SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 [ ] Transition report
pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from to
Commission file number 0-9253
--------------------------
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
(Name of small business issuer in its charter)
VIRGINIA 54-0720128
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
POST OFFICE BOX 9379, RICHMOND, VIRGINIA 23227
- ---------------------------------------- --------------------------
(Address of principal executive office) (Zip Code)
Issuer's Telephone Number: (804) 746-4120
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:
Common Stock, $1.00 par value per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer had revenues in the amount of $2,858,124 for fiscal year
ended December 31, 1997.
The aggregate market value of the voting stock of the registrant held
by stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately $364,889
as of March 30, 1998 (based on the average closing bid and asked prices). At
March 30, 1998, the registrant had an aggregate of 1,011,200 shares of its
common stock issued and outstanding.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
YES X NO ____
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in Items 9, 10, 11 and 12 of this Form 10-KSB has been
incorporated by reference from the issuer's definitive proxy statement relating
to its 1998 annual shareholders meeting to be held on June 4, 1998.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Corporate Offices Mailing Address
8407 Erle Road Post Office Box 9379
Mechanicsville, Virginia 23116 Richmond, Virginia 23227
(804) 746-4120
Table of Contents
Item Page
1. DESCRIPTION OF BUSINESS..........................................
2. DESCRIPTION OF PROPERTY..........................................
3. LEGAL PROCEEDINGS................................................
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................
7. FINANCIAL STATEMENTS.............................................
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....
10. EXECUTIVE COMPENSATION...........................................
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................
13. EXHIBITS AND REPORTS ON FORM 8-K.................................
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
Consumat Environmental Systems, Inc. (the "Company"), was incorporated
in Virginia in 1960. The original name of the Company was Electrol Corporation.
The Company name was changed to Waste Combustion Corporation in 1965 and to
Consumat Systems, Inc. in 1973. On March 12, 1996, and in connection with its
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, the
Company changed its name to Reorganized Consumat Systems, Inc. On December 12,
1996, the name of the Company changed to Consumat Environmental Systems, Inc.
The Company commenced its bankruptcy proceeding on October 6, 1995, in
the United States Bankruptcy Court for the Eastern District of Virginia,
Richmond Division (the "Bankruptcy Court"). On February 28, 1996, the Bankruptcy
Court confirmed the Company's Second Amended Plan of Reorganization, as amended
by a Modification to Second Amended Plan of Reorganization dated February 27,
1996 (jointly, the "Plan"). On March 12, 1996 (the "Effective Date"), the
Company commenced making the distributions required under the Plan, including
distributions of promissory notes and cash and distributions of the new common
stock, $1.00 par value per share ("New Common Stock") of the Company. On March
28, 1996, the Bankruptcy Court entered a Final Decree closing the Company's
Chapter 11 bankruptcy proceeding.
Pursuant to the Plan, the Company was recapitalized with 5,000,000
authorized shares of New Common Stock and 1,000,000 authorized shares of
preferred stock $1.00 par value per share, with a total of 1,010,000 shares of
New Common Stock issued and outstanding after consummation of the Plan. All
shares of the Company's old common stock and all other equity interests,
including all options, warrants or other agreements requiring the issuance of
equity in the Company, were canceled under the Plan. In addition, the Company
was discharged under the Plan of all of its debts that existed as of the date of
the commencement of its Chapter 11 bankruptcy proceeding.
As of the Effective Date and in accordance with the Plan, the
management, control and operation of the Company became the general
responsibility of its Board of Directors consisting of Robert L. Massey,
Alexander Y. Hoff, and Peter T. Socha. Messrs. Massey and Hoff were directors of
the Company at the time the Company commenced its Chapter 11 bankruptcy
proceedings and at all times since. At the time of his election as a director,
Mr. Socha was an officer of Sirrom Investments, Inc. ("Sirrom"), which provided
the Company with financing during and after its bankruptcy proceeding. At a
meeting of the Board of Directors on March 27, 1996, Mr. Massey was elected as
Chairman.
Each of the officers of the Company immediately prior to the Effective
Date continued in his or her positions as the officers of the Company on and
after the Effective Date. Set forth below is the name, age, and position with
the Company of each such officer:
Name Age Position(s)
---- --- -----------
Robert L. Massey 63 President and Chief Executive Officer
Patricia B. Bradley 55 Corporate Secretary
Mark E. Hills 38 Chief Financial Officer
Mr. Massey was elected Vice President of the Company in 1968 and was
elected President in March 1985, Executive Vice President and Chief Operating
Officer in 1991, and President and Chief Executive Officer in June 1992. Mr.
Massey also was elected as Chairman of the Board of Directors at the first
meeting of the new Board of Directors on March 27, 1996. He is a graduate of
Greenville College, Greenville, Illinois, and has more than 35 years experience
in finance and sales.
Ms. Bradley joined the Company in 1971 and has held various
administrative positions, including Human Resources Manager. She was elected
Corporate Secretary in 1992. Ms. Bradley has over 20 years of experience in
office administration and management.
Mr. Hills joined the Company as the Controller in early 1993, was
elected Treasurer in October 1993 and Chief Financial Officer in June 1995. Mr.
Hills is a graduate of the University of Virginia and has over 15 years of
experience in public accounting and manufacturing management.
At a Board of Directors meeting held on June 14, 1996, Mr. Robert S.
Lee was elected Vice President of the Company. Mr. Lee joined the Company in
1986 as Project Manager, was promoted to Plant Operations Manager in 1987 and
elected Vice-President-Operations in 1989. Prior to joining the Company, Mr. Lee
was employed by RECO Industries, Inc. Mr. Lee has over twenty years experience
in steel fabrication, manufacturing and field erection.
Mr. Socha served as director of the Company from March 12, 1996,
through May 30, 1997, when he chose not to stand for reelection as a director at
the Company's annual meeting on June 14, 1996. Mr. Socha was reelected as a
director of the Company and elected as the Chairman of the Board of Directors of
the Company at a special meeting of the Board of Directors on January 14, 1997.
As Chairman, Mr. Socha's primary responsibilities include strategic planning,
acquisitions, and capital structure/dividend policy.
James W. Bohlig joined the Company's Board of Directors effective April
12, 1996. Mr. Bohlig was and is an officer of New England Waste Services, Inc.,
which owns 107,318 shares of New Common Stock (approximately 10.6% of the issued
and outstanding shares of New Common Stock).
D. Randolph Graham and Charles E. Horner joined the Company's Board of
Directors effective June 14, 1996. Mr. Graham is the Vice President and Chief
Financial Officer of MacroSonix Corp. and Mr. Horner is a local businessman.
Business of Issuer
General
The business of the Company is the design and manufacture of
incineration and pollution control equipment.
Historically, a majority of the Company's revenues have been derived
from the manufacture and sale of specialized incineration systems to dispose of
solid wastes. The Company's line of products consists of solid waste disposal
equipment which can recover the energy released by incineration, and other units
without the energy recovery feature. During 1989, the Company began
manufacturing and selling its own line of small flue gas cleaning equipment both
as a part of new orders and as retrofits of existing systems. Sales of
manufactured and related equipment are made throughout the United States and in
foreign countries, primarily to hospitals, industry and local governments.
Waste Incineration Systems
The Company's regular product line includes continuous and intermittent
feed processing systems. The Consumat(R) system employs a modular design. The
fabrication and installation of standard modules permits rapid repair or
replacement without lengthy periods of facility down time. Modules are
fabricated at the Company's factory and assembled, wired, plumbed, and
pre-checked in the factory's controlled environment before shipment for
reassembly at the customer's site.
Installation of Company systems at the customer's location is generally
the responsibility of other parties under its contract with the Company. The
Company provides technical support during installation.
The Company believes the modular approach, which permits the Company to
match multiple standard modules to the variable needs of its customers, is the
most cost effective method to convert solid waste to energy. This approach
allows economically sized units to be located in close proximity to both the
energy user and the source of solid waste; thus, solid waste can be processed
and energy produced and used without the requirement for long distance
transportation of waste or long distance transmission of the energy produced.
Systems equipped with energy conversion features permit utilization of heat
generated by waste incineration to produce usable energy in the form of steam,
hot air, hot water, or electricity. Large systems are typically composed of
multiple units which can each produce 2,700 to 32,000 pounds of steam per hour
for typical hospital or industrial waste and 1,940 to 23,400 pounds per hour for
typical municipal waste.
The Company's systems are designed to accept unprepared hospital,
industrial or municipal wastes. Continuous systems incorporate automatic loading
and ash removal and are designed for continuous 24 hour-a-day operation at
burning rates of 720 to 10,420 pounds per hour. The Company also manufactures
and sells non-continuous models which are sold without automatic ash removal
equipment and, accordingly, are not designed for continuous 24 hour-a-day
operation. These units are typically used by smaller hospitals, veterinarians or
other low volume applications.
The three significant markets for the Company's products are local
governments, hospitals, and private industry.
The Company has directed resources to meet the needs of hospitals,
industry and local governments whose typical solid waste disposal requirements
are up to 500 tons per day. Federal, state, and local air pollution laws,
designed to protect ambient air quality, in many instances specify emissions
standards that require the Company to supplement its equipment with auxiliary
emission-reducing equipment. In response, the Company has developed a dry
scrubber fabric filter emissions control system to match its incinerator model
line and actively markets both systems. The Company's development of its own
flue gas cleaning equipment allows it to increase manufacturing volume, control
quality and provide equipment in a more cost effective manner. Historically the
Company has purchased and will continue, when appropriate, to purchase certain
other flue gas cleaning equipment from other suppliers.
Marketing
The Company markets its systems through sales representatives. The
Company's employees service the orders placed by those representatives and
follow up leads for direct sales. From time to time, project developers have
purchased equipment and systems from the Company and assumed certain financial
risks such as bonding and construction financing.
Sales arrangements generally provide for progress payments beginning at
the signing of the contract. The Company and the end-user purchasing a system
generally agree to use the percentage of completion method or establish a
payment schedule based upon completion of components upon which periodic
progress payments are based. As the system is manufactured, the Company receives
periodic progress payments in accordance with the contract. If retainage is
included in the negotiated payment structure, typically a portion is due at
mechanical completion and final payment is due upon final testing of the system
or at the conclusion of such period as is specified by contract. Testing may be
involved in satisfying contract specifications respecting performance.
The Company believes that a significant portion of its future revenues
will come from international markets. Since the Company reorganization pursuant
to Chapter 11 of the Bankruptcy Code, a major portion of its renewed marketing
effort has been directed to the international market. The Company has targeted
several areas, including the Pacific Rim, Thailand, India and Turkey, to direct
its international marketing resources. Direct sales to international customers
are usually made only after the receipt of an irrevocable letter of credit.
The financial crises in the Pacific Rim during the second half of 1997
are a significant concern to the Company. This region is one of the areas that
the Company has targeted for future growth. The Company believes that the
current economic crisis will slow business in that part of the world
significantly in 1998 but that sales in that region will increase in 1999 and
remain strong in the long-term future.
Because of the downturn in the Pacific Rim market and the promulgation
of certain regulations by the U.S. Environmental Protection Agency, the Company
has concentrated its efforts in late 1997 and early 1998 on selected domestic
markets. As discussed below the Company has received three new orders in 1998,
all of which are for domestic projects.
The Company pays sales commissions to its sales representatives.
Commissions are intended to compensate representatives for services in
connection with such sales. These services typically involve locating customers
with a need for Consumat(R) equipment, assistance in coordinating installation
after a sale is made, furnishing information to the purchaser's staff and
maintaining contact with customers and potential customers.
Competition
The Company conducts its business under competitive conditions. There
are a number of organizations that offer equipment to produce energy from solid
waste. The Company chooses to compete in the small systems markets in which the
principal existing competitors for the systems the Company sells are Crawford
Equipment and Engineering, International Waste Industries, and Simonds
Manufacturing Corporation. Internationally, the Company is encountering
additional competition from foreign companies. The Company believes that the
principal bases for competition in this market are product performance and
price. The Company believes that its ability to engineer its products to the
specific needs of customers is a competitive advantage. The Company's relative
small size and limited financial resources pose competitive disadvantages which
the Company seeks to counter by aligning itself with other companies which act
as suppliers or developers.
The Company's products also may be subject to competition from
alternative medical waste treatment technologies such as autoclaving and
microwaving.
Raw Materials
The principal raw materials and supplies purchased by the Company are
steel, refractory material, pressure vessels, and electrical and hydraulic
components, all of which are readily available from several suppliers. The
Company has not experienced any shortage of raw materials in the past five
years. The Company has no special long-term arrangements with any suppliers of
raw materials needed to produce its products.
Dependence on Large Customers
Because of the dollar amount of a contract for a large hospital,
municipal or industrial system in relation to the Company's size, in any year or
financial period, the sale may account for a substantial percentage (10% or
greater) of the Company's sales. In 1997, 50.4% of the Company's sales were made
to one customer and 26.2% of the Company's sales were made to another customer.
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 energy
conversion systems.
Patents and Trademarks
The controlled air technology basic to the Company's system of solid
waste disposal and energy recovery is not protected by patents. Management of
the Company believes that the lack of patents has not increased competition
since competitors use a variety of processes to incinerate waste.
Seasonal Considerations
The Company's manufacturing business is not subject to seasonal
considerations. Occasionally, a customer will ask the Company to defer testing
until the weather improves, and bad weather in winter occasionally delays
installation of equipment.
Backlog
The nature of the Company's business is such that it does not maintain
inventories of its principal products and manufactures only pursuant to purchase
orders or contracts. At December 31, 1997, and December 31, 1996, the Company
had manufacturing and related backlog of $227,422 and $1,130,950, respectively.
