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, 1998
[ ] 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
POST OFFICE BOX 9379, RICHMOND, VIRGINIA 23227
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(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 $3,183,162 for fiscal year
ended December 31, 1998.
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 $127,774
as of March 30, 1999 (based on the average closing bid and asked prices). At
March 30, 1999, the registrant had an aggregate of 1,014,400 shares of its
common stock issued and outstanding.
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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 1999 annual shareholders meeting to be held on June 3, 1999.
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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............................................... 4
2. DESCRIPTION OF PROPERTY............................................... 9
3. LEGAL PROCEEDINGS..................................................... 9
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 9
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............. 9
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................10
7. FINANCIAL STATEMENTS..................................................13
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..............................................13
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..........13
10. EXECUTIVE COMPENSATION................................................13
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................13
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................13
13. EXHIBITS AND REPORTS ON FORM 8-K......................................14
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTORY NOTE
The description of the Company's business in this Item 1 is qualified in
its entirety by the fact that the Company may or may not be able to continue as
a going concern. See Item 6: Liquidity and Capital.
BUSINESS OF ISSUER
GENERAL
The business of Consumat Environmental Systems, Inc. (the "Company") is
the design and manufacture of incineration and pollution control equipment. 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.
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.
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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 mid 1996, 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,
Egypt and Pakistan, 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 through at least the latter part 1999 but that sales in that
region will increase in 2000 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
concentrated its efforts in late 1997 and 1998 on selected domestic markets. As
discussed below the Company has received two new orders in 1999, both of which
are domestic projects and have received a letter of intent on an incineration
project in Pakistan.
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.
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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 this
market in the U.S., the Company compares with three or four companies of
similar size which have similar product lines. 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 1998, 44% of the Company's sales were made
to one customer and 27% 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, 1998, and December 31, 1997, the Company
had manufacturing and related backlog of $665,809 and $227,422, respectively.
Subsequent to year end 1998 the Company has received two orders totaling
approximately $270,000. In addition, the Company received a letter of intent for
another $250,000 order that is anticipated to be finalized in the second quarter
of 1999.
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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 1998. 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 1998 and 1997.
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. Subsequent to the
promulgation of these regulations, a lawsuit was filed challenging their
legality. Therefore, as of this time these regulations have not been implemented
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. Once the regulations are implemented
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
several 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, 1998, the Company employed 37 full-time employees. In
the opinion of management, the Company's labor relations are satisfactory. The
Company's workforce is not unionized.
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OFFICERS OF THE COMPANY
The following table provides information as of December 31, 1998
regarding the Company's executive officers and the positions they hold with the
Company:
Name Age Position(s)
Peter T. Socha 39 Chairman of the Board
Robert L. Massey 64 President and Chief Executive Officer
Robert S. Lee 52 Vice President
Patricia B. Bradley 56 Corporate Secretary
Mark E. Hills 39 Chief Financial Officer
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.
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 has also served as a Director of the Company since January 21, 1971. He
is a graduate of Greenville College, Greenville, Illinois, and has more than 36
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 21 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 16 years of experience in
public accounting and manufacturing management.
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.
On June 14, 1996, Mr. Robert S. Lee was elected Vice President of the Company.
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.
Alexander Y Hoff has served as a Director of the Company since August 3,
1995.
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 the common stock (approximately 10.6% of the issued
and outstanding shares). Mr. Bohlig resigned as a director as of March 2, 1999.
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.
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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 $955,242).
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 4 to the
Audited Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
As of March 30, 1999, 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
1998 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, 1998.
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.
BID PRICE
1997 HIGH LOW
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
1998
First Quarter $ 11/16 $ 1/2
Second Quarter 1/2 3/8
Third Quarter 3/8 1/4
Fourth Quarter 5/16 1/8
There were approximately 440 record holders of the Company's common
stock as of December 31, 1998.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In 1998, the Company had a net loss of $1,738,086, $1.39 per share, as
compared to a net loss of $1,563,453, $1.24 per share in 1997. The net loss for
1998 included an unusual non-cash charge of $1,039,355, $0.83 per share, related
to the write-off of the Reorganization value in excess of amounts allocable to
identifiable assets and certain other long-lived assets at December 31, 1998. An
analysis of expected future cash flows by the Company at that time resulted in a
determination that this asset would not be recoverable. This will decrease the
amortization expense related to this asset that would have been charged against
earnings in future years by approximately $54,000 per year. The Company had a
loss before income tax expense and impairment charges of $698,731 on revenues of
$3,183,162 in 1998 as compared with a loss before income tax expense and unusual
charges of $1,408,532 on revenues of $2,858,124 in 1997.
