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 March 31, 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 1,011,200
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
INDEX
Page No.
--------
Part I. Financial Information:
Item 1:
Balance Sheet.........................................................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.........................8
Part II. Other Information
Item 1:
Legal Proceedings.....................................................9
Item 6:
Exhibits and Reports on Form 8-K......................................9
Signatures...........................................................10
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1.
<PAGE>
<TABLE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
BALANCE SHEETS
<CAPTION>
<S> <C>
March 31, December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
----------- -----------
Current assets:
Cash and cash equivalents $ 289,760 $ 107,116
Accounts receivable and contract costs (net of
allowance for doubtful accounts of $26,147 at
March 31, 1998 and December 31, 1997) 498,373 1,701,726
Note receivable 87,355 224,667
Inventories 219,160 193,367
Prepaid expenses and other 53,407 52,222
----------- -----------
Total current assets 1,148,055 2,279,098
Property, plant and equipment, at cost,
net of accumulated depreciation and amortization 546,549 571,861
Other assets 119,600 125,727
Reorganization value in excess of amount
allocable to identifiable assets, net of
accumulated amortization 977,345 990,950
$ 2,791,549 $ 3,967,636
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of senior debt $ 500,000 $ 500,000
Current maturities of capital lease obligation 89,791 86,736
Notes payable 59,184 933,967
Accounts payable 175,949 171,220
Accrued expenses 196,181 195,466
----------- -----------
Total current liabilities 1,021,105 1,887,389
Senior debt, excluding current maturities 2,000,000 2,000,000
Capitalized lease obligation 391,400 414,938
Stockholders' deficit
Common stock: $1 par value, authorized 25,000,000
shares; issued and outstanding 1,011,200
at March 31, 1998 and December 31, 1997 1,011,200 1,011,200
Accumulated deficit (1,632,156) (1,345,891)
----------- -----------
Total stockholders' deficit (620,956) (334,691)
----------- -----------
$ 2,791,549 $ 3,967,636
=========== ===========
See accompanying notes.
4
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Month Three Month
Period ended Period ended
March 31, March 31,
1998 1997
--------- ---------
Revenues $ 603,486 $ 821,160
Cost of goods sold 538,828 719,509
--------- ---------
Gross profit 64,658 101,651
Selling, general and administrative expenses 221,221 302,167
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 13,605 14,356
--------- ---------
Operating loss (170,168) (214,872)
Other income (expense):
Investment income 3,185 2,409
Interest expense (120,927) (74,735)
Other 1,645 343
--------- ---------
(116,097) (71,983)
--------- ---------
Loss before income tax benefit (286,265) (286,855)
Income tax benefit - (109,005)
--------- ---------
Net loss $ (286,265) $ (177,850)
========== ==========
Loss per common share:
Basic ($0.23) ($0.14)
Diluted ($0.23) ($0.14)
See accompanying notes.
5
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Three Month
Period ended Period ended
March 31, March 31,
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $ (286,265) $ (177,850)
Adjustments to reconcile net loss to
cash flows from operating activities
Depreciation and amortization 45,044 42,340
Deferred income taxes - (109,005)
Changes in operating assets and liabilities
net of non-cash transactions:
Accounts receivable 1,203,353 (477,348)
Notes receivable 137,312 -
Inventories (25,793) 23,967
Other current assets (1,185) (5,398)
Accounts payable 4,729 93,743
Other current liabilities 715 (28,483)
---------- ----------
Net cash generated by (used in) operating activities 1,077,910 (638,034)
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment - (36,987)
---------- ----------
Cash flows from financing activities:
Proceeds from senior debt, net - 489,000
Repayments on notes payable (874,783) (15,891)
Repayments on capital lease obligations (20,483) (17,630)
---------- ----------
Net cash provided by (used in) financing activities (895,266) 455,479
---------- ----------
Net increase (decrease) in cash and cash equivalents 182,644 (219,542)
Cash and cash equivalents at beginning of period 107,116 684,262
Cash and cash equivalents at end of period $ 289,760 $ 464,720
========= =========
</TABLE>
See accompanying notes.