Subsequent to year end 1997 the Company has received three orders totaling
approximately $1,500,000. In addition, the Company received a letter of
commitment for another $1,500,000 order that is anticipated to close in the
second quarter of 1998.
The Company believes that backlog that can be filled in approximately a
six to nine month period is the most satisfactory level attainable. See Item 6:
Backlog. The Company's backlog at any one time is not necessarily indicative of
anticipated revenues for any fiscal period.
Environmental Matters
The uncertain regulatory environment strongly influenced the Company's
business during 1997. Almost every state as well as the federal government was
either in the process of tightening quality standards or had recently tightened
them. The air quality changes included more stringent particulate emission
standards and control over acid gas and other emissions. In addition, pending
federal and other regulations affecting the disposal of ash residue remain
uncertain. New or pending regulations affect both the permitting process for
installation of the Company's equipment and the design of the equipment itself.
Customers are reluctant to order equipment and regulators are slow to
issue permits while laws are being changed. In order for an installation to be
made, environmental permit(s) must be obtained. This complex process sometimes
requires analysis of site background data in addition to the technical analysis
of the proposed equipment to be installed. Management believes that the slower
permit process, which caused many companies to delay capital expenditures,
resulted in a slowdown in orders for equipment fabrication during 1997 and 1996.
In August 1997, after several years of delay, the United States
Environmental Protection Agency ("EPA") promulgated final rules restricting
certain emissions from medical waste incinerators. Due to the cost of conforming
with these regulations, many small incinerator operators may choose to shut down
operations. Conversely, many of the operators that choose to continue operations
will require extensive modifications and upgrades to conform with the
regulations. This should provide the Company with an opportunity to address this
particular market and could generate additional revenue in the United States
over the next five years.
Prior to recent changes in regulations of air quality, Consumat(R)
equipment met most regulations without additional complex emissions control
equipment. New laws often require system design changes to include the addition
of emissions control devices. When appropriate, the Company has incorporated
these required changes into its design.
The Company's manufacturing operations are regulated by certain
federal, state, and local clean air and water laws now in effect or anticipated
to be in effect. Because the Company's manufacturing operations discharge no
waste into the air or water in its manufacturing process and produce no
regulated quantities or types of solid waste, the effects of such regulation
have been minimal to date.
Research and Development
The Company has no dedicated research and development effort. However,
in connection with modifying the Company's products to meet the specified needs
of particular customers, the Company conducts engineering and research efforts
at its facility in Mechanicsville, Virginia. This activity fosters the
improvement and development of the Company's existing products and the
broadening of the Company's product line. Research and development costs, which
are not material to the Company's operations, are included in product overhead.
Employees
At December 31, 1997, the Company employed 38 full-time employees. In
the opinion of management, the Company's labor relations are satisfactory. The
Company's workforce is not unionized.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's manufacturing plant and facility is located on a site of
15.5 acres in Mechanicsville, Hanover County, Virginia, near Richmond. This
facility, which was owned by the Company prior to 1992, was sold in July 1992 as
part of a sale-leaseback transaction. The Company has a ten year lease on the
property with two five year renewal options. In addition, the Company has the
option to repurchase the property at a predetermined price (currently $927,419).
Approximately fifty percent of this acreage is used for buildings, streets, and
utilities. The remaining portion is vacant land available for expansion and
development. The Company's plant facility, engineering offices and shops, sales
offices, and main administrative offices are located on this site. The buildings
currently utilize a total of approximately 78,000 square feet. See Note 8 to the
Audited Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
As of March 27, 1998, the Company is not a party to any pending legal
proceeding and the property of the Company is not the subject of any pending
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the Company's
1997 fiscal year.
PART II
ITEM 5. 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 common stock
for each quarterly period during the two-year period ended December 31, 1997.
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. The stated prices for the first quarter of 1996 are for the
Company's old common stock which was cancelled pursuant to the Company's Chapter
11 bankruptcy plan (see Item 1) and the prices stated for the second, third, and
fourth quarters of 1996 and for 1997 are for the Company's New Common Stock.
Bid Price
---------
1996 - Predecessor High Low
- ------------------ ---- ---
First Quarter $1 1/4 $ 3/16
1996 - Successor
Second Quarter $3 $ 3/4
Third Quarter 3 7/8
Fourth Quarter 1 3/8 7/8
1997 - Successor
First Quarter $1 7/8 $1 5/16
Second Quarter 2 3/8 1 5/8
Third Quarter 2 3/8 1 5/8
Fourth Quarter 1 1/4 3/8
There were 439 record holders of the Company's common stock as of
December 31, 1997. The Company has not previously paid any dividends on
its common stock, and there is no expectation that the Company will pay
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
As discussed in Item 1, the Company concluded the fiscal year ending
December 31, 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 2 to the Audited 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 to
reflect fair market value.
This reporting also enabled 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. The loan proceeds, received both during and in
conjunction with the Company's emergence from its Chapter 11 bankruptcy
proceeding, were used to provide working capital for operations and to
consummate the Plan. Since March 12, 1996, Sirrom has loaned an additional
$1,000,000 to the Company.
The periods and dates prior to the Effective Date are referred to as
those of the predecessor Company (the "Predecessor") while the period and dates
subsequent to the Effective Date are referred to as those of the successor
Company (the "Successor"). To facilitate a more meaningful comparison of the
1996 operating performance, the following discussion of the results of
operations is presented on a combined basis for the fiscal year ended December
31, 1996. The following table shows the 1996 combined results of the Predecessor
for the period January 1, 1996, through March 11, 1996, and the Successor for
the period March 12, 1996, through December 31, 1996.
The effects of the consummation of the Plan and the fresh-start reporting
allowed 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.
In 1997, the Company adopted 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. See Note 10 to the Audited
Financial Statements. 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 net earnings per share data has
been restated to conform with the provisions of SFAS No. 128.
Liquidity and Capital
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 energy conversion
systems. For example, contracts in process as of December 31, 1997, were
completed in the first quarter of 1998. However, the Company has entered into
three new contracts in the first quarter totaling approximately $1.5 million and
received a letter of commitment for an additional $1.5 million order. As a
result, the loss of any of these contracts or commitments could have a
significant impact on the Company's cash flows.
The financial crises which occurred in the Pacific Rim 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 the Pacific Rim in 1998, but that sales in this
region will increase in 1999 and remain strong in the long-term future. 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 Pacific Rim 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 entirely from North American contracts.
Management believes that revenues from current year operations will
provide sufficient cash flow to meet its cash requirements during 1998.
Results of Operations
<TABLE>
<CAPTION>
<S> <C>
(Successor) (Combined)
Year Ended Year Ended
December 31, December 31,
1997 Percent 1996 Percent
---- ------- ---- -------
Revenues $2,858,124 100.00% $ 5,205,237 100.00%
Cost of goods sold 2,647,756 92.64% 3,573,296 68.65%
---------- ------ --------- ------
Gross profit 210,368 7.36% 1,631,941 31.35%
Selling, general and administrative expenses
1,168,388 40.88% 968,138 18.60%
Amortization expense 54,422 1.90% 43,066 0.83%
---------- ------ --------- ------
Operating income (loss) (1,012,442) (35.42%) 620,737 11.92%
Other income (expense):
Investment income 10,311 0.36% 20,192 0.39%
Interest expense (374,371) (13.10%) (291,367) (5.60%)
Other (32,030) (1.12%) 66,686 1.28%
---------- ------ --------- ------
(396,090) (13.86%) (204,489) 3.93%
Income (loss) before fresh-start revaluation,
income taxes and extraordinary item (1,408,532) (49.28%) 416,248 7.99%
Income tax expense (154,921) (5.42%) (160,000) (3.07%)
---------- ------ --------- ------
Net income (loss) before fresh-start
revaluation and extraordinary item ($1,563,453) (54.70%) $ 256,248 4.92%
============ ======= =========== =====
</TABLE>
<PAGE>
Results of Operations -- 1997 Compared with 1996
Revenues (Successor v. Successor/Predecessor Combined). Total revenues
decreased $2,347,113 or 45.1% to $2,858,124 in 1997 from $5,205,237 in 1996. The
decrease was primarily the result of delays in a number of domestic projects,
the effects of the bankruptcy, and the economic slowdown in the Pacific Rim
region during 1997.
Cost of Goods Sold (Successor v. Successor/Predecessor Combined). Cost of
goods decreased $925,540 or 25.9% to $2,647,756 in 1997 from $3,573,296 in 1996.
Gross profit decreased $1,421,573 to $210,368 in 1997 from $1,631,941 in 1996.
The gross profit rate of 7.4% in 1997 compares to a gross profit rate of 31.4%
for 1996. This is the result of the fixed manufacturing costs being spread over
a smaller revenue base.
Selling, general and administrative expenses (Successor v.
Successor/Predecessor Combined). Selling, general and administrative expenses
increased $200,250 or 20.7% to $1,168,388 in 1997 from $968,138 in 1996. As a
percentage of revenue, selling, general and administrative expenses increased to
40.90% in 1997 from 18.6% in 1996. Total selling expenses increased $123,932 as
the result of the Company's renewed marketing effort, including the hiring of a
new Director of International Business Development and a new Director of Sales
and Marketing in mid-1996.
Interest expense (Successor v. Successor/Predecessor Combined). Interest
expense increased $83,004 to $374,371 in 1997 from $291,367 in 1996. The
increase in interest expense resulted primarily from the interest cost on the
$1,500,000 of senior long-term debt incurred during and subsequent to the
Chapter 11 bankruptcy filing plus the additional $1,000,000 in senior long-term
debt incurred by the Company in 1997. The funds from this debt were used by the
Company to satisfy the claims in its Chapter 11 Plan and to provide the Company
with the working capital it needed in 1996 and 1997 to improve the efficiency of
its manufacturing operation and increase its marketing effort as described
above.
Income taxes (Successor v. Successor/Predecessor Combined). The Company
recorded income tax expense of $154,921 in 1997 as the result of an increase in
the valuation allowance. The Company has approximately $5,000,000 of net
operating losses available from the Predecessor and Successor operations.
Generally accepted accounting principles require that the Successor record any
utilization of benefits of net operating losses that existed on the Effective
Date as a reduction to the "Reorganization in excess of amount allocable to
identifiable assets."
Net Income (Loss) and earnings (loss) per share (Successor v.
Successor/Predecessor Combined). The Successor's net loss for the year ended
December 31, 1997, was $1,563,453. The Successor's historical net income for the
period March 12, 1996, to December 31, 1996, was $217,562. The Predecessor's
historical net income for the period January 1, 1996, to March 11, 1996, was
$587,073. Of this amount, $538,480 was the gain recorded as the result of the
adoption of fresh-start reporting. The Predecessor's net income for the periods
presented were significantly impacted by the Company's Chapter 11 proceedings
and the adoption of fresh-start reporting. If the Company had emerged from its
Chapter 11 proceedings on December 31, 1995, the net income for the year ended
December 31, 1996 would have been $256,248. Additionally, the basic income per
share for 1996 would have been $.20 per common share.
Backlog
The Company manufactures only pursuant to purchase orders or contracts.
At December 31, 1997, the Company had backlog orders with a market value of
$227,422. Backlog levels indicate the expected near-term manufacturing and
related sales. Total backlog orders as of December 31, 1997, are expected to be
filled during the first two months of 1998. Since year end, the Company has
received three new orders totaling approximately $1,500,000 and a letter of
commitment for another $1,500,000 which should close in the second quarter of
1998.
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
In some cases, tighter government regulations on incineration work in the
Company's favor because the Company 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 domestic markets because of
significant pending regulations. 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, the Company's customers may require the Company to provide
supply bonds. Bonds and retainage are used to protect the customer.
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.
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.
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. Based on information and work completed to date, the Company believes
that it will be able to manage the Year 2000 transition without any material
adverse affect on its business operations, services or financial condition. The
Company is working with its customers and suppliers to ensure that they have
developed plans to address the Year 2000 issue. The Company expects that its
Year 2000 remediation efforts should be complete by early 1999.
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 1 to the
Audited Financial Statements, management does not currently expect the adoption
of the standards to affect materially the Company's financial condition.
Forward-Looking Statements
Management has included herein certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words "anticipate,"
"estimate," "should'" "expect," "believe," "intend," and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Among the factors that could
cause actual results to differ materially from those projected are the
following: business conditions and the general economy both domestically and
abroad; the federal, state, and local regulatory matters, especially as such
regulations concern the environment; and changes in the financial condition or
corporate strategy of the Company's customers. Other risks, uncertainties, and
factors that could cause actual results to differ materially than those
projected are detailed from time to time in reports filed by the Company with
the Securities and Exchange Commission, including Forms 8-K, 10-QSB, and 10-KSB.
ITEM 7. FINANCIAL STATEMENTS
See Item 13(a)(i) hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors dismissed Parham, P.C., as the Company's auditors
effective October 18, 1996. Parham, P.C., served as independent auditors of the
Company for the fiscal years ended December 31, 1995, and December 31, 1994. The
engagement of Parham, P.C., had previously been ratified on June 14, 1996, by
the shareholders of the Company.
The report of Parham, P.C., 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 principles, except that the report
contained an explanatory paragraph related to the Predecessor's reorganization
and emergence from Chapter 11 bankruptcy.
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 accounting firm 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.