The Company was able to improve gross margins on its manufacturing
operations and significantly reduce selling, general and administrative expenses
but was not able to generate sufficient sales volume to generate net income in
1998. The economic crises in Asia that began during 1997 and continued
throughout 1998 severely impacted the Company's 1998 revenues. While the Company
is beginning to see a rise in quotation activity from that region, it believes
that it will be late in 1999 or into 2000 before significant new sales are
realized. Likewise, the uncertainty of EPA regulations has severely restricted
the construction of new incineration plants in this country. The majority of the
Company's revenue in 1998 was generated from the expansion and refurbishment of
existing facilities. In addition, two significant contracts that the Company had
in progress during 1998 were put on hold, due to financing problems of the
customers, during the fourth quarter which limited the amount of revenue the
Company was also to recognize on these two projects.
LIQUIDITY AND CAPITAL
The liquidity of the Company is a critical concern as of the end of
1998. At December 31, 1998, the Company had a working capital deficit of
approximately $228,000. While the Company has received new orders or commitments
totaling approximately $500,000 early in 1999, it is critical that significant
additional orders be received throughout the balance of the year. At this time,
the Company has several significant projects that it believes will become orders
in the second quarter of 1999, however there can be no assurance that these will
occur. In addition, in January, 1999 the Company laid off approximately 16
employees to conserve working capital until these new orders are received.
Due to the working capital deficit, the Company has had discussions with
certain parties about the possibility of obtaining project financing for certain
projects, especially foreign projects which are less likely to allow progress
payments.
As of March 30, 1999, the Company has not made its required March 1,
1999 interest payment on its Senior Debt, therefore, the lender has the right to
demand immediate repayment of the debt. The Company has had and is continuing
to have discussions with the lender regarding the possible extension or deferral
of the required interest payments for the next 30 to 60 days. At this time,
there can be no assurance that an agreement with the lender can be reached.
Because of the uncertainty of these new orders and the critical nature
of the Company's current liquidity concern, management of the Company is also
pursuing a number of other options at this time. The Company is looking at
possible equity investors, the sale of assets, a possible merger with or
acquisition by another entity, joint ventures or any other business opportunity
which would strengthen the Company's financial position. At this time, there is
no assurance that any such relationship or transaction will be found. As a
result of these conditions, there is substantial doubt about the Company's
ability to continue as a going concern.
RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997
REVENUES. Total revenues increased $325,038 or 11.4% to $3,183,162 in 1998
from $2,858,124 in 1997. The increase was primarily the result of two
significant contracts for the expansion and refurbishment of two existing
incineration facilities which had older Consumat equipment.
COST OF GOODS SOLD. Cost of goods decreased $146,138 or 5.5% to $2,501,618
in 1998 from $2,647,756 in 1997. Gross profit increased $471,176 to $681,544 in
1998 from $210,368 in 1997. The gross profit rate of 21.4% in 1998 compares to a
gross profit rate of 7.4% for 1997. This is the result of manufacturing cost
reductions as well as the fixed manufacturing costs being spread over a larger
revenue base.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $248,148 or 21.2% to $920,240 in 1998 from
$1,168,388 in 1997. As a percentage of revenue, selling, general and
administrative expenses decreased to 28.9% in 1998 from 40.9% in 1997. Total
selling expenses decreased approximately $190,000 as the result of decreases in
salaries and related travel expenses related to two former employees.
INTEREST EXPENSE. Interest expense increased $19,706 to $394,077 in 1998
from $374,371 in 1997. The increase in interest expense resulted primarily from
the additional senior debt which was carried during 1998 as well as significant
project financing which was carried in January and February of 1998.
INCOME TAXES. The Company recorded no income tax expense or benefit in
1998. At December 31, 1998 the Company has net operating loss carrryforwards for
federal income tax purposes of approximately $5,325,000 which are available to
offset future federal taxable income , if any, through 2018. Of this amount,
approximately $2,052,000 is subject to an annual limitation of approximately
$250,000 due to a change in ownership of the Company which occurred in 1992.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE. The Company's net loss
for the year ended December 31, 1998, was $1,738,086. The Company's net loss for
the year ended December 31, 1997, was $1,563,453. The basic loss per share for
1998 and 1997 were $1.39 and $1.24 per common share, respectively. The 1998 loss
included an unusual non-cash charge of $1,039,355 or $0.83 per share
related to the 1998 write-off of the Reorganization value in excess of amount
allocable to identifiable assets account and certain other long-lived assets.
