SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
_____________
Commission File No 0-9253
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0720128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 9379, Richmond, Virginia
23227
(Address of principal executive offices)
(Zip Code)
(804) 746-4120
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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
Check whether the issuer has filed all documents and reports required to be
filed by Section 12,13 or 15(d) of the Securities Exchange Act after the
distributions of securities under a plan confirmed by a court.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Number of Shares
- ----------------------------------- ---------------------
Common Stock, par value $1.00 1,011,200
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
INDEX
Page No.
Part I. Financial Information:
Item 1:
Balance Sheets................................................ 4
Statements of Operations...................................... 5
Statements of Cash Flows...................................... 7
Notes to Financial Statements................................. 8
Item 2:
Management's Discussion and Analysis of Unaudited
Financial Condition and Results of Operations................. 10
Part II. Other Information
Item 1:
Legal Proceedings............................................... 11
Item 6:
Exhibits and Reports on Form 8-K................................ 12
Signatures...................................................... 13
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Successor Successor
------------ ------------
September 30 December 31,
ASSETS 1997 1996
---- ----
(Unaudited) (Audited)
<S> <C>
Current assets:
Cash and cash equivalents $ 28,281 $ 684,262
Short-term investment 46,585 92,500
Accounts receivable and contract costs (net of
allowance for doubtful accounts of $21,368 and $10,000
at September 30, 1997 and December 31, 1996, respectively) 1,830,198 696,613
Inventories 197,107 226,351
Prepaid expenses and other 140,822 70,812
------------ ------------
Total current assets 2,242,993 1,770,538
Property, plant and equipment, at cost,
net of accumulated depreciation and amortization 638,621 669,893
Note receivable from officer 19,028 19,028
Debt issuance costs, net of accumulated
amortization 90,054 79,111
Deferred income taxes, net 258,544 154,921
Reorganization value in excess of amount
allocable to identifiable assets, net of
accumulated amortization 1,002,306 1,045,372
------------ ------------
$ 4,251,546 $ 3,738,863
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligation $ 83,700 $ 75,082
Current maturities of long-term debt 91,337 59,578
Senior debt 314,902 -
Senior subordinated debt 500,000 -
Accounts payable 280,283 63,764
Accrued warranty expense 45,643 61,400
Other accrued expenses 124,579 164,498
------------ ------------
Total current liabilities 1,440,444 424,322
Senior subordinated debt 2,000,000 1,500,000
Long-term debt 21,851 85,311
Capitalized lease obligation 437,902 501,668
Stockholders' equity
Common stock: $1 par value, authorized 25,000,000 shares;
issued and outstanding 1,011,200 and 1,010,000
at September 30, 1997 and December 31, 1996, respectively 1,011,200 1,010,000
Retained earnings (deficit) (659,851) 217,562
------------ ------------
Total stockholders' equity 351,349 1,227,562
------------ ------------
$ 4,251,546 $ 3,738,863
============ ============
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Successor Successor
----------- -----------
Three Month Three Month
Period ended Period ended
September 30, September 30,
1997 1996
---- ----
<S> <C>
Revenues $ 752,370 $ 1,345,507
Cost of goods sold 585,594 896,519
------------ -----------
Gross profit 166,776 448,988
Selling, general and
administrative expenses 263,921 252,374
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 14,355 14,355
------------ -----------
Operating income (loss) (111,500) 182,259
Other income (expense):
Investment income 362 10,719
Interest expense (104,824) (74,556)
Other 268 781
------------ -----------
(104,194) (63,056)
------------ -----------
Income (loss) before taxes (215,694) 119,203
Income tax expense 187,207 45,297
------------ -----------
Net income (loss) $ (402,901) $ 73,906
============ ===========
Earnings (loss) per common share:
Primary ($0.32) $0.06
Fully diluted ($0.32) $0.05
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
Nine Month Period from Period from
Period Ended March 12 to January 1 to
September 30, September 30, March 11,
1997 1996 1996
---- ---- ----
<S> <C>
Revenues $ 2,159,232 $ 3,063,893 $ 923,043
Cost of goods sold 1,912,649 1,993,367 706,309
------------ ----------- ------------
Gross profit 246,583 1,070,526 216,734
Selling, general and
administrative expenses 920,980 548,048 177,710
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 43,065 28,711 -