6
<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 is a reconciliation of the calculation of basic and
diluted net loss per share:
<TABLE>
<S> <C>
---------------------------------------------------------------- ------------------------ -------------------------
Three Month Period Three Month Period
Ended March 31, 1998 Ended March 31, 1997
---------------------------------------------------------------- ------------------------ -------------------------
Basic and Diluted:
Numerator
Net loss $ (286,265) $ (177,850)
Denominator
Common shares outstanding 1,011,200 1,011,200
Minimum Senior Debt warrant 244,872 248,621
---------------------------------------------------------------- ------------------------ -------------------------
Weighted average common shares outstanding 1,256,072 1,259,821
---------------------------------------------------------------- ------------------------ -------------------------
</TABLE>
3. The inventories balance at March 31, 1998 includes raw materials of
$205,379 and work in process of $13,781. 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. At March 31, 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.
7
<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
March 31, 1998, the Company had a working capital surplus of $126,950 and a net
capital deficit of $620,956.
1st QUARTER 1998 - RESULTS OF OPERATIONS
The Company lost $286,265 on revenues of $603,486 in the three month
period ended March 31, 1998. In the first quarter of 1997 the Company lost
$177,850 on revenues of $821,160. The loss for the first quarter of 1997 is
shown net of the income tax benefit of $109,005. This income tax benefit had
been recorded based on the Company's expectation of income to be generated
during the balance of the year ended December 31, 1997.
LIQUIDITY AND CAPITAL
Backlog was $1,104,039 and $227,422 at March 31, 1998 and
December 31, 1997, respectively. Also, on April 24, 1998, the Company received
an additional order for $1,500,000.
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.
8
<PAGE>
RESULTS OF OPERATIONS 3/31/9
COMPARED WITH 3/31/97
Revenues Revenues decreased $218,000 or 26.5% from $821,000 for the
first quarter of 1997 to $603,000 for the first quarter of 1998. The decrease in
revenues for the first quarter of 1998 is primarily the result of the lack of
adequate marketing during the bankruptcy period as well as the economic crises
in much of Asia during the second half of 1997. 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 Costs of Goods Sold decreased by $181,000 or 25.1%
from $720,000 for the first quarter of 1997 to $539,000 for the first quarter of
1998. The gross margin of $102,000 for the first quarter of 1997 compares to a
gross margin of $65,000 for the first quarter of 1998. The gross margin rate
decreased from 12.4% for the first quarter of 1997 to 10.7% for the first
quarter of 1998. 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 Selling, general and
administrative expenses decreased by $81,000 or 26.8% from $302,000 for the
first quarter of 1997 to $221,000 for the first quarter of 1998. The majority of
the decrease, approximately $50,000, is related to a decrease in sales and
marketing expenses, including professional fees and travel. In addition, general
and administrative expenses decreased by approximately $31,000 primarily the
result of reductions in legal and printing costs. These costs were incurred
during the first quarter of 1997 as a result of the Company's name change.
Interest Expense Interest expense increased by $46,000 or 61.8% from
$75,000 for the first quarter of 1997 to $121,000 for the first quarter of 1998.
The increase for the first quarter 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.
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 March 31, 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
(c) None
9
<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: May 12, 1998 /s/ Robert L. Massey
---------------------------------
Robert L. Massey
Chief Executive Officer
Date: May 12, 1998 /s/ Mark E. Hills
---------------------------------
Mark E. Hills
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 290
<SECURITIES> 0
<RECEIVABLES> 499
<ALLOWANCES> 26
<INVENTORY> 219
<CURRENT-ASSETS> 1,148
<PP&E> 3,104
<DEPRECIATION> 2,557
<TOTAL-ASSETS> 2,792
<CURRENT-LIABILITIES> 1,021
<BONDS> 0
0
0
<COMMON> 1,011
<OTHER-SE> (1,632)
<TOTAL-LIABILITY-AND-EQUITY> 2,792
<SALES> 603
<TOTAL-REVENUES> 603
<CGS> 539
<TOTAL-COSTS> 235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (286)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (286)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