BACKLOG
The Company manufactures only pursuant to purchase orders or contracts. At
December 31, 1998, the Company had backlog orders with a market value of
$665,809. Backlog levels indicate the expected near-term manufacturing and
related sales. Total backlog orders as of December 31, 1998, are expected to be
filled during the first six months of 1999. Since year end, the Company has
received two new orders totaling approximately $270,000 and a letter of intent
for another $250,000 which the Company anticipates finalizing as an order in the
second quarter of 1999.
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.
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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.
The Company has initiated a comprehensive program to test all hardware
and software systems to determine their Year 2000 compliance. To date, the
Company has tested all significant hardware components in its internal computer
network. Approximately 70% of its overall systems were determined to be
compliant at this time. Of the systems which were deemed critical to the
accounting, reporting, manufacturing and telecommunications operations,
virtually 100% of these systems were deemed compliant. All components which were
noted to be non-compliant were being used in non-critical operations. The
Company has analyzed the non-compliant systems and determined that these systems
can be upgraded or replaced. The total cost to bring these systems into
compliance is approximately $15,000 to $20,000. This should be completed by mid
1999.
In addition the Company has reviewed its current software packages to
determine their Year 2000 compliance. All software used by the Company has been
purchased from major software vendors, such as Microsoft and Great Plains, and
has been purchased or upgraded in the last two years. The Company does not use
any custom written software at this time. The Company has received certification
from each vendor who has supplied critical software to the Company certifying
its Year 2000 compliance. This includes the accounting, engineering and office
administration systems.
In addition to this internal testing and certification, the Company has
contracted with an outside company to independently test all of the Company's
critical systems to verify that all hardware and software is Year 2000
compliant. This testing should be completed by mid 1999.
As part of its comprehensive program, the Company has contacted all
third party vendors who supply critical components or services to the Company to
determine there Year 2000 readiness. As of this time, all have certified to the
Company that their products are compliant or will be compliant well before the
end of 1999. Also, the Company has reviewed and is continuing to review its own
products to determine whether there are any date critical components embedded in
these products. At this time, it is believed that there are no components
embedded in the Company's products which will cause the products to fail to
function in the Year 2000.
Based on the results of the Year 2000 compliance tests performed as of
this time, the Company does not believe that a contingency plan will be
necessary and has not prepared one.
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.
12
<PAGE>
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
Not Applicable
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 1999
annual meeting of shareholders to be held on June 3, 1999.
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 1999
annual meeting of shareholders to be held on June 3, 1999.
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 1999
annual meeting of shareholders to be held on June 3, 1999.
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 1999
annual meeting of shareholders to be held on June 3, 1999.
13
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents
(i) Financial Statements
The financial statements filed as part of this report and
appear immediately after the signatures to this report.
(ii) Financial Statement Schedules
None Required
(iii) Exhibits filed or incorporated by reference
An Exhibit Index appears immediately after the financial
statements in 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, 1999 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.
Signature Title Date
- --------- ----- ----
/s/ PETER T. SOCHA Chairman of the Board of Directors March 30, 1999
- ------------------
Peter T. Socha
/s/ ROBERT L. MASSEY Director, Chief Executive Officer, March 30, 1999
- -------------------- and President
Robert L. Massey
/s/ MARK E. HILLS Chief Financial Officer March 30, 1999
- --------------------
Mark E. Hills
/s/ ALEXANDER Y. HOFF Director March 30, 1999
- ---------------------
Alexander Y. Hoff
/s/ D. RANDOLPH GRAHAM Director March 30, 1999
- ----------------------
D. Randolph Graham
/s/ CHARLES E. HORNER Director March 30, 1999
- ---------------------
Charles E. Horner
15
<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 "Company") as of December 31, 1998 and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows for the
years ended December 31, 1998 and 1997. 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 Company as of December 31,
1998, and its results of operations and cash flows for the years ended December
31, 1998 and 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 12 to the
financial statements, 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.
