (used in) financing activities of continuing operations 396,247 (2,449,556)
Net cash provided by financing activities of discontinued operations -- 161,927
Net cash provided by (used in) total financing activities 396,247 (2,287,629)
Net increase in cash and cash equivalents 79,565 13,545
Cash and cash equivalents at beginning of year 59,183 45,638
Cash and cash equivalents at end of year $ 138,748 $ 59,183
Supplemental disclosure of cash paid for:
Interest $ 84,880 $ 83,586
Income taxes -- --
</TABLE>
SEE ACCOMPANYING NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
Consumat Systems, Inc.
NOTES TO AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1: Organization and Basis of Presentation
Reorganized Consumat Systems, Inc. (the "Company"), incorporated in 1960,
manufactures and sells incineration systems comprised of multiple modular
components and individual units of waste disposal equipment. The Company ended
1995 operating as a Debtor-In-Possession in its Chapter 11 bankruptcy
proceedings. Second Amended Plan of Reorganization ("The Plan") was confirmed on
February 28, 1996 and the Effective Date of the Plan was March 12, 1996. The
Company accounted for its reorganization using fresh start reporting (See Note
3). In accordance with the Plan, the articles of incorporation and bylaws of the
Company were amended and restated effective on the Effective Date, to (a)
prohibit the issuance of nonvoting equity securities in accordance with Section
1123(a)(6) of the Bankruptcy Code, (b) change the name of the Company to
Reorganized Consumat Systems, Inc. and (c) effectuate the provisions of the
Plan.
The Company sold it's wholly owned subsidiary, Consumat Sanco Inc.
("Sanco"), on July 13, 1994, which owned and operated a permitted landfill and,
accordingly, has reported the Sanco transactions as discontinued operations for
1994. (See Note 20).
All significant intercompany balances and transactions have been
eliminated.
Note 2: Summary of Significant Accounting Policies
CONTINUING OPERATIONS
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
unrestricted investments with an original maturity of three months or less when
acquired to be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is depreciated
using the straight-line method over estimated useful lives as follows:
<TABLE>
<CAPTION>
Years
<S> <C>
Land improvements 5 -- 35
Buildings 10 -- 40
Machinery and equipment 3 -- 20
</TABLE>
The costs of major renewals and replacements are capitalized while the
costs of maintenance and repairs are charged to operations as incurred. Such
repairs and maintenance costs approximated $12,000 for 1995 and 1994. When
properties are sold or retired, their costs and the related accumulated
depreciation are removed from the accounts and the gains or losses are reflected
in operations.
REVENUE RECOGNITION -- Waste systems are manufactured under customer
contracts which provide for the manufacture and delivery of modular units
comprising the system. Revenue is recognized on these systems using the
percentage of completion method. The percentage of completion is based primarily
on contract manufacturing costs incurred to date compared with total estimated
manufacturing costs. Changes in estimated contract costs and anticipated
contract losses, if any, are recognized in the period they are determined.
Recognized revenues in excess of billings are included in accounts receivable.
Billings in excess of recognized revenue are deferred and included in accrued
contract and warranty expenses.
COST OF OPERATIONS -- Cost of goods sold includes manufacturing,
engineering and field service costs. The Company accrues estimated warranty and
other costs related to completed contracts.
INCOME TAXES -- The Company accounts for income taxes using the liability
method. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax return basis of assets and
liabilities and their corresponding amounts for financial reporting purposes.
See Note 16.
EARNINGS (LOSS) PER COMMON SHARE -- Earnings (loss) per common share are
computed based on the weighted average number of common and common equivalent
shares outstanding during the year to the extent the equivalents have a dilutive
effect on earnings per common share. The number of shares used in computing
primary earnings per share was 1,560,348 in 1995 and 1,552,033 in 1994. All
shares and per-share amounts reflect the effect of the one-for-three reverse
stock split which occurred on December 30, 1992 (See Note 14). Fully diluted
earnings per share are the same as the amounts presented.