KPMG Peat Marwick LLP, independent certified public accountants, was
selected by the Board of Directors as accountants and auditors for the Company
for the fiscal year ended December 31, 1996, and such selection was ratified by
the shareholders at a special meeting of shareholders held on December 12, 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this Item 9 is incorporated herein by
reference from the Company's proxy statement relating to the Company's 1998
annual meeting of shareholders to be held on June 4, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item 10 is incorporated herein by
reference from the Company's proxy statement relating to the Company's 1998
annual meeting of shareholders to be held on June 4, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 is incorporated herein by
reference from the Company's proxy statement relating to the Company's 1998
annual meeting of shareholders to be held on June 4, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 12 is incorporated herein by
reference from the Company's proxy statement relating to the Company's 1998
annual meeting of shareholders to be held on June 4, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
`
(a) Documents
(i) Financial Statements
The financial statements filed as part of this report
are listed in the Index to Financial Statements and
Schedules on page F-1 hereof.
(ii) Financial Statement Schedules
NONE REQUIRED
(iii) Exhibits filed or incorporated by reference
An Exhibit Index appears immediately after the
signatures to this report.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSUMAT ENVIRONMENTAL
SYSTEMS, INC. (Registrant)
Date: March 30, 1998 By:/s/ ROBERT L. MASSEY
--------------------
Robert L. Massey
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/ PETER T. SOCHA Chairman of the Board of Directors March 30, 1998
- ----------------------------
Peter T. Socha
/s/ ROBERT L. MASSEY Director, Chief Executive Officer, March 30, 1998
- --------------------------
Robert L. Massey and President
/s/ MARK E. HILLS Chief Financial Officer March 30, 1998
- ------------------------------
Mark E. Hills
/s/ ALEXANDER Y. HOFF Director March 30, 1998
- ------------------------
Alexander Y. Hoff
/s/ JAMES W. BOHLIG Director March 30, 1998
- ----------------------------
James W. Bohlig
/s/ D. RANDOLPH GRAHAM Director March 30, 1998
- ----------------------
D. Randolph Graham
/s/ CHARLES E. HORNER Director March 30, 1998
- --------------------------
Charles E. Horner
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2(a) Second Amended Plan of Reorganization
of Company and Modification to Second
Amended Plan of Reorganization filed
by Company and confirmed by the
United States Bankruptcy Court for
the Eastern District of Virginia,
Richmond Division, on February 28,
1996 (Incorporated by reference to
Exhibits 2(a) and 2(b) on the
Company's Current Report on Form 8-K
filed on February 28, 1996)
2(b) Mutual General Release dated March
12, 1996, by and among the Company,
Lighthouse Investment, L.L.C., Sirrom
Capital Corporation, Environmental
Systems Company, and Thomas A.
Pearson and T. Jackson Lawson,
Trustees. (Incorporated by reference
to Exhibit 2(b) to the Company's
Annual Report on Form 10-KSB filed on
March 29, 1996)
3(a) Articles of Amendment and Restatement
to the Amended and Restated Articles
of Incorporation of the Company.
(Incorporated by reference to Exhibit
3(a) to the Company's Annual Report
on Form 10-KSB filed on March 28,
1997)
3(b) Amended and Restated Bylaws of the
Company. (Incorporated by reference
to Exhibit 3(b) to the Company's
Annual Report on Form 10-KSB filed on
March 28, 1997)
4(a) Instruments defining rights of
security holders (See Exhibits 3 (a)
and 3 (b))
4(b) Specimen certificate for the
Company's common stock, par value
$1.00 per share. (Incorporated by
reference to Exhibit 4(b) to the
Company's Annual Report on Form
10-KSB filed on March 28, 1997)
4(c) Promissory Note dated March 12, 1996,
in the original principal amount of
$192,306.29 payable to Lighthouse
Investments, L.L.C. (Incorporated by
reference to Exhibit 4(c) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(d) Loan Agreement with Sirrom Capital
Corporation dated October 11, 1995.
(Incorporated by reference to Exhibit
4(e) to the Company's Annual Report
on Form 10-KSB filed on March 29,
1996)
4(e) Amendment to Loan Agreement with
Sirrom Capital Corporation dated
October 26, 1995. (Incorporated by
reference to Exhibit 4(f) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(f) Amended and Restated Secured
Promissory Note dated October 26,
1995, in the original principal
amount of $500,000 payable to Sirrom
Capital Corporation. (Incorporated by
reference to Exhibit 4(g) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(g) Loan Agreement with Sirrom Capital
Corporation dated January 16, 1996.
(Incorporated by reference to Exhibit
4(h) to the Company's Annual Report
on Form 10-KSB filed on March 29,
1996)
4(h) Secured Promissory Note dated January
16, 1996, in the original principal
amount of $500,000 payable to Sirrom
Capital Corporation. (Incorporated by
reference to Exhibit 4(i) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(i) Loan Agreement with Sirrom Capital
Corporation dated March 12, 1996.
(Incorporated by reference to Exhibit
4(j) to the Company's Annual Report
on Form 10-KSB filed on March 29,
1996)
4(j) Secured Promissory Note dated March
12, 1996, in the original principal
amount of $500,000 payable to Sirrom
Capital Corporation. (Incorporated by
reference to Exhibit 4(k) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(k) Stock Purchase Warrant dated March
12, 1996, granted to Sirrom Capital
Corporation. (Incorporated by
reference to Exhibit 4(l) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
4(l) Second Amendment to Loan Agreement
with Sirrom Investments, Inc. dated
July 17, 1997.
4(m) Secured Promissory Note dated March
26, 1997, in the original principal
amount of $500,000 payable to Sirrom
Investments, Inc.
4(n) Secured Promissory Note dated July
17, 1997, in the original principal
amount of $500,000 payable to Sirrom
Investments, Inc.
4(o) Amended and Restated Stock Purchase
Warrant dated September 30, 1997,
granted to Sirrom Investments, Inc.
10(a) Promissory Note dated December 11,
1985, in the amount of $75,000 from
Robert L. Massey to the Company
(Incorporated by reference to Exhibit
10 (e) to the Company's Annual Report
on Form 10-K filed on March 31, 1986)
10(b) Employment Contract with Robert S.
Lee dated February 12, 1991.
(Incorporated by reference to Exhibit
10 (g) to the Company's Annual Report
filed on March 31, 1993)
10(c) Purchase and Lease Agreements
relating to the sale and leaseback of
the Company's headquarters and
manufacturing facility in
Mechanicsville, Virginia
(Incorporated by reference to Exhibit
6(a)(2) of the Company's Quarterly
Report on Form 10-Q filed August 7,
1992)
10(d) Employment Contract dated February
12, 1991, between the Company and
Robert L. Massey. (Incorporated by
reference to Exhibit 10(d) to the
Company's Annual Report on Form
10-KSB filed on March 29, 1996)
10(e) Employment Contract dated June 14,
1995, between the Company and Mark E.
Hills. (Incorporated by reference to
Exhibit 10(e) to the Company's Annual
Report on Form 10-KSB filed on March
29, 1996)
10(f) Reorganized Consumat Systems, Inc.
1996 Non-Employee Directors Stock
Option Plan dated April 19, 1996.
(Incorporated by reference to Exhibit
10(f) to the Company's Annual Report
on Form 10-KSB filed on March 28,
1997)
10(g) Consumat Environmental Systems, Inc.
1996 Stock Option Plan, as amended
and restated as of December 13, 1996.
(Incorporated by reference to Exhibit
10(g) to the Company's Annual Report
on Form 10-KSB filed on March 28,
1997)
10(h) Consumat Environmental Systems, Inc.
1996 Stock Option Plan For
Nonmanagement Employees dated
December 13, 1996. (Incorporated by
reference to Exhibit 10(h) to the
Company's Annual Report on Form
10-KSB filed on March 28, 1997)
10(i) Consumat Environmental Systems, Inc.
Peter T. Socha Stock Option Plan
dated January 14, 1997. (Incorporated
by reference to Exhibit 10(i) to the
Company's Annual Report on Form
10-KSB filed on March 28, 1997)
27(a) Financial Data Schedule
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
Consumat Environmental Systems, Inc.:
We have audited the accompanying balance sheet of Consumat Environmental
Systems, Inc. (the "Successor") as of December 31, 1997 and the related
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the year then ended and for the period from March 12, 1996 to December
31, 1996. We also have audited the accompanying statements of operations,
changes in stockholders' equity (deficit) and cash flows for the period from
January 1, 1996 to March 11, 1996 of Consumat Systems, Inc. (the "Predecessor").
These financial statements are the responsibility of the Company's management.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Successor as of December
31, 1997, and its results of operations and cash flows for the year then ended
and for the period from March 12, 1996 to December 31, 1996, and the
Predecessor's results of operations and cash flows for the period from January
1, 1996 to March 11, 1996, in conformity with generally accepted accounting
principles.
On March 12, 1996, the Successor emerged from Chapter 11 reorganization. As
discussed in note 1 to the financial statements, the Successor adopted fresh
start reporting. As a result, the financial statements as of and for the year
ended December 31, 1997 and for the period from March 12, 1996 to December 31,
1996, which present the financial condition, results of operations and cash
flows of the reorganized entity, are not generally comparable to the financial
statements of prior periods.
KPMG Peat Marwick LLP
Richmond, Virginia
March 13, 1998
<PAGE>
<TABLE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Balance Sheet
December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
Assets (note 9)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 107,116
Accounts receivable and contract costs (net of allowance for doubtful accounts
of $26,147) (notes 4 and 13) 1,701,726
Note receivable 224,667
Inventories (note 5) 193,367
Other current assets 52,222
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 2,279,098
- ----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (notes 6 and 8) 571,861
Other assets (note 3) 125,727
Reorganization value in excess of amounts allocable to identifiable
assets, net of accumulated amortization of $97,488 (note 2) 990,950
- ----------------------------------------------------------------------------------------------------------------------
$ 3,967,636
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
- ----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of senior debt (note 9) $ 500,000
Current maturities of capital lease obligation (note 8) 86,736
Notes payable (notes 3 and 7) 933,967
Accounts payable 171,220
Accrued expenses 195,466
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,887,389
- ----------------------------------------------------------------------------------------------------------------------
Senior debt, excluding current maturities (note 9) 2,000,000
Capitalized lease obligation, excluding current maturities (note 8) 414,938
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,302,327
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 8, 9, 14 and 16)
Stockholders' deficit (note 11):
Preferred stock, $1 par value: authorized - 5,000,000 shares,
issued and outstanding shares - none -
Common stock, $1 par value: authorized - 25,000,000 shares;
issued and outstanding shares - 1,011,200 1,011,200
Accumulated deficit (1,345,891)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (334,691)
- ----------------------------------------------------------------------------------------------------------------------
$ 3,967,636
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Operations
December 31, 1997
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
|
Successor | Predecessor
----------------------------------- | ----------------
Period from | Period from
Year ended March 12 to | January 1 to
December 31, December 31, | March 11,
1997 1996 | 1996
- -----------------------------------------------------------------------------------------------------------------------
|
Revenues (note 13) $ 2,858,124 4,282,194 | 923,043
|
Cost of revenues 2,647,756 2,866,987 | 706,309
- -----------------------------------------------------------------------------------------------------------------------
|
Gross profit 210,368 1,415,207 | 216,734
|
Selling, general and administrative expenses 1,168,388 790,428 | 177,710
|
Amortization of reorganization value in excess |
of amounts allocable to identifiable assets 54,422 43,066 | -
- -----------------------------------------------------------------------------------------------------------------------
|
Operating income (loss) (1,012,442) 581,713 | 39,024
|
Other income (expense): |
Interest income 10,311 20,192 | -
Interest expense (374,371) (242,369) | (48,998)
Other (32,030) 18,026 | 48,660
- -----------------------------------------------------------------------------------------------------------------------
|
Total other expense, net (396,090) (204,151) | (338)
- -----------------------------------------------------------------------------------------------------------------------
|
Income (loss) before fresh start revaluation, |
income tax expense and extraordinary item (1,408,532) 377,562 | 38,686
|
Fresh start revaluation (note 2) - - | 538,480
- -----------------------------------------------------------------------------------------------------------------------
|
Income (loss) before income tax expense and |
extraordinary item (1,408,532) 377,562 | 577,166
|
Income tax expense (note 12) 154,921 160,000 | -
- -----------------------------------------------------------------------------------------------------------------------
|
Income (loss) before extraordinary item (1,563,453) 217,562 | 577,166
|
Extraordinary item-gain on debt discharge, |
net of income taxes - - | 9,907
- -----------------------------------------------------------------------------------------------------------------------
|
Net income (loss) $ (1,563,453) 217,562 | 587,073
- -----------------------------------------------------------------------------------------------------------------------
|
Basic income (loss) per common share: |
Income (loss) before extraordinary gain $ (1.24) 0.17 | 0.37
Extraordinary gain - - | 0.01
- -----------------------------------------------------------------------------------------------------------------------
|
Net income (loss) per common share (1.24) 0.17 | 0.38
- -----------------------------------------------------------------------------------------------------------------------
|
Diluted income (loss) per common share: |
Income (loss) before extraordinary gain (1.24) 0.15 | 0.37
Extraordinary gain - - | 0.01
- -----------------------------------------------------------------------------------------------------------------------
|
Net income (loss) per common share $ (1.24) 0.15| 0.38
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Changes in Stockholders' Equity (Deficit)
December 31, 1997
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Retained
Additional earnings
Common stock paid-in (accumulated
-----------------------------
Shares Amounts capital deficit) Total
- --------------------------------------------------------------------------------------------------------------------------
Predecessor:
Balances as of December 31, 1995 1,564,699 $ 4,694,097 5,208,958 (10,529,128) (626,073)
Net income for the period from
January 1 to March 11, 1996 - - - 587,073 587,073
Effects of reorganization and fresh
start reporting (1,564,699) (4,694,097) (5,208,958) 9,942,055 39,000
- --------------------------------------------------------------------------------------------------------------------------
Balances as of March 11, 1996 - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Successor:
Issuance of common stock on
March 12, 1996 1,010,000 1,010,000 - - 1,010,000
Net income for the period from
March 12 to December 31, 1996 - - - 217,562 217,562
- --------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 1996 1,010,000 1,010,000 - 217,562 1,227,562
- --------------------------------------------------------------------------------------------------------------------------
Common stock issued 1,200 1,200 - - 1,200
Net loss - - - (1,563,453) (1,563,453)
- --------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 1997 1,011,200 $ 1,011,200 - (1,345,891) (334,691)
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Cash Flows
December 31, 1997
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
|
Successor | Predecessor
----------------------------------------------------
Period from | Period from
Year ended March 12 to | January 1 to
December 31, December 31, | March 11,
1997 1996 | 1996
- -------------------------------------------------------------------------------------------------------------------------
|
Cash flows from operating activities |
Net income (loss) $ (1,563,453) 217,562 | 587,073
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operating activities: |
Depreciation and amortization 192,822 131,823 | 18,011
Deferred income taxes 154,921 155,121 | -
Fresh start revaluation - - | (538,480)
Extraordinary item - gain on debt discharge - - | (9,907)
Changes in operating assets and liabilities |
giving rise to increases (decreases) in cash: |
Accounts receivable (1,005,113) 433,776 | (584,543)
Note receivable (224,667) - | -
Inventories 32,984 (53,203) | 49,504
Other current assets 18,590 3,695 | (4,939)
Other assets (24,356) - | -
Accounts payable 107,456 19,918 | (12,275)
Accrued expenses (30,432) (254,896) | 127,274
Net change in liabilities subject to compromise - - | (342,889)
- -------------------------------------------------------------------------------------------------------------------------
|
Net cash provided by (used in) operating activities (2,341,248) 653,796 | (711,171)
|
Cash flows from investing activities: |
(Purchase) redemption of short-term investment 92,500 (92,500) | -
Purchases of property, plant and equipment (18,100) (129,039) | -
- -------------------------------------------------------------------------------------------------------------------------
|
Net cash provided by (used in) investing activities 74,400 (221,539) | -
- -------------------------------------------------------------------------------------------------------------------------
|
Cash flows from financing activities |
Proceeds from senior debt 974,500 - | 931,135
Proceeds from other borrowings 856,789 16,000 | -
Repayments on borrowings and capital lease obligations (142,787) (124,211) | (37,495)
Issuance of common stock 1,200 - | 39,000
- -------------------------------------------------------------------------------------------------------------------------
|
Net cash provided by (used in) financing activities 1,689,702 (108,211) | 932,640
- -------------------------------------------------------------------------------------------------------------------------
|
Net increase (decrease) in cash and cash equivalents (577,146) 324,046 | 221,469
Cash and cash equivalents at beginning of period 684,262 360,216 | 138,748
- -------------------------------------------------------------------------------------------------------------------------
|
Cash and cash equivalents at end of period $ 107,116 684,262 | 360,217
- -------------------------------------------------------------------------------------------------------------------------
|
Supplemental disclosure of cash flow information: |
Cash paid for: |
Interest $ 374,371 232,868 | 47,193
Noncash activities: |
Reduction of reorganization value in excess |
of identifiable assets to recognize additional |
deferred tax benefit - 60,000 | -
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1997
================================================================================
(1) Summary of Significant Accounting Policies
Description of Business
Consumat Environmental Systems, Inc. (the "Company"), incorporated in
1960, manufactures and sells incineration systems comprised of multiple
modular components and individual units of waste disposal equipment.
