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 June 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
Financial Condition and Results of Operations................... 10
Part II. Other Information
Item 1:
Legal Proceedings................................................. 11
Item 4:
Submission of Matters to a Vote of Security Stockholders.......... 12
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
--------- ---------
June 30, December 31,
ASSETS 1997 1996
---- ----
(Unaudited) (Audited)
<S> <C>
Current assets:
Cash and cash equivalents $ 12,650 $ 684,262
Short-term investment 46,823 92,500
Accounts receivable and contract costs (net of
allowance for doubtful accounts of $21,368 and
$10,000 at June 30, 1997 and December 31, 1996, respectively) 1,348,014 696,613
Inventories 208,338 226,351
Prepaid expenses and other 71,639 70,812
------ ------
Total current assets 1,687,464 1,770,538
Property, plant and equipment, at cost,
net of accumulated depreciation and amortization 662,910 669,893
Note receivable from officer 19,028 19,028
Debt issuance costs, net of accumulated
amortization 80,407 79,111
Deferred income taxes, net 445,751 154,921
Reorganization value in excess of amount
allocable to identifiable assets, net of
accumulated amortization 1,016,661 1,045,372
--------- ---------
$ 3,912,221 $3,738,863
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligation $ 80,738 $ 75,082
Current maturities of long-term debt 86,555 59,578
Accounts payable 284,007 63,764
Accrued warranty expense 45,643 61,400
Other accrued expenses 159,952 164,498
------- -------
Total current liabilities 656,895 424,322
Senior debt 2,000,000 1,500,000
Long-term debt 40,755 85,311
Capitalized lease obligation 460,321 501,668
Stockholders' equity
Common stock: $1 par value, authorized 25,000,000 shares;
issued and outstanding 1,011,200 and 1,010,000
at June 30, 1997 and December 31, 1996, respectively 1,011,200 1,010,000
Retained earnings (deficit) (256,950) 217,562
-------- -------
Total stockholders' equity 754,250 1,227,562
------- ---------
$ 3,912,221 $ 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
June 30, June 30,
1997 1996
---- ----
<S> <C>
Revenues $ 585,702 $ 1,357,250
Cost of goods sold 607,546 887,404
------- -------
Gross profit (loss) (21,844) 469,846
Selling, general and
administrative expenses 354,891 245,611
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 14,355 14,355
------ ------
Operating income (loss) (391,090) 209,880
Other income (expense):
Investment income 3,144 1,635
Interest expense (91,596) (74,984)
Other 1,055 6,509
----- -----
(87,397) (66,840)
------- -------
Income (loss) before taxes (478,487) 143,040
Income tax expense (benefit) (181,825) 54,355
-------- ------
Net income (loss) $ (296,662) $ 88,685
=========== ===========
Earnings (loss) per common share:
Primary ($0.24) $0.07
Fully diluted ($0.24) $0.06
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Successor
--------- Predecessor
Six Month Period from Period from
Period Ended March 12 to January 1 to
June 30, June 30, March 11,
1997 1996 1996
---- ---- ----
<S> <C>
Revenues $ 1,406,862 $ 1,718,386 $ 923,043
Cost of goods sold 1,327,055 1,096,848 706,309
--------- --------- ----------
Gross profit 79,807 621,538 216,734
Selling, general and
administrative expenses 657,058 295,674 177,710
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 28,711 14,355 --
--------- --------- ----------
Operating income (loss) (605,962) 311,509 39,024
Other income (expense):
Investment income 5,552 1,635 --
Interest expense (166,331) (88,271) (48,998)
Other 1,399 6,547 48,660
--------- --------- ----------
(159,380) (80,089) (338)
--------- --------- ----------
Income (loss) before fresh start revaluation, income
tax expense (benefit) and extraordinary item (765,342) 231,420 38,686
Fresh start revaluation -- -- 538,480
Income (loss) before income tax expense (benefit)
and extraordinary item (765,342) 231,420 577,166
Income tax expense (benefit) (290,830) 87,940 --
Income (loss) before extraordinary item (474,512) 143,480 577,166
Extraordinary item-gain on debt discharge -- -- 9,907
--------- --------- ----------
Net income (loss) $ (474,512) $ 143,480 $ 587,073
========== ========= ==========
Earnings (loss) per common share:
Primary ($0.38) $ 0.11 $ 0.38
Fully diluted ($0.38) $ 0.10 $ 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
June 30, June 30, March 11,
1997 1996 1996
---- ---- ----
<S> <C>
Cash flows from operating activities
Net income (loss) $ (474,512) $ 143,480 $ 587,073
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization 85,848 43,278 18,011
Deferred income taxes (290,830) 82,978 --
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:
Accounts receivable and contract costs (651,401) (235,940) (584,543)
Inventories 18,013 (71,621) 49,504
Other current assets (829) (4,878) (4,939)
Accounts payable 220,243 43,625 (12,275)
Other current liabilities (20,303) 2,741 127,274
------- ----- -------
Net cash provided by (used in) operating activities (1,112,571) 3,663 (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) (33,596) --
------- ------- --------
Cash flows from financing activities
Proceeds from senior debt, net 489,000 -- 931,135
Proceeds from other borrowing -- 16,000 --
Repayments on borrowings/capital lease obligations (53,270) (58,787) (37,496)
------- ------- -------
Net cash provided by (used in) financing activities 435,730 (42,787) 893,639
------- ------- -------
Net increase (decrease) in cash and cash equivalents (717,289) (72,720) 221,468
Cash and cash equivalents at beginning of period 776,762 360,216 138,748
------- ------- -------
Cash and cash equivalents at end of period $ 59,473 $ 287,496 $ 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 June 30, 1997 was
1,261,200.