DISCONTINUED OPERATIONS
PROPERTY, PLANT AND EQUIPMENT -- The cost of the landfill was being
amortized using a units-of-fill method. Sanco capitalized interest and labor as
elements of the costs of constructing the landfill.
REVENUE RECOGNITION -- Revenues from landfill operations were recognized
when materials were received at the facility.
CLOSURE AND POST CLOSURE MAINTENANCE -- The future estimated costs of
closing and post-closure monitoring of the landfill were accrued as materials
were received, based on the estimated capacity of the landfill.
Note 3: Reorganization under Chapter 11
On October 6, 1995, the Company filed a petition for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Eastern District of Virginia, Richmond Division. Under Chapter 11,
certain claims of the Debtor in existence prior to the filing of the petition
are stayed while the Debtor continues business operations as
Debtor-In-Possession ("DIP"). These claims are reflected in the December 31,
1995 balance sheet as "liabilities subject to compromise".
7
<PAGE>
The Debtor received approval from the Bankruptcy Court ("the Court") on
October 26, 1995 to incur up to $500,000 in Debtor-In-Possession financing
during the Bankruptcy proceeding. This debt is recorded as "Senior debt" in the
December 31, 1995 balance sheet. Subsequent to the balance sheet date, the Court
approved an additional $500,000 in DIP financing, which was received in January
1996.
On February 28, 1996, the Court confirmed the Company's Second Amended Plan
of Reorganization, with Modifications. The Effective Date of the confirmed plan
was March 12, 1996 ("Effective Date").
The confirmed plan provided for the following:
SECURED DEBT -- The secured debts of AFCO, $33,679 and Air Pollution
Control Products, Inc. ("APC"), $132,722 were assumed on March 12, 1996.
Regarding the secured debt to Lighthouse Investments, LLC, $213,673 as of March
12, 1996, was issued a new note in the amount of $192,306. The terms of the note
are as follows: March 31, 1996 -- $18,695 payment of interest and principal for
the period March 12, 1996 to March 31, 1996 and eleven (11) equal quarterly
payments of $18,358 beginning June 30, 1996. A note was issued to Sirron Capital
Corporation in the amount of $21,367, 10% interest, payable as follows: March
31, 1996, $2,077 of principal and interest for the period March 12, 1996 to
March 31, 1996 and eleven (11) quarterly installments of $2,040 beginning June
30, 1996.
TAX AND OTHER PRIORITY CLAIMS -- All Tax and Other Priority Claims,
totaling $24,984 were paid on the Effective Date.
UNSECURED TRADE CLAIMANTS -- The holders of all trade claims, totaling
$82,559 were paid fifty percent (50%) of their claim on the Effective Date.
UNSECURED MISCELLANEOUS CLAIMANTS -- The holders of all other miscellaneous
claims were paid twenty-five percent of their claim in cash and received a
pro-rata share of 150,000 shares (14.85%) of the common stock in the reorganized
company. The total of the Allowed Unsecured Miscellaneous Claims included
approximately $309,000 of recorded liabilities and approximately $615,000 of
previously contingent liabilities.
COMMON STOCK -- The holders of approximately 1,565,000 outstanding shares
of the Company's existing common stock received, in exchange for their shares,
500,000 shares or 49.5% of the shares in the reorganized company.
As a result of adopting fresh-start reporting, the Company recorded
reorganization value in excess of amounts allocable to identifiable assets of
approximately $1,398,000 as of the Effective date. This intangible asset will be
amortized on a straight-line method over a twenty year period. The following
tables (Table I and Table II) summarize the recovery of the various classes of
debt under the plan as confirmed and the effects of the plan and the adoption of
fresh-start reporting on the company's balance sheet as of the Effective Date
March 12, 1996.
Note 4: Contract Settlement
During the fourth quarter of 1991, the Company and its subsidiary, Consumat
Medical Services, Inc., reached a settlement agreement with Medical Waste
Associates of Baltimore, Maryland ("MWA"), whereby the Company issued 450,793
shares of its common stock (the "Shares") to MWA and another party and
transferred to MWA all assets and rights related to a medical waste facility in
Baltimore, Maryland, that the Company had contracted to build and operate for
MWA.