/s/ KPMG LLP
Richmond, Virginia
March 5, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Balance Sheet
December 31, 1998
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 17,313
Accounts receivable and contract costs (net of allowance for doubtful
accounts of $11,392) (notes 2, 5 and 9) 373,207
Inventories (note 5) 139,430
Other current assets 75,865
--------------
Total current assets 605,815
--------------
Property, plant and equipment, net (notes 3, 4 and 5) 372,264
Other assets 101,218
--------------
$ 1,079,297
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of senior debt (note 5) $ 250,000
Current maturities of capital lease obligation (note 4) 99,694
Notes payable 20,870
Accounts payable 144,025
Accrued expenses 319,100
--------------
Total current liabilities 833,689
Senior debt, excluding current maturities (note 5) 2,000,000
--------------
Capital lease obligation, excluding current maturities (note 4) 315,185
--------------
Total liabilities 3,148,874
Stockholders' deficit (note 7):
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 - 1,014,400 1,014,400
Accumulated deficit (3,083,977)
-------------
Total stockholders' deficit (2,069,577)
Commitments and contingencies (notes 4, 5, 10 and 12)
--------------
$ 1,079,297
==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Operations
December 31, 1998 and 1997
1998 1997
-------------- --------------
<S> <C> <C>
Revenues (notes 2 and 9) $ 3,183,162 2,858,124
Cost of revenues 2,501,618 2,647,756
-------------- --------------
Gross profit 681,544 210,368
Selling, general and administrative expenses 920,240 1,168,388
Impairment loss on long-lived assets (note 13) 1,039,355 --
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 54,422 54,422
-------------- --------------
Operating loss (1,332,473) (1,012,442)
-------------- --------------
Other income (expense):
Interest income 11,529 10,311
Interest expense (394,077) (374,371)
Other (23,065) (32,030)
-------------- --------------
Total other expense, net (405,613) (396,090)
-------------- --------------
Loss before income tax expense (1,738,086) (1,408,532)
Income tax expense (note 8) -- 154,921
-------------- --------------
Net loss $ (1,738,086) (1,563,453)
============== ==============
Basic loss per common share $ (1.39) (1.24)
============== ==============
Diluted loss per common share $ (1.39) (1.24)
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Changes in Stockholders' Equity (Deficit)
December 31, 1998 and 1997
RETAINED
COMMON STOCK EARNINGS
---------------------------- (ACCUMULATED
SHARES AMOUNTS DEFICIT) TOTAL
------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
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)
Common stock issued 3,200 3,200 - 3,200
Net loss - - (1,738,086) (1,738,086)
------------- ------------- ---------------- --------------
Balances as of December 31,
1998 1,014,400 $ 1,014,400 (3,083,977) (2,069,577)
============= ============= ================ ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Statements of Cash Flows
December 31, 1998 and 1997
1998 1997
-------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,738,086) (1,563,453)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 180,728 192,822
Write-down of impaired long-lived assets 1,039,355 --
Deferred income taxes -- 154,921
Changes in operating assets and liabilities
giving rise to increases (decreases) in cash:
Accounts receivable 1,328,519 (1,005,113)
Note receivable 224,667 (224,667)
Inventories 53,937 32,984
Other current assets (23,643) 18,590
Other assets -- (24,356)
Accounts payable (27,195) 107,456
Accrued expenses 123,634 (30,432)
-------------- --------------
Net cash provided by (used in) operating
activities 1,161,916 (2,341,248)
-------------- --------------
Cash flows from investing activities:
Purchase of short-term investment -- 92,500
Purchases of property, plant and equipment (5,028) (18,100)
-------------- --------------
Net cash provided by (used in) investing
activities (5,028) 74,400
-------------- --------------
Cash flows from financing activities
Proceeds from senior debt -- 974,500
Proceeds from other borrowings -- 856,789
Repayments on borrowings and capital lease obligations (1,249,891) (142,787)
Issuance of common stock 3,200 1,200
-------------- --------------
Net cash provided by (used in) financing
activities (1,246,691) 1,689,702
-------------- --------------
Net decrease in cash and cash equivalents (89,803) (577,146)
Cash and cash equivalents at beginning of year 107,116 684,262
-------------- --------------
Cash and cash equivalents at end of year $ 17,313 107,116
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 394,077 374,371
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
Notes to Financial Statements
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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
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.
(B) CASH AND CASH EQUIVALENTS
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.