Beginning October 6, 1995, the Company operated as a
Debtor-In-Possession in its Chapter 11 bankruptcy proceedings (the
"Predecessor") (note 2). The Second Amended Plan of Reorganization (the
"Plan") was confirmed on February 28, 1996 and the Effective Date of
the Plan with modifications was March 12, 1996 (the "Effective Date").
The Company accounted for its reorganization using fresh start
reporting. In accordance with the Plan, the articles of incorporation
and bylaws of the Company were amended and restated effective on the
Effective Date, to change the name of the Company from Consumat
Systems, Inc. to Reorganized Consumat Systems, Inc. and effectuate the
provisions of the Plan. On December 12, 1996, the Company's name was
changed to Consumat Environmental Systems, Inc. (the "Successor").
Cash and Cash Equivalents
Cash equivalents totaled approximately $107,000 at December 31, 1997,
and consists of an overnight repurchase agreement. For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Note Receivable
Note receivable is a note related to a customer receivable, bears
interest at 12% and matures March 1998.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for all inventories.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Property and plant
under capital leases are stated at the present value of minimum lease
payments.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(1) Continued
Depreciation on equipment is calculated on the straight-line method
over the estimated useful lives of the assets. Plant held under capital
lease and leasehold improvements are amortized on a straight line basis
over the shorter of the lease term or estimated useful life of the
asset. Plant and equipment useful lives are as follows:
Land improvements 10 years
Buildings 10 years
Machinery and equipment 3-15 years
The costs of major renewals and replacements are capitalized while the
costs of maintenance and repairs are charged to operations as incurred.
When assets 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 and contract costs.
Cost of Revenues
Cost of revenues include manufacturing, engineering and field service
costs. The Company accrues estimated warranty and other costs related
to completed contracts during completion of the contract.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
<PAGE>
(1) Continued
Income (Loss) Per Common Share
In 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 (note 10). 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 net earnings per share data
has been restated to conform with the provisions of SFAS No.
128.
Stock Compensation
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price at that date. On January
1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1996 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future
<PAGE>
(1) Continued
undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the estimated fair value of the assets determined
using the present value of expected future cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a
material impact on the Company's financial position, results of
operations, or liquidity.
Pending Accounting Changes
The Company will implement SFAS No. 130, "Reporting Comprehensive
Income" in the first quarter of 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in financial statements. Comprehensive income generally
represents all changes in shareholders' equity except those resulting
from investments by or distributions to shareholders. Such changes are
not significant to the Company.
(2) 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 were stayed while the Debtor
continued business operations as Debtor-In-Possession ("DIP").
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. 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
Plan was March 12, 1996 ("Effective Date").
The Plan provided for the following:
Secured Debt
Secured debts totalling $166,401 were assumed as part of the Plan. A
new note, in the amount of $192,306, was issued to Lighthouse
Investments, LLC, in settlement of its secured debt ($213,673 as of
March 12, 1996).
<PAGE>
(2) Continued
Tax and Other Priority Claims
All Tax and Other Priority Claims, as defined, totaling $24,984 were
paid on the Effective Date.
Unsecured Trade Claimants
The holders of all trade claims, totaling $82,554 were paid fifty
percent (50%) of their claims on the Effective Date.
Unsecured Miscellaneous Claimants
The holders of all other miscellaneous claims were paid twenty-five
percent of their claims in cash and received a pro-rata share of
150,000 shares (14.85%) of the common stock in the reorganized company.
This class totalled 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 $1,148,438 as of the effective date. This intangible asset is
being amortized on a straight-line method over a twenty year period.
Fresh Start Revaluation
The fresh start revaluation of $538,480 reflects a net gain in
recording assets at their fair values and liabilities at their present
values and to record reorganization value in excess of amounts
allocable to identifiable assets.
Reorganization Value
The estimated reorganization value (the approximate fair value) of the
assets of the Company upon emergence was determined by consideration of
a number of factors, including discounted cash flow and price/earnings
and other applicable ratios believed by management to be representative
of the Company's business and industry.
<PAGE>
(2) Continued
The adjustments to the Company's balance sheet as of March 11, 1996 to
reflect the consummation of the Plan, including the related discharge
for liabilities subject to compromise under reorganization cases and to
record (i) assets at their fair values including an adjustment for the
excess of reorganization value over total fair value of assets and (ii)
liabilities at their present values are presented below as of March 11,
1996:
<TABLE>
<CAPTION>
Reorganized
Pre Confirmation Fresh balance
confirmation activities start sheet
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 222,078 138,138 - 360,216
Accounts receivable 1,112,756 - - 1,112,756
Inventories 173,148 - - 173,148
Prepaid expenses and other 74,507 17,633 - 92,140
- ----------------------------------------------------------------------------------------------------------------
Total current assets 1,582,489 155,771 - 1,738,260
Property, plant and equipment, at cost 614,418 - - 614,418
Notes receivable from officer 38,000 (18,972) - 19,028
Debt issuance costs, net of accumulated
amortization 56,359 37,945 - 94,304
Deferred income taxes - - 250,042 250,042
Reorganization value in excess of amounts
allocable to identifiable assets - - 1,148,438 1,148,438
- ----------------------------------------------------------------------------------------------------------------
$ 2,291,266 174,744 1,398,480 3,864,490
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Reorganized
Pre Confirmation Fresh balance
confirmation activities start sheet
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payables $ 43,846 - - 43,846
Other liabilities 570,114 (89,320) - 480,794
Current portion of indebtedness 78,424 60,708 - 139,132
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 692,384 (28,612) - 663,772
Liabilities subject to compromise 627,149 (627,149) - -
Indebtedness:
Senior debt 1,000,000 500,000 - 1,500,000
Long-term debt less current portion - 131,598 - 131,598
Capitalized lease obligation less current
portion 559,120 - - 559,120
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - old 4,694,097 (4,694,097) - -
Common stock - new - 1,010,000 - 1,010,000
Capital in excess of par value 5,208,958 3,873,097 (9,082,055) -
Retained earnings (deficit) (10,490,442) 9,907 10,480,535 -
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (587,387) 198,907 1,398,480 1,010,000
- ----------------------------------------------------------------------------------------------------------------
$ 2,291,266 174,744 1,398,480 3,864,490
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Related-Party Transactions
During 1994, 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 representatives. The
balance outstanding was $69,062 (Note 7) as of December 31, 1997 and is
included in notes payable in the accompanying financial statements.
Included in other assets is a note receivable from officer of $19,028
which relates to an interest free loan to an officer in conjunction
with his employment contract provided by the Company. The loan is to be
repaid out of bonuses during the officer's employment or one year
thereafter.
<PAGE>
(4) Accounts Receivable and Contract Costs
Accounts receivable consist of the following as of December 31, 1997:
Billed accounts receivable $ 165,604
Revenue recognized in excess of billings 1,550,599
Accounts receivable - other 11,670
- -----------------------------------------------------------------------------
1,727,873
Allowance for doubtful accounts 26,147
- -----------------------------------------------------------------------------
Accounts receivable and contract costs, net $ 1,701,726
- -----------------------------------------------------------------------------
For the year ended December 31, 1997, and periods from March 12, 1996
through Decemeber 31, 1996 and January 1, 1996 through March 11, 1996
revenues recognized for uncompleted contrcts totaled approximately
$2,214,000, $1,513,000 and $693,934, respectively. and progress
billings on these contracts totaled approximately $605,000 and
$1,621,000 at December 31, 1997 and 1996, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral except for international
distributors where the Company obtains irrevocable letters of credit
for portions of the contract amount. Significant concentrations of
accounts receivable are as follows at December 31, 1997:
Equipment distributors located throughout the United States $ 242,354
Equipment distributors located outside the United States 1,485,519
- -------------------------------------------------------------------------------
(5) Inventories
Inventories consist of the following at December 31, 1997:
Raw materials $ 179,604
Work in process 13,763
- -----------------------------------------------------
Total $ 193,367
- -----------------------------------------------------
<PAGE>
(6) Property, Plant and Equipment
Property, plant and equipment consist of the following at December 31,
1997:
Land improvements $ 21,350
Buildings 620,453
Machinery and equipment 2,303,625
- ----------------------------------------------------------------------
2,945,428
Less accumulated depreciation and amortization (2,531,764)
- ----------------------------------------------------------------------
Land 158,197
- ----------------------------------------------------------------------
$ 571,861
- ----------------------------------------------------------------------
Depreciation and amortization expense on property, plant and equipment
was $116,418 for 1997 and $73,564 and $13,384 for the periods from
March 12 to December 31, 1996, and January 1 to March 11, 1996,
respectively. See note 8 regarding the sale and leaseback of the
Company's manufacturing facility in 1992.
(7) Notes Payable
Notes payable consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Note payable to the bank, bearing interest at prime plus .5% (9.0% at
December 31, 1997), maturing June 1998, secured by a senior lien
on all Company properties and assignment of letter of credit
proceeds (note 14) $ 856,789
Note payable to a company, bearing interest at 10%, payable in
quarterly installments of $18,358 including interest, maturing
December 1998, secured by subordinated lien on Company's
intellectual properties 69,062
Other 8,116
- --------------------------------------------------------------------------------------------
Total $ 933,967
- --------------------------------------------------------------------------------------------
</TABLE>
(8) Capital Lease Obligations
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 recognized a
loss of $495,706. The lease has an initial
<PAGE>
(8) Continued
term of 10 years with two five-year renewal options. The Company
currently can repurchase the property for an approximate price of
$927,000, 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 included
in property, plant and equipment in the accompanying balance sheet.
At December 31, 1997, the gross amount of property and plant and
related accumulated amortization recorded under capital leases were as
follows:
Land $ 158,196
Buildings 620,454
Leasehold improvements 21,350
- ---------------------------------------------------------
800,000
Less accumulated amortization 352,992
- ---------------------------------------------------------
Total $ 447,008
- ---------------------------------------------------------
Amortization of assets held under capital leases is included with
depreciation expense in the accompanying statements of operations.