Under certain circumstances, however, claims against the Company by MWA or
others might have been made notwithstanding such settlement. In June, 1994, MWA
filed for protection under Chapter 11 of the Bankruptcy Code. In December, 1994,
MWA's plan for reorganization was approved and finalized by the Bankruptcy
Court. As part of the plan, the Company was released and all claimants
permanently enjoined from making any claim now or in the future. Therefore any
claims which might have been made regarding the Baltimore project have been
extinguished.
Note 5: Related-Party Transactions
Prior to November 19, 1991, the Company was 54%-owned by Environmental
Systems Company ("ENSCO"), which, until its acquisition in 1992 by Brambles
International, was a publicly owned company, located in Little Rock, Arkansas.
On November 19, 1991, the Company issued 367,460 shares to MWA as part of the
settlement of its contract to construct and operate a medical waste facility in
Baltimore, Maryland (see Note 4). In the 1994 Bankruptcy of MWA, the stock was
distributed to Yankee Engineering, Inc. and Gill-Simpson Company as partial
settlement for their claims. At December 31, 1995, ENSCO and Yankee owned 36%
and 19%, respectively, of the Company's common stock.
During 1989, the Company issued 11% demand notes totaling $2,000,000 to
ENSCO which were collateralized by the common stock of Consumat Sanco, Inc. The
proceeds from these borrowings were used to repay the Company's $2,000,000 bank
line of credit that was due on October 1, 1989. Interest expense incurred on the
ENSCO notes was $110,000, (see Note 3, included in the unsecured miscellaneous
debt) for the period January 1, 1994 through the date of sale, and $220,000 for
1993. Accrued interest payable to ENSCO totaled $12,923 (see Note 3 included in
the unsecured miscellaneous debt) at December 31, 1995.
During 1993, the Company issued a 10% note in the amount of $170,000 to
Lighthouse Investments LLC, a limited liability corporation which is principally
owned by several of the Company's dealers, including two of its directors. The
balance outstanding was $174,048 (see Note 3) as of December 31, 1995. Accrued
interest as of December 31, 1995 amounted to $36,288. The proceeds were used as
operating funds. The note is collateralized by the intellectual properties of
the Company.
8
<PAGE>
Note 6: Accounts Receivable and Contract Costs
Accounts receivable consist of the following as of December 31, 1995:
<TABLE>
<S> <C>
Billed accounts receivable
(net of allowance for doubtful accounts) $293,853
Revenue recognized in excess of billings 234,360
$528,213
</TABLE>
Recognized revenues for uncompleted contracts totaled $2,551,630 and
$3,377,823 at December 31, 1995 and 1994, respectively and progress billings on
these contracts totaled $2,521,228 and $4,385,827 at December 31, 1995 and 1994,
respectively. As described in Note 10, billings in excess of recognized revenues
totaled $223,525 at December 31, 1995.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Significant concentrations of accounts
receivable for continuing operations are as follows at December 31, 1995:
<TABLE>
<S> <C>
Equipment distributors located
throughout the United States $250,092
Equipment distributors located
outside the United States 278,121
</TABLE>
Note 7: Inventories
Inventories consist of the following at December 31, 1995:
<TABLE>
<S> <C>
Raw materials $204,509
Work in process 18,143
Total $222,652
</TABLE>
Note 8: Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31,
1995:
<TABLE>
<S> <C>
Land improvements $ 148,008
Buildings 1,411,751
Machinery and equipment 2,159,486
3,719,245
Less accumulated depreciation
and amortization 3,246,817
472,428
Land 158,196
$ 630,624
</TABLE>
Depreciation and amortization expense on property, plant and equipment was
$130,820 and $167,320 for 1995 and 1994, respectively. See Note 12 regarding the
sale and leaseback of the Company's manufacturing facility in 1992.
Note 9: Notes Receivable From Officer
The Company provided an interest free loan to one officer in conjunction
with his employment contract. The loan is to be repaid out of bonuses during the
officer's employment or one year thereafter.
