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, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to _____________
Commission File 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 1,012,800
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I. Financial Information:
<S> <C>
Item 1:
Balance Sheets..........................................................................................4
Statements of Operations................................................................................5
Statements of Cash Flows................................................................................6
Notes to Financial Statements...........................................................................7
Item 2:
Management's Discussion and Analysis of Unaudited
Financial Condition and Results of Operations...........................................................9
Part II. Other Information
Item 1:
Legal Proceedings.........................................................................................11
Item 6:
Exhibits and Reports on Form 8-K..........................................................................11
Signatures................................................................................................12
</TABLE>
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,739 $ 107,116
Accounts receivable and contract costs (net of
allowance for doubtful accounts of $26,147 at
September 30, 1998 and December 31, 1997) 536,102 1,701,726
Note receivable -- 224,667
Inventories 196,155 193,367
Prepaid expenses and other 90,637 52,222
----------- -----------
Total current assets 880,633 2,279,098
Property, plant and equipment, at cost,
net of accumulated depreciation and amortization 499,491 571,861
Other assets 107,346 125,727
Reorganization value in excess of amount
allocable to identifiable assets, net of
accumulated amortization 950,134 990,950
----------- -----------
$ 2,437,604 $ 3,967,636
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of senior debt $ 250,000 $ 500,000
Current maturities of capital lease obligation 96,323 86,736
Notes payable 21,840 933,967
Accounts payable 123,525 171,220
Accrued expenses 182,641 195,466
----------- -----------
Total current liabilities 674,329 1,887,389
Senior debt, excluding current maturities 2,000,000 2,000,000
Capitalized lease obligation 341,526 414,938
Stockholders' deficit
Common stock: $1 par value, authorized 25,000,000
shares; issued and outstanding 1,012,800 and 1,011,200
at September 30, 1998 and December 31, 1997, respectively 1,012,800 1,011,200
Accumulated deficit (1,591,051) (1,345,891)
----------- -----------
Total stockholders' deficit (578,251) (334,691)
----------- -----------
$ 2,437,604 $ 3,967,636
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,049,977 $ 752,370 $ 2,755,292 $ 2,159,232
Cost of goods sold 698,751 585,594 1,961,670 1,912,649
----------- ----------- ----------- -----------
Gross profit 351,226 166,776 793,622 246,583
Selling, general and administrative expenses 218,789 263,921 686,293 920,980
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 13,605 14,355 40,816 43,065
----------- ----------- ----------- -----------
Operating income (loss) 118,832 (111,500) 66,513 (717,462)
Other income (expense):
Investment income 12 362 10,177 5,915
Interest expense (96,896) (104,824) (323,186) (271,156)
Other -- 268 1,336 1,667
----------- ----------- ----------- -----------
(96,884) (104,194) (311,673) (263,574)
----------- ----------- ----------- -----------
Income (loss) before income tax benefit 21,948 (215,694) (245,160) (981,036)
Income tax expense (benefit) -- 187,207 -- (103,623)
----------- ----------- ----------- -----------
Net income (loss) $ 21,948 $ (402,901) $ (245,160) $ (877,413)
=========== =========== =========== ===========
Income (loss) per common share:
Basic $ 0.02 ($ 0.32) ($ 0.20) ($ 0.70)
Diluted $ 0.01 ($ 0.32) ($ 0.20) ($ 0.70)
</TABLE>
See accompanying notes.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Nine Month
Period ended Period ended
September 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (245,160) $ (877,413)
Adjustments to reconcile net loss to
cash flows from operating activities
Depreciation and amortization 135,136 129,343
Deferred income taxes -- (103,623)
Non cash compensation expenses 1,600 1,200
Changes in operating assets and liabilities
net of non-cash transactions:
Short-term investments -- 45,915
Accounts receivable 1,165,624 (1,133,585)
Notes receivable 224,667 --
Inventories (2,788) 29,244
Other current assets (38,415) (70,010)
Accounts payable (47,695) 216,519
Other current liabilities (12,827) (55,676)
----------- -----------
Net cash generated by (used in) operating activities 1,180,142 (1,818,086)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,567) (40,448)
----------- -----------
Cash flows from financing activities:
Proceeds from senior debt, net -- 1,289,402
Repayments on senior debt (250,000) --
Repayments on notes payable (912,127) (31,701)
Repayments on capital lease obligations (63,825) (55,148)
----------- -----------
Net cash provided by (used in) financing activities (1,225,952) 1,202,553
----------- -----------
Net increase (decrease) in cash and cash equivalents (49,377) (655,981)
Cash and cash equivalents at beginning of period 107,116 776,762
----------- -----------
Cash and cash equivalents at end of period $ 57,739 $ 120,781
=========== ===========
</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, 1997 filed with the Securities
and Exchange Commission.