(C) INVENTORIES
Inventories of raw materials are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method for
all inventories.
(D) 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.
Depreciation on machinery and 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.
<PAGE>
(E) 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.
(F) 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.
(G) 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.
(H) STOCK COMPENSATION
The Company accounts for its stock option plan in accordance with the
provisions of 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 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.
(I) 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.
<PAGE>
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, (SFAS
No. 121). 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 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.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(K) PENDING ACCOUNTING CHANGES
The Company will implement SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, in the first quarter of 2000. The
Company expects there to be no impact on the financial statements as
a result of this adoption.
The American Institute of Certified Public Accountants Statement of
Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE, and SOP 98-5, REPORTING ON
THE COSTS OF START-UP ACTIVITIES will be adopted in 1999. SOP 98-1
and SOP 98-5 are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
(2) ACCOUNTS RECEIVABLE AND CONTRACT COSTS
Accounts receivable consist of the following as of December 31, 1998:
Billed accounts receivable $ 392,921
Excess of billings over revenue recognized (9,322)
Accounts receivable - other 1,000
---------
384,599
Allowance for doubtful accounts 11,392
---------
Accounts receivable and contract costs, net $ 373,207
=========
Revenues recognized for uncompleted contracts totaled approximately
$2,294,000 and $2,214,000 at December 31, 1998 and 1997, respectively.
Progress billings on these contracts totaled approximately $2,333,000 and
$605,000 at December 31, 1998 and 1997, 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.
<PAGE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1998:
Land and buildings under capital lease $ 800,000
Machinery and equipment 2,308,653
-----------
3,108,653
Less accumulated depreciation and amortization 2,736,389
-----------
$ 372,264
===========
Depreciation and amortization expense on property, plant and equipment was
$101,798 and $116,418 for 1998 and 1997, respectively. See note 4
regarding the sale and leaseback of the Company's manufacturing facility
in 1992.
(4) 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 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.
Amortization of assets held under capital leases is included with
depreciation expense in the accompanying statements of operations.
Accumulated amortization amounted to $417,172 at December 31, 1998.
<PAGE>
Minimum lease payments subsequent to 1998 are as follows:
1999 $135,740
2000 139,812
2001 144,007
2002 73,068
--------
492,627
Less amount representing interest 77,748
--------
Present value of net minimum lease
payments 414,879
--------
Less current maturities of
capital lease obligation 99,694
--------
Capital lease obligation, excluding
current maturities $315,185
========
(5) SENIOR DEBT
The Company has incurred Senior Debt totaling $2,250,000 as of December
31, 1998. This debt consists of one $2,000,000 note due March 2001 and one
$250,000 note due July 1999, with both 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,
inventories, 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 increases by 75,000 shares per year beginning March 1999, up to a
total of 475,000 shares, if the $2,000,000 note has not been repaid. This
warrant may be exercised over a period of approximately three years
commencing March 31, 1999 at an exercise price of $.01 per share. In
conjunction with extensions of due dates of certain of the senior debt,
stock purchase warrants of 33,190 were issued. These warrants expire April
2001 and are exercisable at $.25 per share.
<PAGE>
(6) NET LOSS PER SHARE
The following is a reconciliation of the calculation of basic and diluted
net loss per share:
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
Basic:
Numerator:
Net Loss $ (1,738,086) (1,563,453)
Denominator:
Common shares outstanding 1,012,506 1,011,200
Minimum Senior Debt warrant 241,614 248,564
---------- ---------
Weighted average common
shares outstanding $ 1,254,120 1,259,764
========== =========
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
Diluted:
Numerator:
Net loss $ (1,738,086) (1,563,453)
Denominator:
Common shares outstanding 1,012,506 1,011,200
Minimum Senior Debt warrant 241,614 248,564
---------- ---------
Weighted average common
shares outstanding $ 1,254,120 1,259,764
========== =========
(7) STOCK COMPENSATION
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. 20,000 stock options were
forfeited in 1998 and an additional 25,000 stock options were granted in
1998 at an exercise price of $.47 per share and vest over a three-year
period.
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.