Note 10: Accrued Contract and Warranty Expense
Accrued contract and warranty expense includes billings in excess of
recognized revenues on long-term manufacturing contracts of $223,525 at December
31, 1995.
Note 11: Long-Term Debt
Long-term debt consists of the following as of December 31, 1995:
<TABLE>
<S> <C>
Long term debt $171,025
Less current maturities 83,108
$ 87,917
</TABLE>
Long-term debt at December 31, 1995 consisted of an installment note and
other deferred payment arrangements bearing interest at rates of 5.1% to 9% per
annum, payable through 1997. No interest was capitalized by the Company's
continuing operations for 1995. Interest expensed by the Company's continuing
operations amounted to $107,217 and $260,669 for 1995 and 1994, respectively.
Note 12: Capital Lease Obligation
The Company sold its manufacturing facility for $800,000 on July 1, 1992 in
a sale-leaseback transaction. The book value of the land and buildings exceeded
the net sales proceeds and the Company has recognized a loss of $495,706. The
lease has an initial term of 10 years with two five-year renewal options.
Beginning July 1995, the Company can repurchase the property for an approximate
price of $875,000, increasing annually thereafter to approximately $1,044,000 in
2002.
Pursuant to the lease, the Company pays monthly rent, property taxes,
insurance, repairs and other executory costs related to the property. The lease
meets the criteria for a capital lease and has been recorded in the accompanying
financial statements.
Minimum lease payments for the five years subsequent to 1995 and in the
aggregate are:
<TABLE>
<S> <C>
1996 $ 124,224
1997 127,948
1998 131,790
1999 135,740
2000 139,812
Thereafter 217,075
876,589
Less amount representing interest 235,227
Present value of net minimum
lease payments 641,362
Less current maturities 64,612
Amount due after one year $ 576,750
</TABLE>
Note 13: Senior Debt
During the Bankruptcy proceedings and approved by the Court, the Company
incurred Senior Debt in the amount of
9
<PAGE>
$500,000 as of December 31, 1995. The debt is at an interest rate of 14%. The
interest is payable monthly in arrears. The principal is due in a balloon
payment in 2000. Additionally, the Company has borrowed $500,000 in January 1996
and $500,000 in March 1996 in Senior Debt, interest payable monthly in arrears
and the principal due in balloon payments in 2001. The lender was granted a
stock purchase warrant to purchase up to 475,000 shares in the reorganized
company.
Note 14: Capital Stock and Related Matters
The Board of Directors is authorized to issue, in one or more series, up to
1,000,000 shares of preferred stock once the Board has designated the relative
rights and preferences of such stock and filed documents with the state. At
December 31, 1995 no shares of preferred stock were issued or outstanding.
On September 30, 1992, the Company's Board of Directors approved a
one-for-three reverse stock split. This action was subsequently ratified at a
meeting of the Company's stockholders on December 30, 1992. All share and
per-share data in the accompanying financial statements have been restated to
give effect to the reverse stock split.
The Company issued 7,000 and 12,500 shares of common stock during 1995 and
1994, respectively, to persons as compensation for their services as outside
directors.
As of the Effective Date equity interest consisting of options, warrants
and other agreements requiring the issuance of equity interests of the Company
are disallowed and canceled under the Plan. Thus the following outstanding
warrants as of December 31, 1995 are canceled.
In connection with the sale and leaseback of its manufacturing facility
(See Note 12), the Company issued a warrant to purchase 33,333 shares of its
common stock at $2.25 per share. The warrant expires on July 1, 2002. No value
was assigned by the Company to the warrant.
Note 15: Common Stock Options
As of the Effective Date equity interest consisting of options, warrants
and other agreements requiring the issuance of equity interests of the Company
are disallowed and canceled under the Plan. Thus the following outstanding
common stock options as of December 31, 1995 are canceled.
On October 21, 1993, the stockholders approved the 1993 Employee Stock
Option Plan and the Non-employee Directors' Stock Option Plan, each of which
reserves 200,000 shares of the Company's common stock for issuance upon the
exercise of options granted pursuant to the plans. At December 31, 1995 there
were outstanding options for the purchase of 150,000 shares at prices ranging
from $0.375 to $0.9375 per share. No further options will be granted under the
Company's previous plans and all previously outstanding options were canceled or
expired during 1993.
