SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 5, 1999
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Consumat Environmental Systems, Inc.
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(Exact name of registrant as specified in its charter)
Virginia
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(State or other jurisdiction of incorporation)
0-9253 54-0720128
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(Commission file number) (IRS Employer Identification No.)
8407 Erle Road, Mechanicsville, Virginia 23116
and
Post Office Box 9379, Richmond, Virginia 23227
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 746-4120
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Item 4. Change in Registrant's Certifying Accountant
On May 5, 1999 KPMG LLP ("KPMG") resigned as the independent public
accountants for Consumat Environmental Systems, Inc. ("Consumat").
KPMG's reports on Consumat's financial statements for the two most
recent fiscal years did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles, except as follows: KPMG's auditors' report on the financial
statements of Consumat as of December 31, 1998 and for the years ended December
31, 1998 and 1997, contained a separate paragraph stating that "The Company has
suffered recurring losses from operations and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 12. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty".
During the two most recent fiscal years and through May 5, 1999, there
was no disagreement with KPMG regarding any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference thereto in its reports.
On May 4, 1999 KPMG advised the Company by letter that KPMG believed
there were two matters involving the internal control structure and its
operation they considered to be reportable conditions under standards
established by The American Institute of Certified Public Accountants
(reportable condition). The first matter referred to a lack of certain controls
over inventory management including:
o Controls over recording unit costs of inventory purchases;
o Controls over identifying and using older inventory items
and policies for recording allowances to reduce inventories
to lower of cost or market; and
o Controls over monitoring and recording physical inventory
quantity adjustments.
The second matter referred to a lack of segregation of duties in the
accounting department due to the size and staffing levels at the Company. The
Company's Chief Financial Officer handles most of the accounting functions and
these functions are generally not subject to a detailed review by a second
party.
KPMG has not met with the Audit Committee to discuss this May 4, 1999
letter from KPMG.
On April 28, 1998, KPMG advised the Company by letter that KPMG
believed there was one reportable condition, the lack of segregation of duties
in the accounting department. KPMG met with the Audit Committee on May 6, 1998
to discuss this letter. The Company has authorized KPMG to respond fully to the
inquiries of the Company's successor accountant.
The Registrant has requested that KPMG furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not it
agrees with the above statements. A copy of such letter dated May 10, 1999, is
filed as Exhibit 16 (a) to this Current Report on Form 8-K.
Item 5. Other Events
On May 7, 1999, the Company received verbal notification from Finova
Mezzanine Capital (formerly Sirrom Capital Corporation), its senior lender, that
Finova was immediately exercising its rights of foreclosure against the assets
of the Company as detailed in its various security agreements with the Company.
Prior to that date, the Company and Finova had been involved in ongoing
negotiations related to the possible financing for certain foreign contracts
that the Company currently has finalized. In addition, there were negotiations
related to the possible restructuring of its current debt and related interest
payments. A copy of a memo detailing recent discussions between Finova and the
Company is filed as Exhibit 28(a) to this Current Report on Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(c.) Exhibits:
Exhibit Number Description
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16(a) Letter from KPMG LLP dated May 10, 1999.
28(a) Memo dated May 11, 1999 to Consumat Board of
Directors regarding recent negotiations between
Consumat and Finova.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Consumat Environmental Systems, Inc.
(Registrant)
Date: May 11, 1999 /s/ ROBERT L. MASSEY
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Robert L. Massey
Chief Executive Officer
Date: May 11, 1999 /s/ MARK E. HILLS
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Mark E. Hills
Chief Accounting Officer
Exhibit 16(a)
Securities and Exchange Commission
Washington, D.C. 20549
May 10, 1999
Ladies and Gentlemen:
We were previously principal accountants for Consumat Environmental Systems,
Inc. and, under the date of March 5, 1999, we reported on the financial
statements of Consumat Environmental Systems, Inc. as of December 31, 1998 and
for the years ended December 31, 1998 and 1997. On May 5, 1999, we resigned. We
have read Consumat Environmental Systems, Inc.'s statements included under Item
4 of its Form 8-K dated May 5, 1999, and we agree with such statements.
Very truly yours,
KPMG LLP
Richmond, Virginia
Exhibit 28(a)
May 11, 1999
To: Consumat Board of Directors
From: Consumat Management
Re: Actions of Finova Capital
Below is a recap of recent events in relation to action by the Finova
Mezzanine Capital Group (formerly Sirrom):
1) April 23, 1999 - Bob Massey, Bob Lee, and Mark Hills went to
Nashville and met with representatives of Finova to present an
action plan. This included a list of actions taken to date and to
be taken , projected income forecasts based on these plans , cash
flow projections for the next 90 days and a list of near term
projects. In addition, we discussed the immediate cash crises and
the need for project financing for three foreign projects we have
coming up which will be paid from Letters of Credit. Finova asked
for some additional cash projections and information, but
indicated that they were most interested in seeing the Company go
forward for the four to six month period while the best buyer of
the assets could be found in that period.
2) April 26, 1999 - Consumat sent Finova an updated six month cash
flow projection which included the Peel project in Canada along
with some information on the projected material and labor costs
related to the projects on that list. These projections showed
positive cash flow over the six-month period, but a cash deficit
for the next 30 days.
3) April 28, 1999 - Finova sent Consumat a revised cash flow
projection assuming the foreign projects were turned down. It
continued to show positive cash flow for the six-month period but
a short term deficit.
4) April 29 and 30, 1999 - We had a couple of telephone conversations
regarding the various cash flow models. Finova agreed that the
cash flow model was improved with the foreign projects but that
they were unwilling to put ANY additional cash into the Company at
this time.
5) May 3, 1999 - Finova called Mark Hills and discussed a possible
proposal whereby Finova would provide a forebearance on the debt
for six months while the best buyer for the assets could be found.
6) May 4, 1999 - Consumat sent Finova an E-mail letter acknowledging
the proposal and agreeing that a forebearance of the debt
including interest payments for that period would improve both the
operating position and the cash flow position, thereby improving
the ability to maximize the value of the assets. Finova responded
that their forebearance proposal did not include the waiving of
interest, but only the ability to delay payments for up to 60 days
if cash flow warranted.
7) May 5, 1999 - Consumat sent an E-mail letter to Finova stating
that their proposal would do nothing to help the Company's cash
flow over this period and that Bob Lee was scheduled to go to
Canada to finalize the Peel contract on May 12 and that the city
council of Blytheville was scheduled to meet on May 18 to deal
with their incinerator project, but due to the continuing delays
of certain of these projects the Company needed an immediate
infusion of cash in order to remain viable until the next order
was received. Finova E-mailed that they would call us on Friday,
May 7 to discuss further.
8) May 7, 1999 - At 3:30 PM we called Finova to discuss the issue. We
were told that Finova did not feel that they could put any
additional money into the Company because it did not materially
improve their position in the long term. We were told that we
would receive a letter on Monday, May 10, that basically gave us
10 days and at that that time they would proceed with foreclosure
action.
9) May 10, 1999 - We talked to Finova and were told that we should
receive the letter on Tuesday, May 11 but that we had received our
ten day notice in April when we were late on our interest payments
and received notification of the acceleration of the debt. In the
meantime, a Mr. Stan Curtis would be arriving on Tuesday morning
to look over the assets and to begin their evaluation and
liquidation process.
10) May 11, 1999 - Mr. Stan Curtis arrived at approximately 8:30 AM
and spent approximately 11/2 to 2 hours reviewing asset listings
and examining the Company equipment. He left and said that he
would be reporting to Finova on his visit.