3. The inventories balance at June 30, 1997 includes raw materials of $191,613
and work in process of $16,725. 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.
5. Income taxes have been provided as follows in the accompanying statements
of income:
Period From Three Month
March 12- Period Ended
June 30,1996 June 30, 1997
------------ -------------
Current Expense (Benefit)
Federal $ 3,969 $ -
State 993 -
Deferred Expense (Benefit)
Federal 74,713 (252,563)
State 8,265 (38,267)
------ ---------
$87,940 $(290,830)
Income taxes are provided at the applicable federal and state rates.
<PAGE>
At June 30, 1997, the Company had NOL carryforwards of approximately $3.9
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 $445,751 and $154,921 as of
June 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 six month period ended June 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
June 30, 1997, the Company had a working capital surplus of $1,030,569 and a net
capital surplus of $754,250.
2nd QUARTER 1997 - RESULTS OF OPERATIONS
The Successor lost $296,662 on revenues of $585,702 in the three month
period ended June 30, 1997. In the second quarter of 1996 the Successor earned
$88,685 on revenues of $1,357,250. The loss for the second quarter of 1997 is
shown net of the income tax benefit of $181,825. This income tax benefit has
been recorded based on the Company's expectation of income to be generated
during the balance of the year ended December 31, 1997. The income for the
second quarter of 1996 is net of income tax expense of $54,355.
LIQUIDITY AND CAPITAL
In mid 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 $1,514,912 and $1,130,950 at June 30, 1997 and December 31,
1996, respectively. The majority of the backlog ($1.46 million) at June 30,
1997, is the result of a new contract signed by the Company in mid June. This
new contract had only minimal effect on revenue during the second quarter of
1997. 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 one to 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 Taiwan, Thailand, Turkey,
Mexico and Chile.
<PAGE>
RESULTS OF OPERATIONS 6/30/97
COMPARED WITH 6/30/96
Revenues (Successor vs. Successor/Predecessor Combined) Revenues
decreased $1.23 million or 46.7% from $2.64 million for the first half of 1996
to $1.41 million for the first half of 1997. The decrease in revenues for the
first half 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 $476,000 or 26.4% from $1.80 million for the first
half of 1996 to $1.33 million for the first half of 1997. The gross margin of
$838,000 for the first half of 1996 compares to a gross margin of $80,000 for
the first half of 1997. The gross margin rate decreased from 31.7% for the first
half of 1996 to 5.7% for the first half 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 $183,000 or 36.4% from $473,000 for the first half of 1996 to
$657,000 for the first half of 1997. The majority of the increase, approximately
$135,000 are additional sales and marketing expenses incurred in the first half
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 half of 1997.
The only significant general and administrative expense that increased in the
first half of 1997 was the professional fees related to the 1997 audit.
Interest Expense (Successor vs. Successor/Predecessor Combined) Interest
expense increased by $29,000 or 21.2% from $137,000 for the first half of 1996
to $166,000 for the first half of 1997. The increase for the first half of 1997
is the net result of an increase related to additional senior debt incurred
March of 1996 and in March of 1997 and 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 June 30, 1997
was previously reported in the Company's report on Form 10-KSB for the year
ended December 31, 1996.
<PAGE>
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company, was held on June 5,
1997 for the purposes of electing a board of directors, considering a proposal
to adopt the Peter T. Socha Stock Option Plan, and ratifying the selection of
auditors. Proxies for the meeting were solicited pursuant to Section 14(a) of
the Securities Exchange Act of 1934.
All of management's nominees for directors listed in the proxy statement
were elected.
The proposal of management to adopt the Peter T. Socha Stock Option Plan
was approved by the following vote:
Shares Shares
Voted Voted Shares
For Against Abstaining
811,985 3,800 7,292
The selection of KPMG, Peat Marwick. as independent auditors was ratified
by the following vote:
Voted Voted Shares
For Against Abstaining
904,807 1,104 269
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: August 14, 1997 /s/ Robert L. Massey
_____________________________
Robert L. Massey
Chief Executive Officer
Date: August 14, 1997 /s/ Mark E. Hills
_____________________________
Mark E. Hills
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 13
<SECURITIES> 47
<RECEIVABLES> 1,369
<ALLOWANCES> 21
<INVENTORY> 208
<CURRENT-ASSETS> 1,687
<PP&E> 4,044
<DEPRECIATION> 3,381
<TOTAL-ASSETS> 3,912
<CURRENT-LIABILITIES> 657
<BONDS> 0
0
0
<COMMON> 1,011
<OTHER-SE> (257)
<TOTAL-LIABILITY-AND-EQUITY> 3,912
<SALES> 1,407
<TOTAL-REVENUES> 1,407
<CGS> 1,327
<TOTAL-COSTS> 686
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166
<INCOME-PRETAX> (765)
<INCOME-TAX> (291)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