On July 23, 1992, the Company entered into a stock option agreement with a
consulting firm assisting in the Company's restructuring plans as part of the
consideration for services rendered. Under the terms of the agreement, options
to purchase a total of 65,333 shares of the Company's common stock were granted
over a period of several months with all options available for exercise on
October 1, 1992 and expiring on July 23, 1997. The Company recorded an expense
of $83,000 in 1992 for the excess of the fair value of the common stock over the
exercise price.
Note 16: Income Taxes
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes," which requires the liability method of accounting
similar to the method previously used by the Company under FASB Statement No.
96.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $8,750,000 for both financial statement and tax return purposes,
which expire in the years 1996 to 2007. Due to certain ownership changes in
1992, the use of these net operating losses prior to 1993 are limited to
approximately $250,000 per year in future years. The difference between the net
operating loss carryforward for financial statement and tax return purposes
results principally from the use of accelerated depreciation methods for tax
return purposes and financial statement provisions for accrued contract,
warranty and bad debt expenses which do not enter into the determination of
taxable income until actually paid or incurred.
Note 17: Major Customers
Air Pollution Control Products, Inc., accounted for approximately 25% and
65% of the Company's revenues from continuing operations for 1995 and 1994,
respectively.
Note 18: Employee Benefit Plans and Employment Contracts
The Company has employment contracts with certain of its executive officers
and other management personnel. Under the terms of such agreements, severance
payments would become payable in the event of specified terminations. The
maximum contingent liability of the Company pursuant to all such agreements was
approximately $427,500 at December 31, 1995.
Note 19: Change in Estimates and Fourth Quarter Adjustments
As disclosed in Note 2, changes in estimated contract costs are recognized
in the period they are determined. Income from continuing operations for 1994
decreased by approximately $7,000 due to a change in estimated contracts.
Note 20: Sale of and Discontinued Operations of Consumat Sanco, Inc.
On July 13, 1994, the Company completed the sale of its landfill operation
through the sale of the stock of the Company's subsidiary, Consumat Sanco, Inc.
(SANCO).
The sale generated $3,050,000, consisting of cash and notes receivable, and
the entire proceeds of the sale were used to satisfy existing debts of the
Company. The Company recognized a gain on this sale of $539,613 less tax effect
of
10
<PAGE>
$183,468 which represented the present value of the proceeds received in excess
of the Company's basis in this asset.
ENSCO agreed to accept a portion of the proceeds as total satisfaction of
its claims against the Company except for a new note for $110,000 due in July,
1995. Additionally, an agreement was reached with certain of the Company's
unsecured creditors whereby those creditors agreed to accept the balance of the
sale proceeds, consisting of two promissory notes, in exchange for the total
releases of their outstanding claims. Therefore, at this time the company has no
further interest in such proceeds. The agreement was approved by 100% of these
creditors who represented approximately, $1,285,000 of accounts and notes
payable plus related accrued interest.
The above debt forgiveness resulted in a gain of $732,019 less tax effect
of $248,886.
Sanco's results of operations have been presented as discontinued
operations; its revenues and income have been excluded from continuing
operations. Summary results of Sanco's operations are as follows:
<TABLE>
<CAPTION>
January 1-July 13
1994
<S> <C>
Revenues $ 2,739,972
Gross profit 844,997
Income tax (91,186)
Net income $ 268,195
</TABLE>
Note 21: Recently Issued Accounting Standards:
The Company does not offer its employees post-retirement benefits;
accordingly, FASB Statement No. 106, "Employers' Accounting for Post-retirement
Benefits Other Than Pension," will not apply to the Company.
FASB Statement No. 112, "Employers' Accounting for Post-employment
Benefits," was issued in November 1991 and is effective for fiscal years
beginning after December 15, 1993.