<PAGE>
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. One hundred thousand
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, 1998, there were 111,667 shares exercisable at the
weighted-average exercise price of $2.20 and there were 147,500 additional
shares available for grant under the plans. The per share weighted-average
fair value of stock options granted during 1998 and 1997 was $.40 and
$1.22, respectively, 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 5.74% and 6.72%,
respectively, expected volatility of .67, 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 loss and loss per share
would have been equal to the pro forma amounts indicated below:
1998 1997
----------- ------------
Net loss:
As reported $(1,738,086) (1,563,453)
Pro forma (1,813,986) (1,653,625)
Basic loss per share:
As reported $ (1.39) (1.24)
Pro forma (1.45) (1.31)
=========== ==========
<PAGE>
Stock option activity during the period indicated is as follows:
Weighted-
average
Number of exercise
shares price
--------- ---------
Balance at December 31, 1996 162,500 $ 2.16
Granted 100,000 1.31
--------- ---------
Balance at December 31, 1997 262,500 1.84
Granted 25,000 0.47
Forfeited (20,000) 1.56
--------- ---------
Balance at December 31, 1998 267,500 1.73
========= =========
At December 31, 1998, the range of exercise prices was $.47 to $3.50.
The contractual life of all options is 10 years.
(8) INCOME TAXES
Income tax expense for the year ended December 31, 1997 consists of
deferred income taxes.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax loss as a result of the
following:
1998 1997
-------- ---------
Computed "expected" tax benefit $ (591,000) $ (479,000)
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 195,000 727,000
State and local income taxes, net
of federal income tax benefit (69,000) (53,000)
Amortization and recognition of
impairment loss of reorganization
value in excess of amounts allocable
to identifiable assets 376,000 20,000
Other, net 89,000 (60,079)
-------- --------
$ - 154,921
======== ========
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 are presented below.
Deferred tax assets:
Accounts receivable principally due to
allowance for doubtful accounts $ 4,000
Inventories 19,000
Reserve for warranty expense 15,000
Compensated absences, principally due to
accrual for financial reporting purposes 42,000
Net operating loss carryforwards 2,022,000
Capital leases obligations, principally due to
operating lease treatment for tax purposes 158,000
---------
Total gross deferred tax assets 2,260,000
Less valuation allowance 2,143,000
---------
Net deferred tax assets 117,000
---------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation (117,000)
---------
Total gross deferred liabilities (117,000)
---------
Net deferred tax assets $ -
=========
The net change in the total valuation allowance for 1998 was a increase of
approximately $195,000. 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, 1998. Therefore, management has recorded a valuation
allowance to reduce the net deferred tax asset to zero at December 31,
1998.
Subsequently recognized tax benefits relating to the valuation allowance
established for net operating losses of the Company as of March 11, 1996
(approximately $3.4 million remaining at December 31, 1998), would be
treated as a contribution to additional paid-in capital.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $5,325,000 which are
available to offset future federal taxable income, if any, through 2018.
Of this amount, approximately $2,052,000 is subject to an annual
limitation of approximately $205,000 through 2007 due to a change in
ownership of the Company, which occurred in 1992.
<PAGE>
(9) MAJOR CUSTOMERS
For the year ended December 31, 1998, three major customers accounted for
approximately 44%, 27% and 11% of the Company's revenues and 25%, 46% and
11% of the Company's accounts receivable, respectively. 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. Substantially all revenues for the year ended
December 31, 1998 related to domestic customers. For the year ended
December 31, 1997, one customer in Korea accounted for approximately 51%
of the Company's revenues. The remaining 49% of the Company's revenues
related to domestic customers.
(10) 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,
1998.
(11) 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.
Based on borrowing rates currently available to the Company for notes
payable and senior debt with similar terms and maturities and its recent
issuance, management believes that the carrying amount of debt
approximates fair value.
(12) NATURE OF BUSINESS AND LIQUIDITY
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.
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.
<PAGE>
The lingering effects of 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 slowed business in the Pacific
Rim in 1998, but that sales in this region will increase in the latter
portion of 1999 and remain strong in the long-term future. The Company
anticipates that it will continue to improve its liquidity through recent
regulations promulgated by the U.S. Environmental Protection Agency
(USEPA) which 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 other areas
of Asia and selected domestic markets.
The Company's financial statements for the year ended December 31, 1998
have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in
the normal course of business. As of and for the year ended December 31,
1998, the Company had a stockholders' deficit of approximately $2.1
million, negative working capital of approximately $227,874 and a net loss
of $1,738,086. While the Company has received new orders or commitments
totaling approximately $500,000 early in 1999, it is critical that
significant additional orders be received throughout the balance of the
year. At this time, the Company has several significant projects that it
believes will become orders in the second quarter of 1999, however, there
can be no assurance that these will occur.