2. As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted net earnings
per share with basic and diluted net earnings per share. Unlike primary
net earnings per share, basic net earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted net earnings per share is similar to the previous fully diluted
net earnings per share. All prior-period loss per share data has been
restated to conform to the provisions of SFAS No. 128.
The following are reconciliations of the calculations of basic and
diluted net income (loss) per share:
<TABLE>
<CAPTION>
Three Month Period Three Month Period
Ended September 30, Ended September 30,
1998 1997
------------------- -------------------
<S> <C> <C>
Basic and Diluted:
Numerator
Net income (loss) $ 21,948 $ (402,901)
Denominator
Common shares outstanding 1,012,800 1,011,200
Minimum Senior Debt warrant 242,000 248,728
------------- -----------
Weighted average common shares outstanding-Basic 1,254,800 1,259,928
Contingent Senior Debt warrant 217,800 0
------------- -----------
Weighted average common shares outstanding-Diluted 1,472,600 1,259,928
============= ===========
Nine Month Period Nine Month Period
Ended September 30, Ended September 30,
1998 1997
------------------ ------------------
Basic and Diluted:
Numerator
Net income (loss) $ (245,160) $ (877,413)
Denominator
Common shares outstanding 1,012,237 1,011,200
Minimum Senior Debt warrant 243,809 248,704
------------- -----------
Weighted average common shares outstanding 1,256,046 1,259,904
============= ===========
</TABLE>
<PAGE>
3. The inventories balance at September 30, 1998 includes raw materials of
$187,946 and work in process of $8,209. The inventories balance at
December 31, 1997 included raw materials of $179,604 and work in
process of $13,763. 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 June 17, 1998, the Company repaid Senior Debt in the amount of
$250,000. This was a portion of the $500,000 note which was due in July
1998. At that same time, the lender granted the Company an extension on
the due date of the balance of this note until August 16, 1998. The
ability to exercise the warrants associated with this debt was likewise
extended until that date. On August 16,1998, the lender granted the
Company an additional extension of the $250,000 balance until November
15, 1998. At the same time, the Company amended the stock purchase
warrant previously granted to the lender. The amendment reduced the
number of shares available from 66,379 to 33,190 while also reducing
the exercise price from $2.25 to the then current market price of
$0.375.
5. At September 30, 1998, the Company had NOL carryforwards of
approximately $5.25 million for federal income tax purposes. Such NOL
carryforwards, if not used as offsets to future taxable income, will
expire beginning in 1998 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.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S 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. 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, 1998, the Company had a working capital surplus of $206,304 and a
net capital deficit of $578,251.
3rd QUARTER 1998 - RESULTS OF OPERATIONS
The Company earned $21,948 on revenues of $1,049,977 in the three month
period ended September 30, 1998. In the third quarter of 1997 the Company lost
$402,901 on revenues of $752,370. The loss for the third quarter of 1997
included income tax expense of $187,207. This income tax expense resulted from a
decrease in the deferred income tax account balance at September 30, 1997 to
more accurately reflect the expected utilization of the asset.
LIQUIDITY AND CAPITAL
Backlog was $978,492 and $227,422 at September 30, 1998 and December
31, 1997, respectively.
The Company devotes substantially all of its manufacturing capacity to
a large contract when the equipment for that contract is being built. In
addition, since the Company is presently unable to obtain bonding on large
projects, the Company has and will need to continue to arrange surety bonds and
financial guarantees through entities having an interest in those projects.
Historically, a significant portion of the Company's revenues have been
comprised of a relatively small number of large sales, generally not to the same
customer, resulting from the manufacture of large waste disposal and pollution
control systems.
The financial crises which occurred in Asia during 1997 are a
significant concern to the Company as it is a region that the Company has
targeted for future growth. The Company believes that the current economic
crises will slow business in Asia in 1998, but that sales in this region will
increase in future years and remain strong in the long-term. The Company
believes that the recent regulations promulgated by the U.S. Environmental
Protection Agency (USEPA) will increase customer demand in certain domestic
markets. Because of the downturn in Asian markets and new USEPA regulations, the
Company has concentrated its current marketing efforts on selected domestic
markets. Management anticipates that 1998 revenues will be derived almost
exclusively from North American contracts.
Management believes that revenues from current year operations will
provide sufficient cash flows to meet its cash requirements during 1998.
<PAGE>
RESULTS OF OPERATIONS 9/30/98
COMPARED WITH 9/30/97
Revenues Revenues increased by $596,000 or 27.6% from $2,159,000 for
the first nine months of 1997 to $2,755,000 for the first nine months of 1998.