TABLE 1
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in Possession)
PLAN OF REORGANIZATION RECOVERY ANALYSIS
<TABLE>
<CAPTION>
Recovery
Adjustment
for Elimination
Allowed Allowed of Debt and Surviving Subordinated
Claims Claims Equity Debt Cash Debt
<S> <C> <C> <C> <C> <C> <C> <C>
Postpetition
liabilities $ 2,244,149 $ 2,244,149 $2,244,149
Claim/Interest
Secured debt 224,977 224,977 11,303 $213,674
Priority tax claim 547 21,004 21,551 $ 21,551
Other priority
claims 3,433 3,433 3,433
Trade claims 89,357 -6,798 82,559 -$ 41,280 41,279
Other miscellaneous
claims 308,835 630,654 932,691 -613,262 169,429
627,149 644,860 1,265,211 -654,542 11,303 235,692 213,674
Common stockholders 9,903,055 9,903,055 -9,903,055
Deficit -10,490,442 -10,490,442 10,490,442
$ 2,283,911 $644,860 $ 2,921,973 -$ 67,155 $2,255,452 $235,692 $213,674
<CAPTION>
Common Stock* Total Recovery
% Value $ %
<S> <C> <C> <C> <C>
Postpetition
liabilities $2,244,149 100.00%
Claim/Interest
Secured debt 224,977 100.00%
Priority tax claim 21,551 100.00%
Other priority
claims 3,433 100.00%
Trade claims 41,279 50.00%
Other miscellaneous
claims 14.85% $150,000 319,429 34.25%
150,000 610,669
Common stockholders 49.50% 500,000 500,000
Deficit
$650,000 $3,354,818
</TABLE>
11
<PAGE>
TABLE 2
Reorganized Consumat Systems, Inc.
(Previously Consumat Systems, Inc. and Subsidiaries -- Debtor in Possession)
BALANCE SHEET
March 12, 1996
<TABLE>
<CAPTION>
Post Exchange Issuance
Pre Confirmation Debt of of New
Confirmation Loan Discharge Stock Stock
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 222,078 $462,055 -$ 323,917
Accounts receivable (net of allowance for
doubtful accounts of $10,000 -- 1995
and 1994) 1,112,756
Stock subscription $ 17,633
Inventories 173,148
Prepaid expenses and other 74,507
TOTAL CURRENT ASSETS 1,582,489 462,055 -323,917 0 17,633
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 614,418
Notes receivable from officer 38,000 -18,972
Debt issuance costs, net of accumulated
amortization 56,359 37,945
Reorganization value in excess of amounts
allocable to indentifiable assets
$ 2,291,266 $500,000 -$ 342,889 $ 17,633
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
LIABILITIES
Current liabilities
Accounts/note payable 43,846
Other liabilities 570,114 -89,320
Current portion of indebtedness 78,424 82,075 -21,367
TOTAL CURRENT LIABILITIES 692,384 -7,245 -21,367
Liabilities subject to compromise 627,149 -627,149
Indebtedness
Senior debt 1,000,000 500,000
Long-term debt less current portion 131,598
Capitalized lease obligation less current
portion 559,120
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock-old 4,694,097 -4,694,097
Common stock-new 150,000 500,000 360,000
Capital in excess of par value 5,208,958 4,194,097 -321,000
Retained earnings (deficit) -10,490,442 9,907
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) -587,387 0 159,907 0 39,000
$ 2,291,266 $500,000 -$ 342,889 $ 0 $ 17,633
<CAPTION>
Reorganized
Fresh Balance
Start Sheet
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 360,216
Accounts receivable (net of allowance for
doubtful accounts of $10,000 -- 1995
and 1994) 1,112,756
Stock subscription 17,633
Inventories 173,148
Prepaid expenses and other 74,507
TOTAL CURRENT ASSETS 0 1,738,260
Property, plant and equipment, at cost,
net of accumulated depreciation and
amortization 614,418
Notes receivable from officer 19,028
Debt issuance costs, net of accumulated
amortization 94,304
Reorganization value in excess of amounts
allocable to indentifiable assets $ 1,398,480 1,398,480
$ 1,398,480 $3,864,490
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
LIABILITIES
Current liabilities
Accounts/note payable 43,846
Other liabilities 480,794
Current portion of indebtedness 139,132
TOTAL CURRENT LIABILITIES 663,772
Liabilities subject to compromise
Indebtedness
Senior debt 1,500,000
Long-term debt less current portion 131,598
Capitalized lease obligation less current
portion 559,120
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock-old
Common stock-new 1,010,000
Capital in excess of par value -9,082,055
Retained earnings (deficit) 10,480,535
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,398,480 1,010,000
$ 1,398,480 $3,864,490
</TABLE>
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Reorganized Consumat Systems, Inc.