As of March 30, 1999, the Company has not its required March 1, 1999
interest payment on its Senior Debt, therefore, the lender has the right
to demand immediate repayment of the debt. The Company has had and is
continuing to have discussions with the lender regarding the possible
extension or deferral of the required interest payments for the next 30
to 60 days. At this time, there can be no assurance that an agreement with
the lender can be reached.
Due to the working capital deficit and the default on the Senior Debt
interest payment, the Company has had discussions with certain parties
about the possibility of obtaining project financing for certain projects,
especially foreign projects which are less likely to allow progress
payments.
Because of the uncertainty of these new orders and the critical nature of
the Company's current liquidity concern, management of the Company is also
pursuing a number of other options at this time. The Company is looking at
possible equity investors, the sale of assets, a possible merger with or
acquisition by another entity, joint ventures or any other business
opportunity which would strengthen the Company's financial position. At
this time, there is no assurance that any such relationship or transaction
will be found. As a result of these conditions, there is substantial
doubt about the Company's ability to continue as a going concern.
(13) ASSET IMPAIRMENT
Due to the losses incurred by the Company in 1998 and the Company's
inability to project adequate future cash flows to recover long-lived
assets, the Company determined that the likelihood of recovery of certain
long-lived assets was impaired in accordance with SFAS 121. As a result,
the Company recognized an impairment loss of $1,039,355, which reduced the
reorganization value in excess of amounts allocable to identifiable net
assets to $0 and reduced the value of certain capital lease assets. The
Company also reviewed other long-lived assets for impairment in the
current year.
<PAGE>
EXHIBIT NO. DESCRIPTION
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)
1
<PAGE>
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.
2
<PAGE>
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.
4(p) Third Amendment to Secured Promissory Note
between Consumat Environmental Systems, Inc.
and Sirrom Investments, Inc. dated November
15, 1998
4(q) Third Amendment to Stock Purchase Warrant
between Consumat Environmental Systems, Inc.
and Sirrom Investments, Inc. dated November
15, 1998
4(r) Consolidated, Amended and Restated Secured
Promissory Note in the principal amount of
$2,000,000 dated November 15, 1998 payable to
Sirrom Investments, Inc.
4(s) Third Amendment to Loan Agreement and Loan
Documents between Consumat Environmental
Systems, Inc. and Sirrom Investments, Inc.
dated November 15, 1998
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)
3
<PAGE>
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
4
EXHIBIT 4(P)
THIRD AMENDMENT TO SECURED PROMISSORY NOTE
This Third Amendment to Secured Promissory Note ("Amendment") is made and
entered into as of the 15th day of November, 1998, by and between CONSUMAT
ENVIRONMENTAL SYSTEMS, INC. ("Borrower"), a Virginia corporation, and SIRROM
INVESTMENTS, INC. ("Lender"), a Tennessee corporation.
W I T N E S S E T H:
WHEREAS, Borrower has previously executed that Secured Promissory Note
dated July 17, 1997, payable to order of Lender in the original principal amount
of $500,000, as amended by that First Amendment to Promissory Note dated as of
June 16, 1998, and that Second Amendment to Promissory Note dated as of August
16, 1998(the "Note");
WHEREAS, Lender and Borrower wish to amend the Note;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are acknowledged, it is agreed as follows:
1. Amendment of Note. The Note is hereby amended by deleting the second
paragraph on page one and substituting the following therefor:
One payment of principal in the amount of $250,000.00 shall
become due and payable on July 16, 1998. Interest on the
outstanding principal balance 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 day of each succeeding month thereafter
until July 15, 1999 (the "Maturity Date"), at which time the
entire outstanding principal balance, together with accrued but
unpaid interest, shall be immediately due and payable in full.
2. Full Force and Effect. The Note remains in full effect, as amended
hereby.
3. Governing Law. This Amendment shall be governed by, and construed and
interpreted in accordance with, the internal laws of the State of Tennessee
1
<PAGE>
.
Executed as of the date stated above.
SIRROM INVESTMENTS, INC.