------------ ----------- ------------
Operating income (loss) (717,462) 493,767 39,024
Other income (expense):
Investment income 5,915 12,354 -
Interest expense (271,156) (162,826) (48,998)
Other 1,667 7,331 48,660
------------ ----------- ------------
(263,574) (143,141) (338)
------------ ----------- ------------
Income (loss) before fresh start revaluation, income
tax expense (benefit) and extraordinary item (981,036) 350,626 38,686
Fresh start revaluation - - 538,480
Income (loss) before income tax expense (benefit)
and extraordinary item (981,036) 350,626 577,166
Income tax expense (benefit) (103,623) 133,238 -
Income (loss) before extraordinary item (877,413) 217,388 577,166
Extraordinary item-gain on debt discharge - - 9,907
------------ ----------- ------------
Net income (loss) $ (877,413) $ 217,388 $ 587,073
============ =========== ============
Earnings (loss) per common share:
Primary ($0.70) $0.17 $0.38
Fully diluted ($0.70) $0.15 $0.38
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
--------- -----------
Six Month Period from Period from
Period ended March 12 to January 1 to
September 30, September 30, March 11,
1997 1996 1996
---- ---- ----
<S> <C>
Cash flows from operating activities
Net income (loss) $ (877,413) $ 217,388 $ 587,073
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization 129,343 71,761 18,011
Deferred income taxes (103,623) 125,722 -
Non cash compensation expenses 1,200 - -
Fresh start revaluation - - (538,480)
Extraordinary item - gain on debt discharge - - (9,907)
Changes in operating assets and liabilities
net of non-cash transactions:
Short-term investments 45,915 (92,500) -
Accounts receivable and contract costs (1,133,585) 380,052 (584,543)
Inventories 29,244 (65,531) 49,504
Other current assets (70,010) (219) (4,939)
Accounts payable 216,519 51,238 (12,275)
Other current liabilities (55,676) (206,098) 127,274
------------- ------------ --------------
Net cash provided by (used in) operating activities (1,818,086) 481,813 (368,282)
------------- ------------ --------------
Reorganization activities:
Sale of new stock - - 39,000
Net payment of liabilities subject to compromise - - (342,889)
------------- ------------ --------------
Net cash used in reorganization activities - - (303,889)
------------- ------------ --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (40,448) (83,809) -
------------- ------------ --------------
Cash flows from financing activities
Proceeds from senior debt 314,902 - -
Proceeds from senior subordinated debt, net 974,500 - 931,135
Proceeds from other borrowing - 16,000 -
Repayments on borrowings/capital lease obligations (86,849) (91,105) (37,496)
------------- ------------ --------------
Net cash provided by (used in) financing activities 1,202,553 (75,105) 893,639
------------- ------------ --------------
Net increase (decrease) in cash and cash equivalents (655,981) 322,899 221,468
Cash and cash equivalents at beginning of period 684,262 360,216 138,748
------------- ------------ --------------
Cash and cash equivalents at end of period $ 28,281 $ 683,115 $ 360,216
============= ============ ==============
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") have been
condensed or omitted pursuant to such rules and regulations. The
Company believes that the disclosures made herein are adequate and
that the information presented is not misleading. In the opinion of
management, all adjustments necessary for a fair statement of the
results of operations and financial position for the periods
presented have been made (and any such adjustments are of a normal
recurring nature). These financial statements should be read in
conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996 filed with the Securities and Exchange Commission.
2. Earnings (loss) per share is calculated based on the weighted average
number of common and common equivalent shares outstanding during the
period to the extent the equivalents have a dilutive effect on earnings
(loss) per common share. The number of shares used in computing primary
and fully diluted earnings (loss) per share for the periods ended
September 30, 1997 was 1,261,200.
3. The inventories balance at September 30, 1997 includes raw materials of
$183,391 and work in process of $13,716. The inventories balance at
December 31, 1996 included raw materials of $222,262 and work in
process of $4,089. Inventories used on contracts in progress are
included in cost of goods sold to accurately match the cost with the
revenue recognized on those contracts by the percentage of completion
method of revenue recognition.
4. On March 27, 1997, the Company incurred additional Senior Debt in the
amount of $500,000 under the same terms and conditions as its prior
debt. The debt is at an interest rate of 14%. The interest is payable
monthly in arrears and the principle is due in a balloon payment in
2002.