The increase in revenues for the first nine months of 1998 is primarily the
result of two large contracts in the United States. Both of the contracts are
for additions to, or refurbishments of older plants originally built by the
Company. The economic crises in much of Asia during the second half of 1997 is
continuing to retard new international sales. The Company is continuing to make
additional expenditures in its Sales and Marketing efforts, although on a more
selective basis. Due to the long sales cycle in this industry, these expenses
have yet to generate significant new sales.
Cost of Goods Sold Costs of Goods Sold increased by $49,000 or 2.6%
from $1,913,000 for the first nine months of 1997 to $1,962,000 for the first
nine months of 1998. The gross margin of $247,000 for the first nine months of
1997 compares to a gross margin of $794,000 for the first nine months of 1998.
The gross margin rate increased from 11.4% for the first nine months of 1997 to
28.8% for the first nine months of 1998. The increase in gross margin rate is
primarily the result of the increased revenue volume and the much improved
utilization of the fixed overhead costs related to the Company's manufacturing
operation.
Selling, General and Administrative Expenses Selling, general and
administrative expenses decreased by $235,000 or 25.5% from $921,000 for the
first nine months of 1997 to $686,000 for the first nine months of 1998. The
majority of the decrease, approximately $145,000, is related to a decrease in
sales and marketing expenses, including salaries, professional fees and travel.
In addition, general and administrative expenses decreased by approximately
$90,000 primarily the result of reductions in legal and printing costs, incurred
in 1997, related to the Company's name change, as well as reductions in
telephone costs and other professional fees.
Interest Expense Interest expense increased by $52,000 or 19.2% from
$271,000 for the first nine months of 1997 to $323,000 for the first nine months
of 1998. The increase for the first nine months of 1998 is the net result of an
increase related to additional senior debt incurred during 1997 and offset by a
decrease in the interest on the Company's capital lease and other long-term
debt.
READINESS FOR YEAR 2000
The Company has taken actions to understand the nature and extent of
work required to make its systems, products, services, and infrastructure Year
2000 compliant.
The Company has initiated a comprehensive program to test all hardware
and software systems to determine their Year 2000 compliance. To date, the
Company has tested all significant hardware components in its internal computer
network. Approximately 70% of its overall systems were determined to be
compliant at this time. Of the systems which were deemed critical to the
accounting, reporting, manufacturing and telecommunications operations,
virtually 100% of these systems were deemed compliant. All components which were
noted to be non-compliant were being used in non-critical operations. The
Company has analyzed the non-compliant systems and determined that these systems
can be upgraded or replaced. The total cost to bring these systems into
compliance is approximately $15,000 to $20,000. This should be completed by
early 1999.
In addition the Company has reviewed its current software packages to
determine their Year 2000 compliance. All software used by the Company has been
purchased from major software vendors, such as Microsoft and Great Plains, and
has been purchased or upgraded in the last two years. The Company does not use
any custom written software at this time. The Company has received certification
from each vendor who has supplied critical software to the Company certifying
its Year 2000 compliance. This includes the accounting, engineering and office
administration systems.
<PAGE>
In addition to this internal testing and certification, the Company has
contracted with an outside company to independently test all of the Company's
critical systems to verify that all hardware and software is Year 2000
compliant. This testing should be completed by early 1999.
As part of its comprehensive program, the Company has contacted all
third party vendors who supply critical components or services to the Company to
determine there Year 2000 readiness. As of this time, all have certified to the
Company that there products are compliant. Also, the Company has reviewed and is
continuing to review its own products to determine whether there are any date
critical components embedded in these products. At this time, it is believed
that there are no components embedded in the Company's products which will fail
cause the products to fail to function in the Year 2000.
Based on the results of the Year 2000 compliance tests performed as of
this time, the Company does not believe that a contingency plan will be
necessary and has not prepared one.
GENERAL COMMENTS
Other items stated in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997 are incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
A description of legal proceedings for the quarter ended September 30,
1998 was previously reported in the Company's report on Form 10-KSB for the year
ended December 31, 1997.
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 11, 1998 _____________________________
Robert L. Massey
Chief Executive Officer
Date: November 11, 1998 _____________________________
Mark E. Hills
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 562
<ALLOWANCES> 26
<INVENTORY> 196
<CURRENT-ASSETS> 881
<PP&E> 3,107
<DEPRECIATION> 2,608
<TOTAL-ASSETS> 2,438
<CURRENT-LIABILITIES> 674
<BONDS> 0
0
0
<COMMON> 1,013
<OTHER-SE> (1,591)
<TOTAL-LIABILITY-AND-EQUITY> 2,438
<SALES> 2,755
<TOTAL-REVENUES> 2,755
<CGS> 1,962
<TOTAL-COSTS> 686
<OTHER-EXPENSES> 0
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