Minimum lease payments subsequent to 1997 are as follows:
1998 $ 131,787
1999 135,740
2000 139,812
2001 144,007
2002 73,068
- ----------------------------------------------------------------
624,414
Less amount representing interest 122,740
- ----------------------------------------------------------------
Present value of net minimum
lease payments 501,674
- ----------------------------------------------------------------
Less current maturities 86,736
- ----------------------------------------------------------------
Amount due after one year $ 414,938
- ----------------------------------------------------------------
<PAGE>
(9) Senior Debt
The Company has incurred Senior Debt totalling $2,500,000 as of
December 31, 1997, including $1,000,000 during 1997. This debt consists
of five $500,000 notes bearing interest at 14%, which is payable
monthly in arrears. This debt is secured by liens on all real and
personal property of the Company, including accounts receivable,
inventory, equipment and general intangibles. In conjunction with the
Company's emergence from bankruptcy, the lender was granted a stock
purchase warrant to purchase at least 250,000 shares in the Company.
This warrant, in creases by 75,000 shares per year beginning March
1999, up to a total of 475,000 shares, if the first three $500,000
notes have not been repaid. This warrant may be exercised over a period
of approximately three years commencing March 31, 1998 at an exercise
price of $.01 per share. Additionally, in conjunction with the last of
these five notes, the lender was granted a stock purchase warrant to
purchase approximately 66,000 shares of the Company's stock at $2.25
per share (the fair market value of the Company's stock at the date of
grant) if the note is not repaid according to terms (due July 1998).
Scheduled maturities of senior debt are as follows:
1998 $ 500,000
1999 -
2000 500,000
2001 1,000,000
2002 500,000
------------------------------------------------------
(10) Net Income (Loss) Per Share
The following is a reconciliation between the calculation of basic and
diluted net income (loss) per share:
<TABLE>
<CAPTION>
<S> <C>
Period from Period from
Year ended March 12, 1996 January 1, 1996
December 31, to December 31, to March 11,
1997 1996 1996
- ----------------------------------------------------------------------------------------------------------
Basic:
Numerator:
Net income (loss) $ (1,563,453) 217,562 587,073
Denominator:
Common shares outstanding 1,011,200 1,010,000 1,564,699
Minimum Senior Debt Warrant 248,564 248,457 -
- ----------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 1,259,764 1,258,457 1,564,699
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Period from Period from
Year ended March 12, 1996 January 1, 1996
December 31, to December 31, to March 11,
1997 1996 1996
- ----------------------------------------------------------------------------------------------------------
Diluted:
Numerator:
Net income (loss) $ (1,563,453) 217,562 587,073
Denominator:
Common shares outstanding 1,011,200 1,010,000 1,564,699
Minimum Senior Debt Warrant 248,564 248,457 -
Contingent Senior Debt Warrant - 223,611 -
- ----------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 1,259,764 1,482,068 1,564,699
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(11) Stock Compensation
As of the Effective Date, all options, warrants and other agreements
requiring the issuance of equity interests of the Company were
disallowed and cancelled under the Plan. As a result, stock options of
215,333 were cancelled. Option activity for the period January 1 to
March 11, 1996 was insignificant.
In 1996, the Company adopted a stock option plan ("Plan 1") which
grants stock options to non-employee directors. Plan 1 authorizes
grants of options to purchase up to 100,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Terms and
vesting schedules of all stock options are at the discretion of the
Company's Board of Directors. 50,000 stock options were granted in 1996
at an exercise price of $3.50 per share and vest over a three-year
period under Plan 1.
In 1996, the Company adopted a stock option plan ("Plan 2") pursuant to
which the Company's Board of Directors may grant stock options to
management employees. Plan 2 authorizes grants of options to purchase
up to 200,000 shares of authorized but unissued common stock. Stock
options are granted with an exercise price equal to the stock's fair
market value at the date of grant. Terms and vesting schedules of all
stock options are at the discretion of the Company's Board of
Directors. 97,500 stock options were granted in 1996 at an exercise
price of $1.56 per share and vest over a three-year period under Plan
2.
In 1996, the Company adopted a stock option plan ("Plan 3") pursuant to
which the Company's Board of Directors may grant stock options to
non-management employees. Plan 3 authorizes grants of options to
purchase up to 15,000 shares of authorized but unissued common stock.
Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant. Terms and vesting schedules of
all stock options are at the discretion of the Company's Board of
Directors. 15,000 stock options were granted in 1996 at an exercise
price of $1.56 per share and vest over a three-year period under Plan
3.
In 1997, the Company adopted a stock option plan ("Plan 4") pursuant to
which the Company's Board of Directors may grant stock options to an
employee director. Plan 4 authorizes grants of options to purchase up
to 100,000 shares of authorized but unissued common stock. Stock
options are granted with an exercise price equal to the stock's fair
market value at the date of grant. Terms and vesting schedules of all
stock options are at the discretion of the Company's Board of
Directors. 100,000 stock options were granted in 1997 at an exercise
price of $1.31 per share and become vested in seven years or earlier,
subject to certain earnings levels being achieved by the Company.
At December 31, 1997, there were no shares exercisable and there were
152,500 additional shares available for grant under the plans. The per
share weighted-average fair value of stock options granted during 1997
and 1996 was $1.22 and $1.98, respectively,
<PAGE>
(11) Continued
on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: expected dividend yield 0%,
risk-free interest rate of 6.72%, expected volatility of .76, and an
expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been equal to the pro
forma amounts indicated below:
For the year For the period from
ended March 12, 1996 to
December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------
Net income (loss):
As reported $ (1,563,453) 217,562
Pro forma (1,653,625) 198,696
Basic earnings (loss) per share:
As reported $ (1.24) 0.17
Pro forma (1.31) 0.16
- -----------------------------------------------------------------------------
Stock option activity during the period indicated is as follows:
Weighted-
Number of average
shares exercise price
- ------------------------------------------------------------------------------
Balance at March 11, 1996 - $ -
Granted 162,500 2.16
Exercised - -
- ------------------------------------------------------------------------------
Balance at December 31, 1996 162,500 2.16
Granted 100,000 1.31
Exercised - -
- ------------------------------------------------------------------------------
Balance at December 31, 1997 262,500 $ 1.84
- ------------------------------------------------------------------------------
At December 31, 1997, the range of exercise prices was $1.31 to $3.50.
The contractual life of all options is 10 years.
<PAGE>
(12) Income Taxes
Income tax expense for the year ended December 31, 1997 and the period
from March 12, 1996 to December 31, 1996 consists of the following:
Current Deferred Total
- ----------------------------------------------------------------------------
Year ended December 31, 1997:
Federal $ - 131,921 131,921
State - 23,000 23,000
- ----------------------------------------------------------------------------
$ - 154,921 154,921
- ----------------------------------------------------------------------------
Period ended December 31, 1996:
Federal $ 4,879 131,121 136,000
State - 24,000 24,000
- ----------------------------------------------------------------------------
$ 4,879 155,121 160,000
- ----------------------------------------------------------------------------
There was no income tax expense for the period from January 1, 1996 to
March 11, 1996 due to the Company's utilization of net operating loss
carryforwards.
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income
(loss) as a result of the following:
<TABLE>
<CAPTION>
Period from Period from
March 12 to January 1 to
Year ended December 31, March 11,
1997 1996 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Computed "expected" tax expense (benefit) $ (479,000) 128,000 196,000
Increase (reduction) in income taxes
resulting from:
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense 727,000 - (214,000)
State and local income taxes, net of federal
income tax benefit (53,000) 12,000 23,000
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 20,000 16,000 -
Other, net (60,079) 4,000 (5,000)
- ------------------------------------------------------------------------------------------------------------
$ 154,921 160,000 -
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(12) Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 are presented below.
Deferred tax assets:
Accounts receivable principally due to
allowance for doubtful accounts $ 10,000
Inventories 8,000
Reserve for warranty expense 17,000
Compensated absences, principally due to
accrual for financial reporting purposes 12,000
Net operating loss carryforwards 1,887,000
Capital leases obligations, principally due to
operating lease treatment for tax purposes 190,000
- -------------------------------------------------------------------------------
Total gross deferred tax assets 2,124,000
Less valuation allowance 1,948,000
- -------------------------------------------------------------------------------
Net deferred tax assets 176,000
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation (176,000)
- -------------------------------------------------------------------------------
Total gross deferred liabilities (176,000)
- -------------------------------------------------------------------------------
Net deferred tax assets $ -
- -------------------------------------------------------------------------------
The net change in the total valuation allowance for 1997 was a increase
of approximately $727,000. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income,
projections of future taxable income, and available for planning
strategy over the periods which the deferred tax assets are deductible,
management believes that it is not more likely than not that the
Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 1997. Therefore,
management has recorded a valuation allowance to reduce the net
deferred tax asset to zero at December 31, 1997.
<PAGE>
(12) Continued
Subsequently recognized tax benefits relating to the valuation
allowance established for net operating losses of the Company as of
March 11, 1996 (approximately $3.5 million remaining at December 31,
1997), would first serve to reduce the reorganization value in excess
of amount allocable to identifiable assets. Any additional amounts
recognized related to this portion of the valuation allowance would be
treated as a contribution to additional paid-in capital.
For the period from March 12, 1996 to December 31, 1996, the Company
reduced reorganization value in excess of amounts allocable to
identifiable assets by $60,000. This amount represents a corresponding
decrease in the Company's valuation allowance.
At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4,971,000 which are
available to offset future federal taxable income, if any, through
2012. Of this amount, approximately $2,052,000 is subject to an annual
limitation of approximately $205,000 due to a change in ownership of
the Company which occurred in 1992.
(13) Major Customers
For the year ended December 31, 1997, two major customers accounted for
approximately 50% and 26% of the Company's revenues and 86% and 7% of
the Company's accounts receivable, respectively. Three major customers
accounted for approximately 18%, 19% and 30%; and 19%, 55% and 0%,
respectively, of the Company's revenues for the periods March 12 to
December 31, 1996 and January 1 to March 11, 1996.
(14) Commitments and Contingencies
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 $480,000 at December
31, 1997.
(15) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable
and contract costs, accounts payable and accrued liabilities
approximate fair value because of the short maturities of those
instruments.
<PAGE>
(15) Continued
Based on borrowing rates currently available for long-term debt and
senior debt with similar terms and maturities and its recent issuance,
management believes that the carrying amount of debt approximates fair
value.
(16) Business Risks and Uncertainties
Because of the dollar amount of a contract for a large hospital,
municipal or industrial system in relation to the Company's size, in
any year or financial period, the sale may account for a substantial
percentage (10% or greater) of the Company's revenues.
SECOND AMENDMENT TO
LOAN AGREEMENT AND LOAN DOCUMENTh
THIS SECOND AMENDMENT TO LOAN AGREEMENT AND LOAN DOCUMENTS ("Amendment")
dated as of the 17th day of July, 1997, is made and entered into on the terms
and conditions hereinafter set forth, by and between CONSUMAT ENVIRONMENTAL
SYSTEMS, INC. (formerly known as Reorganized Consumat Systems, Inc.), a Virginia
corporation ("Borrower"), and SIRROM INVESTMENTS, INC., a wholly-owned
subsidiary of and successor-in-interest to Sirrom Capital Corporation, a
Tennessee corporation ("Lender").
W I T N E S S E T H:
WHEREAS, Sirrom Capital Corporation and Lender have made term loans to
Borrower in the aggregate original principal amount of ONE MILLION and No/lOOths
Dollars ($1,000,000.00) (the "Loan") on the terms and conditions set forth in
that certain Loan Agreement dated as of March 12,1996, by and between Sirrom
Capital Corporation and Borrower (as now or hereafter amended, the "Loan
Agreement"); capitalized terms used herein but not otherwise defined shall have
the meanings ascribed thereto in the Loan Agreement; and
WHEREAS, the Loan is further evidenced and secured by certain
agreements, documents and instruments as more particularly described in the Loan
Agreement and defined therein as the "Loan Documents"; and
WHEREAS, Borrower desires to borrow from Lender and Lender desires to
lend to Borrower an additional FIVE HUNDRED THOUSAND and No/lOOths Dollars
($500,000.00) (the "Additional Loan"), all on the terms and conditions set forth
in the Loan Agreement, secured and evidenced by among other things (a) a
security interest in certain personal property granted pursuant to that certain
Security Agreement dated as of March 12, 1996, by and between Sirrom Capital
Corporation and Borrower (the "Security Agreement"); and (b) a security interest
in certain intellectual property granted pursuant to that certain Collateral
Assignment of Intellectual Property dated as of March 12,1996, by and between
Sirrom Capital Corporation and Borrower.
WHEREAS, this Amendment shall amend the Loan Documents.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender hereby agree as follows:
1. The second sentence of Section 1.1 of the Loan Agreement is hereby
amended to read in its entirety as follows:
<PAGE>
The Loan shall be evidenced by (i) a promissory note (the "First
Note") in the original principal amount of $500,000.00, substantially
in the form of Exhibit A attached hereto and incorporated herein by
this reference, dated March 12, 1996, executed by Borrower in favor of
Sirrom Capital Corporation, (ii) a promissory note (the "Second Note")
in the original principal amount of $500,000.00, substantially in the
form of Exhibit A attached to that certain First Amendment to Loan
Agreement and Loan Documents dated March 26, 1997 (the "First
Amendment") and incorporated herein by this reference, of even date
with the First Amendment executed by Borrower in favor of Lender, and
(iii) a promissory note (the "Third Note") in the original principal
amount of $500,000.00, substantially in the form of Exhibit A attached
to the Amendment and incorporated herein by this reference, of even
date with the Amendment, executed by Borrower in favor of Lender (the
First Note, the Second Note, and the Third Note shall be referred to
herein collectively as the "Note").
2. The obligations of Borrower in connection with and/or relating to
the Additional Loan are further evidenced and/or secured by the Loan Documents.
3. Upon satisfaction of the conditions set forth in Section 9 hereof,
Lender shall immediately disburse the proceeds of the Additional Loan to
Borrower by wire transfer upon instructions therefor given to Lender.