On July 17, 1997, the Company incurred additional Senior Debt in the
amount of $500,000. This debt is at an interest rate of 14% and its
interest is payable monthly in arrears. The principle is due in July
1998. Also, the Company granted to the lender, at that time, a warrant
to purchase up to 5% of the Company's outstanding stock at the then
current market price of $2.25 per share. This warrant is only
exercisable if the debt is not paid on or before its due date. In
September,1997 all debt outstanding to Sirrom Capital Corporation was
subordinated to the project financing as discussed below.
In late September, 1997 the Company incurred new Senior Debt to Central
Fidelity Bank in the form of project financing for a major project in
Korea. The debt is secured by an irrevocable Letter of Credit from the
customer. The debt carries an interest rate of Prime plus one-half
percent (currently 9%). Interest on the debt is paid monthly in
arrears. The principle on the debt is to be repaid from the collections
on the Letter of Credit, which should occur in early 1998. In addition,
the debt is 90% guaranteed by the Export-Import Bank of the United
States.
<PAGE>
5. Income taxes have been provided as follows in the accompanying
statements of income:
Period From Nine Month
March 12- Period Ended
September 30,1996 September 30, 1997
------------------ ------------------
Current Expense (Benefit)
Federal $ 6,013 $ -
State 1,503 -
Deferred Expense (Benefit)
Federal 113,200 (89,988)
State 12,522 (13,635)
------- ---------
$133,238 $ (103,623)
Income taxes are provided at the applicable federal and state rates.
At September 30, 1997, the Company had NOL carryforwards of
approximately $3.7 million for federal income tax purposes. Such NOL
carryforwards, if not used as offsets to future taxable income, will
expire beginning in 1997 and continuing through 2008. Certain of these
NOL carryforwards available for future utilization are limited as the
result of a change in ownership of the Company which occurred in 1992.
In addition the Company has deferred tax assets which have arisen from
temporary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. These
differences are primarily related to fixed assets and accrued warranty
expense.
In accordance with FAS 109, the Company has recognized the portion of
future benefits associated with the NOL's that management feels will
more likely than not be realized. This amount totals $258,544 and
$154,921 as of September 30, 1997 and December 31, 1996, respectively.
A valuation allowance has been set up against the remaining amount of
the total NOL's.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF UNAUDITED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consumat Environmental Systems, Inc., formerly known as Consumat
Systems, Inc. (the "Company"), completed its chapter 11 bankruptcy proceeding
during the first quarter of 1996. The Effective Date of the Bankruptcy Plan was
March 12, 1996. For this reason, all information presented in this report
related to the period January 1, 1996 to March 11, 1996 is referred to as the
Predecessor Company. All information presented for the periods subsequent to
March 11, 1996 is referred to as the Successor Company. To facilitate a more
meaningful comparison of the Company's year-to-date operating performance, the
following discussion of the results of operations is presented on a combined
Company (Predecessor plus Successor) basis for the nine month period ended
September 30, 1996.
As was discussed in the Company's Annual Report on Form 10-KSB, 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
effects of the consummation of the Plan and the fresh start reporting allowed
the Company to emerge from its bankruptcy proceeding with a working capital
surplus of approximately $1,074,000 and a net capital surplus of $1,010,000. At
September 30, 1997, the Company had a working capital surplus of $802,549 and a
net capital surplus of $538,556.
3rd QUARTER 1997 - RESULTS OF OPERATIONS
The Successor lost $402,901 on revenues of $752,370 in the three month
period ended September 30, 1997. In the third quarter of 1996 the Successor
earned $73,906 on revenues of $1,345,507. The loss for the third quarter of 1997
includes income tax expense of $187,207. As of September 30, 1997, the Company
reviewed the projected future earnings in relation to the balance of the
deferred tax asset account and determined that a balance of $258,544 was
reasonable at that time. This resulted in a decrease of the asset balance from
June 30, 1997 of $187,207. This change in the asset balance is reflected as the
net income tax for the third quarter. The income for the third quarter of 1996
is net of income tax expense of $45,297.
LIQUIDITY AND CAPITAL
In July of 1997, the Company obtained an additional loan in the amount
of $500,000 from Sirrom Capital Corporation. The loan will be used for working
capital purposes, in particular, the continuation of the renewed sales and
marketing effort especially in selected foreign countries.