We have audited the consolidated financial statements and financial
statement schedule of Reorganized Consumat Systems, Inc. (the "Company")
(previously Consumat Systems, Inc. and subsidiaries) as of December 31, 1995 and
for the years ended December 31, 1995 and 1994. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statements schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 3, Reorganized Consumat Systems, Inc.'s plan of
reorganization was confirmed on February 28, 1996, and became effective on March
12, 1996. The Company has implemented the guidance as to the accounting for
entities emerging from Chapter 11 set forth in Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("Fresh Start Reporting") as of March 12, 1996. The impact of this Fresh Start
Reporting is Presented in Note 3. The implementation of Fresh Start Reporting as
a result of the Company's emergence from Chapter 11 materially changed the
amounts reported in the financial statements of the Company as of and for
periods ending subsequent to March 12, 1996. As a result of the reorganization
and the implementation of Fresh Start Reporting, assets and liabilities are
recorded at fair values and outstanding obligations relating to the claims of
creditors have been discharged in exchange for cash, new indebtedness and
equity. The accompanying consolidated financial statements as of December 31,
1995 and for the years ended December 31, 1995 and 1994 do not give effect to
any adjustments that were made as a result of the Company's reorganization and
emergence from Chapter 11.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Reorganized Consumat Systems, Inc. as of December 31, 1995, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1995 and 1994, respectively, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
Richmond, Virginia
March 27, 1996
13
<PAGE>
CORPORATE DATA
DIRECTORS
Robert L. Massey
Chairman of the Board,
President & Chief Executive Officer
Reorganized Consumat Systems, Inc.
James W. Bohlig
Senior Vice President
Casella Waste Management Systems
Rutland, Vermont
Alexander Y. Hoff
President
Yankee Engineering Company, Inc.
Baltimore, Maryland
Peter T. Socha
Vice President & Chief Credit Officer
Sirrom Capital Corporation
Williamsburg, Virginia
OFFICERS
Robert L. Massey
Chairman, President & Chief Executive Officer
Robert L. Lee
Vice President
Mark E. Hills
Chief Financial Officer
Patricia B. Bradley
Corporate Secretary
LEGAL COUNSEL
LeClair Ryan
Richmond, Virginia
INDEPENDENT ACCOUNTANTS
Parham, P.C.
Richmond, Virginia
TRANSFER AGENT
Chemical Mellon Shareholder Services
Pittsburgh, Pennsylvania
FORM 10-KSB
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-KSB MAY BE OBTAINED BY SHAREHOLDERS WITHOUT CHARGE BY WRITING TO:
CORPORATE SECRETARY P.O. BOX 9379. RICHMOND, VIRGINIA 23227.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ Bulletin Board. The following
table shows the high and low bid prices for the Company's old common stock for
each quarterly period during the two-year period ended December 31, 1995. Such
high and low bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Price
1995 1994
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 3/8 $ 1/4 $ 1/2 $ 3/8
Second Quarter 7/16 1/4 3/8 1/4
Third Quarter 7/16 1/4 1/4 1/4
Fourth Quarter 7/16 3/16 1/4 1/4
</TABLE>
As of December 31, 1995, there were 429 holders of record of common stock.
The Company has never paid any dividends on its common stock. There is no
expectation that the Company will pay dividends in the foreseeable future.
14
<PAGE>
CONSUMAT SYSTEMS, INC.
P.O. Box 9379
Richmond, Virginia 23227
Corporate Offices & Manufacturing:
Mechanicsville, Virginia, USA
804/746-4120
FAX 804-730-9056
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