4. Borrower hereby represents and warrants to Lender that all of the
representations made in Section 2.1 of the Loan Agreement are (i) now applicable
to Borrower and (ii) true and correct as of the date hereof, except as modified
or supplemented by Schedule A attached hereto and incorporated herein by this
reference.
5. The covenants and agreements in Article III of the Loan Agreement
are amended as set forth on Schedule B attached hereto and incorporated herein
by this reference.
6. Borrower hereby represents and warrants to Lender that all
representations regarding Borrower's location(s) set forth in Section 3(f) of
the Security Agreement are true and correct as of the date hereof.
7. Borrower shall pay to Lender a processing fee of $10,000.00 in
connection with the Additional Loan.
8. Borrower shall use the proceeds of the Additional Loan for (a)
working capital and (b) to finance a contract for the construction of an
incinerator.
9. The obligation of Lender to fund the Additional Loan on the date
hereof is subject to Borrower's satisfaction of each of the following:
2
<PAGE>
(a) delivery to Lender of a Secured Promissory Note executed by
Borrower, substantially in the form of Exhibit A attached hereto;
(b) delivery to Lender of a Stock Purchase Warrant executed by
Borrower, substantially in the form of Exhibit B attached hereto, together with
a warrant valuation letter in form and substance acceptable to Lender;
(c) delivery to Lender of an opinion of LeClair Ryan, as Borrower's
counsel, of even date herewith, in form and substance acceptable to Lender's
counsel, Chambliss, Bahner & Stophel, P.C.;
(d) delivery to Lender of a Corporate Secretary's Certificate in form
and substance satisfactory to Lender;
(e) delivery to Lender of resolutions of Borrower's Board of Directors
authorizing the Additional Loan, the issuance of the stock purchase warrant in
connection therewith and the reservation of the shares to be issued in
connection with such warrant;
(f) delivery to Lender of SBA forms 480, 652 and 1031 (Part A)
completed and executed by Borrower; and
(g) delivery to Lender of a Subordination Agreement executed by Central
Fidelity in form and substance satisfactory to Lender's counsel.
10. The terms "Loan Document" and "Loan Documents" as defined in the
Loan Agreement are amended to include this Amendment and any and all other
documents relating to the Loan or the Additional Loan (i) by and between
Borrower or any other person or entity and Lender or (ii) executed by Borrower
or any other person or entity in favor of Lender.
11. Except as modified and amended hereby, the Loan
Documents shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or
have caused this Amendment to be executed by their duly authorized officers, as
of the day and year first above written.
BORROWER: LENDER:
CONSUMAT ENVIRONMENTAL SIRROM INVESTMENTS, INC.,
SYSTEMS, INC., a Tennessee corporation and
a Virginia corporation assignee of Sirrom Capital
Corporation
By: /s/ Robert L. Massey By: /s/ David M. Resha
Title: /s/ President & CEO Title: COO
4
<PAGE>
SCHEDULE A
Modifications of and Supplements to
Representations and Warranties
1. The first sentence of Section 2.1(e) of the Loan Agreement is
deleted and replaced with the following:
The authorized capital stock of Borrower consists of (i)
25,000,000 shares of common stock, of which 1,011,200 shares
(the "Common Shares") are issued and outstanding, and (ii)
5,000,000 shares of preferred stock, of which 0 shares (the
"Preferred Shares") are issued and outstanding.
2. Schedule 2. l(e) to the Loan Agreement is deleted and replaced with
new Schedule 2.1(e) attached hereto.
3. Schedule 2. l(i)(A) and (B) to the Loan Agreement is deleted and
replaced with new Schedule 2. 1(i)(A) and (B) attached hereto.
4. Schedule 2.1(1) to the Loan Agreement is deleted and replaced with
new Schedule 2.1(1) attached hereto.
5. Schedule 2.1(o) to the Loan Agreement is deleted and replaced with
new Schedule 2.1(O) attached hereto.
6. Schedule 2.1(r) to the Loan Agreement is deleted and replaced with
new Schedule 2.1(r) attached hereto.
<PAGE>
<TABLE>
Schedule 2. 1(e) - Outstanding Options, Warrants, etc.
1996 Incentive Stock Option Agreement
-------------------------------------
<CAPTION>
<S> <C>
NAME ISSUE DATE # OF SHARES EXERCISE PRICE EXPIRATION
---- ---------- ----------- -------------- ----------
Robert L. Massey 12/13/96 30,000 $1.5625 12/12/2006
Robert S. Lee 12/13/96 20,000 1.5625 12/12/2006
Mark E. Hills 12/13/96 20,000 1.5625 12/12/2006
Patricia B. Bradley 12/13/96 2,500 1.5625 12/12/2006
Chris C. Brown 12/13/96 10,000 1.5625 12/12/2006
George A. Fultz 12/13/96 2,500 1.5625 12/12/2006
G. Franklin Searles 12/13/96 2,500 1.5625 12/12/2006
Andrew E. Silver 12/13/96 10,000 1.5625 12/12/2006
Directors' Stock Options
------------------------
D. Randolph Graham 06/14/96 25,000 $ 3.50 06/14/2006
Charles E. Horner 06/14/96 25,000 3.50 06/14/2006
Socha Stock Option
------------------
Peter T, Socha 01/14/97 100,000 $ 1.3125 01/13/2007
Non-Management Stock Option Plan
--------------------------------
15,000 shares for 12/13/96 500 $ 1.5625 12/12/2006
30 Non-Management
Employees
(500 share each)
</TABLE>
<PAGE>
Schedule 2. l(i)(A) - Financial Statements
See December 1996 Statement of Earnings and Balance Sheet attached
Schedule 2. 1(i)(B) - Additional Borrowings Since
There has been no additional borrowings since the attached December 1996
Statements attached, except for the borrowing by Borrower of $500,000 from
Sirrom Capital Corporation on March 26, 1997.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
(Formerly Reorganized Consumat Systems, Inc.)
<TABLE>
<CAPTION>
Balance Sheet
December 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------
Assets Successor
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 684,262
Short-term investment 92,500
Accounts receivable and contract costs (net of allowance for doubtful accounts of $10,000) (note 4) 696,613
Inventories (note 5) 226,351
Other current assets 70,812
- - ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,770,538
- - ------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (note 6 and 8) 669,893
Note receivable from officer (note 3) 19,028
Debt issuance costs, net of accumulated amortization 79,111
Deferred income taxes (note 11) 154,921
Reorganization value in excess of amounts allocable to identifiable
assets, net of accumulated amortization (note 2) 1,045,372
- - ------------------------------------------------------------------------------------------------------------------------
$ 3,738,863
- - ------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- - ------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of capital lease obligation (note 8) $ 75,082
Current maturities of long-term debt (note 7) 59,578
Accounts payable 63,764
Accrued warranty costs 61,400
Other accrued expenses 164,498
- - ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 424,322
- - ------------------------------------------------------------------------------------------------------------------------
Senior debt (note 9) 1,500,000
Long-term debt (note 7) 85,311
Capitalized lease obligation, excluding current maturities (note 8) 501,668
- - ------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,511,301
- - ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 13)
Stockholders' equity (note 10):
Preferred stock, $1 par value: authorized - 5,000,000 shares,
issued and outstanding shares - none -
Common stock, $1 par value: authorized - 25,000,000 shares;
issued and outstanding shares - 1,010,000 1,010,000
Retained earnings 217,562
- - ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,227,562
- - ------------------------------------------------------------------------------------------------------------------------
$ 3,738,863
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
(Formerly Reorganized Consumat Systems, Inc.)
<TABLE>
<CAPTION>
Statements of Income
December 31, 1996
- - -------------------------------------------------------------------------------------------------------------------
Successor Predecessor
----------------- ------------------------------------
Period from Period from
March 12 to January 1 to Year ended
December 31, March 11, December 31,
1996 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues $ 4,282,194 923,043 4,399,309
Cost of revenues 2,866,987 706,309 3,246,326
- - -------------------------------------------------------------------------------------------------------------------
Gross profit 1,415,207 216,734 1,152,983
Selling, general and administrative expenses 790,428 177,710 992,110
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 43,066 - -
- - -------------------------------------------------------------------------------------------------------------------
Operating income 581,713 39,024 160,873
Other income (expense):
Investment income 20,192 - 5,264
Interest expense (242,369) (48,998) (107,217)
Other 18,026 48,660 30,318
- - -------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (204,151) (338) (71,635)
- - -------------------------------------------------------------------------------------------------------------------
Income before fresh start revaluation, income tax
expense and extraordinary item 377,562 38,686 89,238
Fresh start revaluation (note 2) - 538,480 -
- - -------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
extraordinary item 377,562 577,166 89,238
Income tax expense 160,000 - -
- - -------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 217,562 577,166 89,238
Extraordinary item-gain on debt discharge,
net of income taxes - 9,907 -
- - -------------------------------------------------------------------------------------------------------------------
Net income $ 217,562 587,073 89,238
- - -------------------------------------------------------------------------------------------------------------------
Income per common share:
Primary $ 0.17 0.38 0.06
Fully diluted $ 0.15 0.38 0.06
- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Schedule 2.1(1) - Schedule of Debts and Liens
Lighthouse Investments, LLC
Promissory Note dated 3/12/96
Outstanding Balance: $119,475.68 including accrued interest
Security: All standard shop drawings owned by Consumat for its product lines of
waste disposal and air pollution control equipment
<PAGE>
Schedule 2. l(o) - Debts to/from Shareholders. Officers and Directors
Note Receivable from Robert L. Massey, President
Note dated 12/11/85
Original Balance: $75,000.00
Current Balance: $19,028.00
<PAGE>
Schedule 2. 1(r) - Schedule of Contracts in Excess of $25.000
Air Pollution Control Products, Inc.
Purchase Order # 008637 Change Order
Project # P-5227 Pentagon Project Addition
Contract Value: $622,400
Air Pollution Control Products, Inc.
Project # P-5261 East Carolina University Medical Center
Contract Value: $751,715
Samsung Heavy Industries Co., Inc.
Purchase Order # F7BM0002
Project # 5272 Hankook Time
Contract Value: $2,137,288
<PAGE>
SCHEDULE B
Amendments to Covenants and Agreements
None
SECURED PROMISSORY NOTE
$500,000 March 26, 1997
FOR VALUE RECE[VED, the undersigned, CONSUMAT ENVIRONMENTAL SYSTEMS,
INC., a Virginia corporation ("Maker"), promises to pay to the order of SIRROM
INVESTMIMTS, INC., a Tennessee corporation ("Payee"; Payee and any subsequent
holders hereof are hereinafter referred to collectively as "Holder"), at P.O.
Box 30443, Nashville, Tennessee 37241A)443, or at such other place as Holder may
designate to Maker in writing from time to time, the principal sum of FIVE
HUNDRED THOUSAND AND NO/100THS DOLLARS ($500,000), together with interest on the
outstanding principal balance hereof from the date hereof at the rate of
fourteen percent (14%) per annum (computed on the basis of a 360 day year);
provided, however, that Holder may charge and receive interest upon any renewal
or extension hereof at the greater of (i) the rate set out above, or (ii) any
rate agreed to by the undersigned that is not in excess of the maximum rate of
interest allowed to be charged under applicable law (the "Maximum Rate") at the
time of such renewal or extension.
Interest only on the outstanding principal balance hereof shall be due
and payable monthly, in arrears, with the first installment being payable on the
first (1st) day of May, 1997, and subsequent installments being payable on the
first (1st) day of each succeeding month thereafter until March 26, 2002 (the
"Maturity Date"), at which time the entire outstanding principal balance,
together with all accrued and unpaid interest shall be immediately due and
payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part,
at any time and from time to time, without penalty. Any such prepayments shall
be credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event that any default be made in the payment of principal or interest as
stipulated above, or in the event that any default or event of default shall
occur under that certain Loan Agreement dated as of March 12, 1996, between
Maker and Payee (as may be amended from time to time, the "Loan Agreement"),
default or event of default is not cured following the giving of any applicable
notice and within any
<PAGE>
applicable cure period set forth in said Loan Agreement; or should any default
by Maker be made in the performance or observance of any covenants or conditions
contained in any other instrument or document now or hereafter evidencing,
securing or otherwise relating to the indebtedness evidenced hereby (subject to
any applicable notice and cure period provisions that may be set forth therein);
then, and in such event, the entire outstanding principal balance of the
indebtedness evidenced hereby, together with any other sums advanced hereunder,
under the Loan Agreement and/or under any other instrument or document now or
hereafter evidencing, securing or in any way relating to the indebtedness
evidenced hereby, together with all unpaid interest accrued thereon, shall, at
the option of Holder and without notice to Maker, at once become due and payable
and may be collected forthwith, regardless of the stipulated date of maturity.
Upon the occurrence of any default as set forth herein, or in the Loan Agreement
at the option of Holder and without notice to Maker, all accrued and unpaid
interest, if any, shall be added to the outstanding principal balance hereof,
and the entire outstanding principal balance, as so adjusted, shall bear
interest thereafter until paid at an annual rate (the "Default Rate") equal to
the lesser of (i) the rate that is two percentage points (2.0%) in excess of the
above-specified interest rate, or (ii) the Maximum Rate in effect from time to
time, regardless of whether or not there has been an acceleration of the payment
of principal as set forth herein. All such interest shall be paid at the time of
and as a condition precedent to the curing of any such default.