Backlog was $828,150 and $1,130,950 at September 1997 and December 31,
1996, respectively. Since late in 1996, the Company has directed substantial
resources, both in time and funding, to expand its sales and marketing presence.
The Company has embarked on a plan to identify and establish strong
representation in certain domestic markets and in a number of selected countries
around the world. But, because the Company sells capital equipment, which often
has a sales cycle of two years or more, this marketing push is only beginning to
generate new orders. The Company has established seven new sales representatives
in the United States. In addition, the Company has set up new sales
representation in several foreign countries, including Chile, China, India,
Korea, Mexico, Taiwan, Thailand, and Turkey.
<PAGE>
RESULTS OF OPERATIONS 9/30/97
COMPARED WITH 9/30/96
Revenues (Successor vs. Successor/Predecessor Combined) Revenues
decreased $1.83 million or 45.8% from $3.99 million for the first nine months of
1996 to $2.16 million for the first nine months of 1997. The decrease in
revenues for the first nine months of 1997 is primarily the result of the lack
of adequate marketing during the bankruptcy period. Subsequent to the Effective
Date of the Plan, significant expenditures were made in the Company's Sales and
Marketing area. Due to the long sales cycle in this industry, these expenses
have yet to generate significant new sales.
Cost of Goods Sold (Successor vs. Successor/Predecessor Combined) Costs
of Goods Sold decreased by $787,000 or 29.2% from $2.70 million for the first
nine months of 1996 to $1.91 million for the first nine months of 1997. The
gross margin of $1.29 million for the first nine months of 1996 compares to a
gross margin of $247,000 for the first nine months of 1997. The gross margin
rate decreased from 32.3% for the first nine months of 1996 to 11.4% for the
first nine months of 1997. The decrease in gross margin rate is primarily the
result of the decreased revenue volume and the significant amount of fixed
overhead costs related to the Company's manufacturing operation.
Selling, General and Administrative Expenses (Successor vs.
Successor/Predecessor Combined) Selling, general and administrative expenses
increased by $195,000 or 26.9% from $726,000 for the first nine months of 1996
to $921,000 for the nine months of 1997. The majority of the increase,
approximately $144,000 is additional sales and marketing expenses incurred in
the first nine months of 1997. The Company hired a new Director of Sales and
Marketing and a new International Business Development Director in the third
quarter of 1996. The costs related to these new positions including wages,
benefits and travel expenses account for the increased sales expenditures in the
first nine months of 1997. The only significant general and administrative
expenses that increased in the first nine months of 1997 were accounting fees,
stock transfer costs related to the December 1996 name change and certain
insurance costs.
Interest Expense (Successor vs. Successor/Predecessor Combined)
Interest expense increased by $59,000 or 28.0% from $212,000 for the first nine
months of 1996 to $271,000 for the first nine months of 1997. The increase for
1997 is the net result of an increase related to additional senior subordinated
debt incurred March of 1996 and in March and July of 1997 and offset by a
decrease in the interest on the Company's capital lease and other long-term
debt.
GENERAL COMMENTS
Other items stated in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 are incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
A description of legal proceedings for the quarter ended September 30,
1997 was previously reported in the Company's report on Form 10-KSB for the year
ended December 31, 1996.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None
<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 there unto duly authorized.
CONSUMAT ENVIRONMENTAL
SYSTEMS, INC.
Registrant
Date: November 13, 1997 _____________________________
Robert L. Massey
Chief Executive Officer
Date: November 13, 1997 _____________________________
Mark E. Hills
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 28
<SECURITIES> 47
<RECEIVABLES> 1,880
<ALLOWANCES> 21
<INVENTORY> 197
<CURRENT-ASSETS> 2,243
<PP&E> 4,044
<DEPRECIATION> 3,405
<TOTAL-ASSETS> 4,252
<CURRENT-LIABILITIES> 1,440
<BONDS> 0
0
0
<COMMON> 1,011
<OTHER-SE> (660)
<TOTAL-LIABILITY-AND-EQUITY> 4,252
<SALES> 2,159
<TOTAL-REVENUES> 2,159
<CGS> 1,913
<TOTAL-COSTS> 967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271
<INCOME-PRETAX> (981)
<INCOME-TAX> (104)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (877)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