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
actual reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest
and nonpayment are hereby waived by Maker and all other parties hereto. No
failure to accelerate the indebtedness evidenced hereby by reason of default
hereunder, acceptance of a past-due installment or other indulgences granted
from time to time, shall be construed as a novation of this Note or as a waiver
of such right of acceleration or of the right of Holder thereafter to insist
upon strict compliance with the terms of this Note or to prevent the exercise of
such right of acceleration or any other right granted hereunder or by applicable
laws. No extension of the time for payment of the indebtedness evidenced hereby
or any installment due hereunder, made by agreement with any person now or
hereafter liable for payment of the indebtedness evidenced hereby, shall operate
to release, discharge, modification, change or affect the original liability of
Maker hereunder or that of any other person now or hereafter liable for payment
of the indebtedness evidenced hereby, either in whole or in part, unless Holder
agrees otherwise in writing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
The indebtedness and other obligations evidenced by this Note are
further evidenced by (i) the Loan Agreement and (ii) certain other instruments
and documents, as may be required to protect and preserve the rights of Maker
and Payee as more specifically described in the Loan Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration of
maturity of the unpaid balance hereof
2
<PAGE>
or otherwise, shall the amount paid or agreed to be paid to Holder for the use
of the money advanced or to be advanced hereunder exceed the Maximum Rate. If,
from or circumstances whatsoever, the fulfillment of any provision of this Note
or any other agreement or instrument now or hereafter evidencing, securing or in
any way relating to the indebtedness evidenced hereby shall involve the payment
of interest in excess of the Maximum Rate, then, ipso facto, the obligation to
pay interest hereunder shall be reduced to the Maximum Rate; and if from any
circumstance whatsoever, Holder shall ever receive interest, the amount of which
would exceed the amount collectible at the Maximum Rate, such amount as would be
excessive interest shall be applied to the reduction of the principal balance
remaining unpaid hereunder and not to the payment of interest. This provision
shall control every other provision in any and all other agreements and
instruments existing or hereafter arising between Maker and Holder with respect
to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to the
extent that federal law may be applicable to the determination of the Maximum
Rate.
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective successors, legal representatives and assigns, whether
by voluntary action of the parties or by operation of law.
IN WITNESS WHEREOF, the Maker has caused this instrument to be executed
by its duly authorized officer, and its seal to be affixed and adopted, as of
the day written above.
MAKER:
CONSUMAT ENVIRONMENTAL
SYSTEMS, INC.,
a Virginia corporation
ATTEST:
By: /s/ Patricia B. Bradley
Patricia B. Bradley,
Corporate Secretary
By: /s/ Robert L. Massey
Robert L. Massey, President and
Chief Executive Officer
3
SECURED PROMISSORY NOTE
$500,000 July 17,1997
FOR VALUE RECEIVED, the undersigned, CONSUMAT ENVIRONMENTAL SYSTEMS,
INC., a Virginia corporation (formerly Reorganized Consumat Systems, Inc.)
("Maker"), promises to pay to the order of SIRROM INVESTMENTS, INC., a Tennessee
corporation and wholly-owned subsidiary of and successor-in-interest to Sirrom
Capital Corporation ("Payee"; Payee and any subsequent holders hereof are
hereinafter referred to collectively as "Holder"), at the office of Payee at
P.O. Box 30443, Nashville, Tennessee 37241-0443, or at such other place as
Holder may designate to Maker in writing from time to time, the principal sum of
FIVE HUNDRED THOUSAND AND NO/100THS DOLLARS ($500,000), together with interest
on the outstanding principal balance hereof from the date hereof at the rate of
fourteen percent (14%) per annum (computed on the basis of a 360-day year);
provided, however, that Holder may charge and receive interest upon any renewal
or extension hereof at the greater of (i) the rate set out above, or (ii) any
rate agreed to by the undersigned that is not in excess of the maximum rate of
interest allowed to be charged under applicable law (the "Maximum Rate") at the
time of such renewal or extension.
Interest only on the outstanding principal balance hereof shall be due
and payable monthly, in arrears, with the first installment being payable on the
first (1st) day of September, 1997, and subsequent installments being payable on
the first (1st) day of each succeeding month thereafter until July 16, 1998 (the
"Maturity Date"), at which time the entire outstanding principal balance,
together with all accrued and unpaid interest shall be immediately due and
payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part,
at any time and from time to time, without penalty. Any such prepayments shall
be credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event that any default be made in the payment of principal or interest as
stipulated above, or in the event that any default or event of default shall
occur under that certain Loan Agreement dated March 12,1996, between Maker and
Sirrom Capital Corporation (as may be amended from time to time, the "Loan
Agreement"), default or event of default is not cured following the giving of
any applicable notice and within any applicable cure period set forth in said
Loan Agreement; or should any default by Maker be made in the performance or
observance of any covenants or conditions contained in any other instrument or
document now or hereafter evidencing, securing or otherwise relating to the
indebtedness evidenced hereby (subject to any applicable notice and cure period
provisions that may be set forth therein); then, and in such event, the entire
outstanding principal balance of the
<PAGE>
indebtedness evidenced hereby, together with any other sums advanced hereunder,
under the Loan Agreement and/or under any other instrument or document now or
hereafter evidencing, securing or in any way relating to the indebtedness
evidenced hereby, together with all unpaid interest accrued thereon, shall, at
the option of Holder and without notice to Maker, at once become due and payable
and may be collected forthwith, regardless of the stipulated date of maturity.
Upon the occurrence of any default as set forth herein, or in the Loan Agreement
at the option of Holder and without notice to Maker, all accrued and unpaid
interest, if any, shall be added to the outstanding principal balance hereof,
and the entire outstanding principal balance, as so adjusted, shall bear
interest thereafter until paid at an annual rate (the "Default Rate") equal to
the lesser of (i) the rate that is two percentage points (2.0%) in excess of the
above-specified interest rate, or (ii) the Maximum Rate in effect from time to
time, regardless of whether or not there has been an acceleration of the payment
of principal as set forth herein. All such interest shall be paid at the time of
and as a condition precedent to the curing of any such default.
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
actual reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest
and nonpayment are hereby waived by Maker and all other parties hereto. No
failure to accelerate the indebtedness evidenced hereby by reason of default
hereunder, acceptance of a past-due installment or other indulgences granted
from time to time, shall be construed as a novation of this Note or as a waiver
of such right of acceleration or of the right of Holder thereafter to insist
upon strict compliance with the terms of this Note or to prevent the exercise of
such right of acceleration or any other right granted hereunder or by applicable
laws. No extension of the time for payment of the indebtedness evidenced hereby
or any installment due hereunder, made by agreement with any person now or
hereafter liable for payment of the indebtedness evidenced hereby, shall operate
to release, discharge, modify, change or affect the original liability of Maker
hereunder or that of any other person now or hereafter liable for payment of the
indebtedness evidenced hereby, either in whole or in part, unless Holder agrees
otherwise in writing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
The indebtedness and other obligations evidenced by this Note are
further evidenced by (i) the Loan Agreement and (ii) certain other instruments
and documents, as may be required to protect and preserve the rights of Maker
and Payee as more specifically described in the Loan Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration of
maturity of the
2
<PAGE>
unpaid balance hereof or otherwise, shall the amount paid or agreed to be paid
to Holder for the use of the money advanced or to be advanced hereunder exceed
the Maximum Rate. If, from any circumstances whatsoever, the fulfillment of any
provision of this Note or any other agreement or instrument now or hereafter
evidencing, securing or in any way relating to the indebtedness evidenced hereby
shall involve the payment of interest in excess of the Maximum Rate, then, ipso
facto, the obligation to pay interest hereunder shall be reduced to the Maximum
Rate; and if from any circumstance whatsoever, Holder shall ever receive
interest, the amount of which would exceed the amount collectible at the Maximum
Rate, such amount as would be excessive interest shall be applied to the
reduction of the principal balance remaining unpaid hereunder and not to the
payment of interest. This provision shall control every other provision in any
and all other agreements and instruments existing or hereafter arising between
Maker and Holder with respect to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to the
extent that federal law may be applicable to the determination of the Maximum
Rate.
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective successors, legal representatives and assigns, whether
by voluntary action of the parties or by operation of law.
IN WITNESS WHEREOF, the Maker has caused this instrument to be executed
by its duly authorized officer, and its seal to be affixed and adopted, as of
the day written above.
MAKER:
CONSUMAT ENVIRONMENTAL
SYSTEMS, INC.,
a Virginia corporation
ATTEST:
By: /s/ Patricia B. Bradley By: /s/ Robert L. Massey
Secretary Title: President & CEO
3
AMENDED AND RESTATED STOCK PURCHASE WARRANT
This Warrant is issued as of this 30th day of September, 1997, by
CONSUMAT ENVIRONMENTAL SYSTEMS, INC., a Virginia corporation (formerly
Reorganized Consumat Systems, Inc.) (the "Company"), to SIRROM INVESTMENTS,
INC., a Tennessee corporation (Sirrom Investments, Inc. and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder" or "Holders")
WITNESSETH:
WHEREAS, the Company and Sirrom Investments, Inc. entered into a Stock
Purchase Warrant dated July 17, 1997 (the "Original Warrant"); and
WHEREAS, this Warrant shall amend, restate and supercede the Original
Warrant.
AGREEMENT:
1. Issuance of Warrant; Term. For and in consideration of the Holder
making a loan to the Company in an amount of Five Hundred Thousand and no/l00ths
Dollars ($500,000) pursuant to the terms of a Secured Promissory Note of even
date herewith (the "Note") and the Loan Agreement dated as of March 12, 1996
(the "Loan Agreement"), and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase 66,379 shares of the Company's common stock (the
"Common Stock"), which the Company represents equals approximately 5% of the
capital stock of the Company on the date hereof, calculated on a fully diluted
basis after exercise. The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Shares." This Warrant shall be
exercisable only if the indebtedness evidenced by the Note is outstanding on
July 16, 1998, and shall be exercisable at any time and from time to time on and
after July 16, 1998 until April 30, 2001. For purposes of this Warrant the term
"fully diluted basis" shall be determined in accordance with generally accepted
accounting principles as of the date hereof.
2. Exercise Price. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be Two Dollars and Twenty-five cents ($2.25)
3. Exercise. This Warrant may be exercised by the Holder hereof (but
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon
1
<PAGE>
delivery of written notice of intent to exercise to the Company at the following
address: 8407 Erle Road, Mechanicsville, Virginia 23116 or P.O. Box 9379,
Richmond, Virginia 23227, or such other address as the Company shall designate
in a written notice to the Holder hereof, together with this Warrant and payment
to the Company of the aggregate Exercise Price of the Shares so purchased. The
Exercise Price shall be payable, at the option of the Holder, (i) by certified
or bank check, (ii) by the surrender of the Note or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price or (iii) by
the surrender of a portion of this Warrant having a fair market value equal to
the aggregate Exercise Price. Upon exercise of this Warrant as aforesaid, the
Company shall as promptly as practicable, and in any event within fifteen (15)
days thereafter, execute and deliver to the Holder of this Warrant a certificate
or certificates for the total number of whole Shares for which this Warrant is
being exercised in such names and denominations as are requested by such Holder.
If this Warrant shall be exercised with respect to less than all of the Shares,
the Holder shall be entitled to receive a new Warrant covering the number of
Shares in respect of which this Warrant shall not have been exercised, which new
Warrant shall in all other respects be identical to this Warrant. The Company
covenants and agrees that it will pay when due any and all state and federal
issue taxes which may be payable in respect of the issuance of this Warrant or
the issuance of any Shares upon exercise of this Warrant.
4. Covenants and Conditions. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended ("Securities Act") or any
state securities laws ("Blue Sky Laws") . This Warrant has been
acquired for investment purposes and not with a view to distribution or
resale and may not be pledged, hypothecated, sold, made subject to a
security interest, or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and
such applicable Blue Sky Laws, or (ii) an opinion of counsel, which
opinion and counsel shall be reasonably satisfactory to the Company and
its counsel, that registration is not required under the Securities Act
or under any applicable Blue Sky Laws (the Company hereby acknowledges
that Bass, Berry & Sims is acceptable counsel) Transfer of the shares
issued upon the exercise of this Warrant shall be restricted in the
same manner and to the same extent as the Warrant and the certificates
representing such Shares shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF
2
<PAGE>
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACTS OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect the
compliance of the issuance of this Warrant and any shares of Common Stock issued
upon exercise hereof with applicable federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may
be issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive
rights, if any, with respect thereto or to the issuance thereof. The
Company shall at all times reserve and keep available for issuance upon
the exercise of this Warrant such number of authorized but unissued
shares of Common Stock as will be sufficient to permit the exercise in
full of this Warrant.
(c) The Company covenants and agrees that it shall not sell
any shares of the Company's capital stock at a price below the fair
market value of such shares, without the prior written consent of the
Holder hereof. In the event that the Company sells 3hares of the
Company's capital stock in violation of this Section 4(c), the number
of shares issuable upon exercise of this Warrant shall be equal to the
product obtained by multiplying the number of shares issuable pursuant
to this Warrant prior to such sale by the quotient obtained by dividing
(i) the fair market value of the shares issued in violation of this
Section 4(c) by (ii) the price at which such shares were sold.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof,
this Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer. Upon such presentation for transfer, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance and delivery of Warrants under this Section.
3
<PAGE>
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights;
Preference Rights. Except as otherwise provided herein, this Warrant does not
confer upon the Holder, as such, any right whatsoever as a shareholder of the
Company. Notwithstanding the foregoing, if the Company should offer to all of
the Company's shareholders the right to purchase any securities of the Company,
then all shares of Common Stock that are subject to this Warrant shall be deemed
to be outstanding and owned by the Holder and the Holder shall be entitled to
participate in such rights offering. The Company shall not grant any preemptive
rights with respect to any of its capital stock without the prior written
consent of the Holder. The Company shall not issue any securities which entitle
the holder thereof to obtain any preference over holders of Common Stock upon
the dissolution, liquidation, winding-up, sale, merger, or reorganization of the
Company without the prior written consent of the Holder.
7. Observation Rights. The Holder of this Warrant shall (a) receive
notice of and be entitled to attend or may send a representative to attend all
meetings of the Company's Board of Directors in a non-voting observation
capacity, (b) receive copies of all notices, packages and documents provided to
members of the Company's Board of Directors for each board of directors meeting,
and (c) receive copies of all actions taken by written consent by the Company's
Board of Directors, from the date hereof until such time as the indebtedness
evidenced by the Note has been paid in full.
8. Adjustment Upon Changes in Stock.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which such Holder would have received if
this Warrant had been exercised immediately prior to such stock split,
stock dividend, recapitalization, combination of shares, or other
similar event. If any adjustment under this Section 8(a) would create a
fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and
the number of shares subject to this Warrant shall be the next higher
number of shares, rounding all fractions upward. Whenever there shall
be an adjustment pursuant to this Section 8 (a), the Company shall
forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
4
<PAGE>
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares,
separation, reorganization or liquidation of the Company, or other
similar event, occurring after the date hereof, as a result of which
shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of securities
of the Company or another entity, then the Holder exercising this
Warrant shall receive, for the aggregate price paid upon such exercise,
the aggregate number and class of shares which such Holder would have
received if this Warrant had been exercised immediately prior to such
merger, consolidation, exchange of shares, separation, reorganization
or liquidation, or other similar event. If any adjustment under this
Section 8(b) would create a fractional share of Common Stock or a right
to acquire a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares subject to this Warrant
shall be the next higher number of shares, rounding all fractions
upward. Whenever there shall be an adjustment pursuant to this Section
8(b), the Company shall forthwith notify the Holder or Holders of this
Warrant of such adjustment, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment
was calculated.
9. Put Agreement.
(a) The Company hereby irrevocably grants and issues to Holder
the right and option to sell to the Company (the "Put") this Warrant
for a period of 30 days immediately prior to the expiration thereof, at
a purchase price (the "Purchase Price") equal to the Fair Market Value
(as hereinafter defined) of the shares of Common Stock issuable to
Holder upon exercise of this Warrant.
(b) The Company shall pay to the Holder, in cash or certified
or cashier's check, the Purchase Price in exchange for the delivery to
the Company of this Warrant within thirty (30) days of the receipt of
written notice, addressed as set forth in Section 3 hereto, from the
Holder of its intention to exercise the Put.
(c) The Fair Market Value of the shares of Common Stock of the
Company issuable pursuant to this Warrant shall be the average trading
price of shares of Common Stock during the week preceding the date of
purchase or if the Common Stock is not publicly traded at such time
shall be determined as follows:
5
<PAGE>
(i) The Company and the Holder shall each appoint an
independent, experienced appraiser who is a member of a
recognized professional association of business appraisers.
The two appraisers shall determine the value of the shares of
Common Stock which would be issued upon the exercise of the
Warrant, taking into consideration that such shares would
constitute a minority interest, and would lack liquidity, and
further assuming that the sale would be between a willing
buyer and a willing seller, both of whom have full knowledge
of the financial and other affairs of the Company, and neither
of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more
than 10% more than the lowest of the appraisals, the Fair
Market Value shall be the average of the two appraisals. If
the highest of the two appraisals is 10% or more than the
lowest of the two appraisals, then a third appraiser shall be
appointed by the two appraisers, and if they cannot agree on a
third appraiser, the American Arbitration Association shall
appoint the third appraiser. The third appraiser, regardless
of who appoints him or her, shall have the same qualifications
as the first two appraisers.
(iii) The Fair Market Value after the appointment of
the third appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be
paid one-half by the Company and one-half by the Holder.
10. Registration.
(a) The Company and the holders of the Shares agree that if at
any time after the date hereof the Company shall propose to file a
registration statement with respect to any of its Common Stock on a
form suitable for a secondary offering, it will give notice in writing
to such effect to the registered holder(s) of the Shares at least
thirty (30) days prior to such filing, and, at the written request of
any such registered holder, made within ten (10) days after the receipt
of such notice, will include therein at the Company's cost and expense
(including the fees and expenses of counsel to such holder(s), but
excluding underwriting discounts, commissions and filing fees
attributable to the Shares included therein) such of the Shares as such
holder(s) shall request; provided, however, that if the offering being
registered by the Company is underwritten and if the representative of
the underwriters certifies in writing that the inclusion therein of the
Shares would
6
<PAGE>
materially and adversely affect the sale of the securities to be sold
by the Company thereunder, then the Company shall be required to
include in the offering only that number of securities, including the
Shares, which the underwriters determine in their sole discretion will
not jeopardize the success of the offering (the securities so included
to be apportioned pro rata among all selling shareholders according to
the total amount of securities entitled to be included therein owned
by each selling shareholder, but in no event shall the total number of
Shares included in the offering be less than the number of securities
included in the offering by any other single selling shareholder).
(b) Whenever required under this Agreement to use its best
efforts to effect the registration of any of the Shares, the Company
shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement
covering such Shares and use its best efforts to cause such
registration statement to be declared effective by the
Commission as expeditiously as possible and to keep such
registration effective until the earlier of (A) the date when
all Shares covered by the registration statement have been
sold or (B) two hundred seventy (270) days from the effective
date of the registration statement; provided, that before
filing a registration statement or prospectus or any amendment
or supplements thereto, the Company will furnish to each
Holder of Shares covered by such registration statement and
the underwriters, if any, copies of all such documents
proposed to be filed (excluding exhibits, unless any such
person shall specifically request exhibits), which documents
will be subject to the review of such Holders and
underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any
supplement thereto (including any documents incorporated by
reference therein) with the Commission if (A) the
underwriters, if any, shall reasonably object to such filing
or (B) if information in such registration statement or
prospectus concerning a particular selling Holder has changed
and such Holder or the underwriters, if any, shall reasonably
object.
(ii) Prepare and file with the Commission such
amendments and post-effective amendments to such registration
statement as may be necessary to keep such registration
statement effective during the period referred to in Section
10(b) (i) and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered
by such
7
<PAGE>
registration statement, and cause the prospectus to be
supplemented by any required prospectus supplement, and as so
supplemented to be filed with the Commission pursuant to Rule
424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers
of copies of such registration statement, each amendment
thereto, the prospectus included in such registration
statement (including each preliminary prospectus), each
supplement thereto and such other documents as they may
reasonably request in order to facilitate the disposition of
the Shares owned by them.
(iv) Use its best efforts to register and qualify
under such other securities laws of such jurisdictions as
shall be reasonably requested by any selling Holder and do any
and all other acts and things which may be reasonably
necessary or advisable to enable such selling Holder to
consummate the disposition of the Shares owned by such Holder,
in such jurisdictions; provided, however, that the Company
shall not be required in connection therewith or as a
condition thereto to qualify to transact business or to file a
general consent to service of process in any such states or
jurisdictions.
(v) Promptly notify each selling Holder of the
happening of any event as a result of which the prospectus
included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to
make the statements therein not misleading and, at the request
of any such Holder, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Shares, such prospectus will not
contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all
such Shares not later than the effective date of such
registration statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary
offering) and take all such other actions as the underwriters,
if any, reasonably request in order to expedite or facilitate
the disposition of such Shares (including, without limitation,
effecting a stock split or a combination of shares)
(viii) Make available for inspection by any selling
Holder or any underwriter participating in any
8
<PAGE>
disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by any such
selling Holder or underwriter, all financial and other
records, pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and
independent accountants of the Company to supply all
information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with
such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if
requested by any such person) confirm such notification in
writing: (A) the filing of the prospectus or any prospectus
supplement and the registration statement and any amendment or
post-effective amendment thereto and, with respect to the
registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments
or supplements to the registration statement or the prospectus
or for additional information, (C) the issuance or threat of
issuance by the Commission of any stop order suspending the
effectiveness of the registration statement or the initiation
of any proceedings for that purpose, and (D) the receipt by
the Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry
of any order suspending the effectiveness of the registration
statement and obtain at the earliest possible moment the
withdrawal of any such order, if entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Shares to be sold
and not bearing any restrictive legends, and enable such
Shares to be in such lots and registered in such names as the
underwriters may request at least two (2) business days prior
to any delivery of the Shares to the underwriters.
(xii) Provide a CUSIP number for all the Shares not
later than the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration
statement and any post-effective amendment
9
<PAGE>
thereto and at each closing of an underwritten offering, (A)
make such representations and warranties to the selling
Holder(s) and the underwriters, if any, with respect to the
Shares and the registration statement as are customarily made
by issuers in primary underwritten offerings; (B) use its best
efforts to obtain "cold comfort" letters and updates thereof
from the Company's independent certified public accountants
addressed to the selling Holders and the underwriters, if any,
such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters by
underwriters in connection with primary underwritten
offerings; (C) deliver such documents and certificates as may
be reasonably requested (1) by the holders of a majority of
the Shares being sold, and (2) by the underwriters, if any, to
evidence compliance with clause (A) above and with any
customary conditions contained in the underwriting agreement
or other agreement entered into by the Company; and (D) obtain
opinions of counsel to the Company and updates thereof (which
counsel and which opinions shall be reasonably satisfactory to
the underwriters, if any), covering the matters customarily
covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by the
selling Holders and underwriters or their counsel. Such
counsel shall also state that no facts have come to the
attention of such counsel which cause them to believe that
such registration statement, the prospectus contained therein,
or any amendment or supplement thereto, as of their respective
effective or issue dates, contains any untrue statement of any
material fact or omits to state any material fact necessary to
make the statements therein not misleading (except that no
statement need be made with respect to any financial
statements, notes thereto or other financial data or other
expertized material contained therein) . If for any reason the
Company's counsel is unable to give such opinion, the Company
shall so notify the Holders of the Shares and shall use its
best efforts to remove expeditiously all impediments to the
rendering of such opinion.
(xiv) Otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and
make generally available to its security holders earnings
statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than forty-five (45) days after the
end of any twelve-month period (or ninety (90) days, if such
period is a fiscal year) (A) commencing at the end of any
fiscal quarter in which the Shares are sold to underwriters in
a firm or best efforts underwritten
10
<PAGE>
offering, or (B) if not sold to underwriters in such an
offering, beginning with the first month of the first fiscal
quarter of the Company commencing after the effective date of
the registration statement, which statements shall cover such
twelve-month periods.
(c) After the date hereof, the Company shall not grant to any
holder of securities of the Company any registration rights which have
a priority greater than or equal to those granted to Holders pursuant
to this Warrant without the prior written consent of the Holder(s).
(d) The Company's obligations under Section 10(a) above with
respect to each holder of Shares are expressly conditioned upon such
holder's furnishing to the Company in writing such information
concerning such holder and the terms of such holder's proposed offering
as the Company shall reasonably request for inclusion in the
registration statement. If any registration statement including any of
the Shares is filed, then the Company shall indemnify each holder
thereof (and each underwriter for such holder and each person, if any,
who controls such underwriter within the meaning of the Securities Act)
from any loss, claim, damage or liability arising out of, based upon or
in any way relating to any untrue statement of a material fact
contained in such registration statement or any omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such
holder of the Shares expressly for use in connection with such
registration statement; and such holder shall indemnify the Company
(and each of its officers and directors who has signed such
registration statement, each director, each person, if any, who
controls the Company within the meaning of the Securities Act, each
underwriter for the Company and each person, if any, who controls such
underwriter within the meaning of the Securities Act) and each other
such holder against any loss, claim, damage or liability arising from
any such statement or omission which was made in reliance upon
information furnished in writing to the Company by such holder of the
Shares expressly for use in connection with such registration
statement.
(e) For purposes of this Section 10, all of the Shares shall
be deemed to be issued and outstanding.
11
<PAGE>
11. Certain Notices. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in
stock or make any special dividend or other distribution to the holders
of its Common Stock;
(c) offer for subscription to the holders of any of its Common
Stock any additional shares of stock in any class or other rights;
(d) reorganize1 or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or sell all
or substantially all of its assets to, another corporation; or
(e) voluntarily or involuntarily dissolve, liquidate or wind
up the affairs of the Company;
then, in any one or more of said cases, the Company shall give to the Holder of
the Warrant, by certified or registered mail, (i) at least twenty (20) days'
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same shall take
place. Any notice required by clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and any notice required by
clause (ii) shall specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
12. Severability. If any provision(s) of this Warrant or
the application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
12
<PAGE>
13. Counterparts. This Warrant may be executed in any number of
counterparts and be different parties to this Warrant in separate counterparts,
each of 'which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
CONSUMAT ENVIRONMENTAL SYSTEMS,
INC., a Virginia corporation
By: /s/ Robert L. Massey
Title: President & CEO
SIRROM INVESTMENTS, INC., a
Tennessee corporation
By: /s/ John C. Harrison
Title: VP
13
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 1,953
<ALLOWANCES> 26
<INVENTORY> 193
<CURRENT-ASSETS> 2,279
<PP&E> 3,104
<DEPRECIATION> 2,532
<TOTAL-ASSETS> 3,968
<CURRENT-LIABILITIES> 1,887
<BONDS> 0
0
0
<COMMON> 1,011
<OTHER-SE> (1,346)
<TOTAL-LIABILITY-AND-EQUITY> 3,968
<SALES> 2,858
<TOTAL-REVENUES> 2,858
<CGS> 2,648
<TOTAL-COSTS> 1,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 374
<INCOME-PRETAX> (1,409)
<INCOME-TAX> 155
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<NET-INCOME> (1,563)
<EPS-PRIMARY> (1.24)
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</TABLE>