By:
Title:
ATTEST: CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
By:_____________________
Secretary By:
Title:
EXHIBIT 4(Q)
THIRD AMENDMENT TO STOCK PURCHASE WARRANT
This Third Amendment to Stock Purchase Warrant ("Amendment") is made and
entered into as of the 15th day of November, 1998, by and between CONSUMAT
ENVIRONMENTAL SYSTEMS, INC. ("Borrower"), a Virginia corporation, and SIRROM
INVESTMENTS, INC. ("Lender"), a Tennessee corporation.
W I T N E S S E T H:
WHEREAS, Borrower and Lender have previously executed that
Amended and Restated Stock Purchase Warrant dated September 30, 1997 (the
"Warrant"), pursuant to which Lender is entitled to acquire shares of the
Borrower in accordance with the terms and conditions set forth therein;
WHEREAS, the Warrant was amended by that First Amendment to Stock
Purchase Warrant dated as of June 16, 1998, and that Second Amendment to Stock
Purchase Warrant as of August 16, 1998.
WHEREAS, Lender and Borrower wish to further amend the Warrant;
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are acknowledged, it is agreed as follows:
1. Exercise Price. The Warrant is hereby amended by deleting Section 2 on
page one and substituting the following therefor:
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 twenty-five cents ($0.25)
2. Full Force and Effect. The Warrant remains in full effect, as amended
hereby.
3. Governing Law. This Amendment shall be governed by, and construed and
interpreted in accordance with, the internal laws of the State of Tennessee
1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their duly authorized officers as of the date stated above.
SIRROM INVESTMENTS, INC.
By:
Title:
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
By:
Title:
EXHIBIT 4(R)
CONSOLIDATED, AMENDED AND RESTATED
SECURED PROMISSORY NOTE
$2,000,000.00 November 15, 1998
FOR VALUE RECEIVED, the undersigned, CONSUMAT ENVIRONMENTAL SYSTEMS,
INC. ("Maker"), a Virginia corporation, and SIRROM INVESTMENTS, INC. ("Lender"),
a Tennessee corporation, promises to pay to the order of SIRROM INVESTMENTS,
INC., a Tennessee corporation ("Payee"; Payee and any subsequent holder[s]
hereof are hereinafter referred to collectively as "Holder"), at the office of
Payee in Nashville, Tennessee, or at such other place as Holder may designate to
Maker in writing from time to time, and by automatic debit if Holder so
requires, the principal sum of Two Million and No/100 Dollars ($2,000,000.00),
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).
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 December, 1998, and subsequent installments being payable on
the first (1st) day of each succeeding month thereafter until March 11, 2001
(the "Maturity Date"), at which time the entire outstanding principal balance,
together with all accrued and unpaid interest.
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.
1
<PAGE>
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, which default is not cured within ten (10) days after written
notice to Maker; 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 amended (the "Loan Agreement"), which 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 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, 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 of interest allowed to
be charged under applicable law (the "Maximum Rate"), 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 indorsers 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.
2
<PAGE>
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 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.
This Note evidences the same obligations previously evidenced by the
following (the "Prior Notes"): (i) that Secured Promissory Note dated March 26,
1997, made by Maker payable to the order of Payee in the original principal
amount of $500,000; (ii) that Secured Promissory Note dated March 12, 1996, made
by Maker payable to the order of Payee in the original principal amount of
$500,000; (iii) that Secured Promissory Note dated January 16, 1995, made by
Maker payable to the order of Payee in the original principal amount of
$500,000; and (iv) that Amended and Restated Secured Promissory Note dated
October 26, 1995, made by Maker payable to the order of Payee in the original
principal amount of $500,000.
This Note is a consolidation, amendment and restatement of the Prior
Notes and does not evidence a novation thereof. All collateral securing the
Prior Notes remains in full effect to secure the obligations evidenced hereby.
3
<PAGE>
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.
MAKER:
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.,
a Virginia corporation
By:___________________________________
EXHIBIT 4(S)
THIRD AMENDMENT TO
LOAN AGREEMENT AND LOAN DOCUMENTS
THIS THIRD AMENDMENT TO LOAN AGREEMENT ("Amendment") dated as of the 15th
day of November, 1998, is made and entered into on the terms and conditions
hereinafter set forth, by and between CONSUMAT ENVIRONMENTAL SYSTEMS, INC.
("Borrower"), a Virginia corporation, and SIRROM INVESTMENTS, INC. ("Lender"), a
Tennessee corporation.
WITNESSETH:
WHEREAS, Lender has made certain loans to Borrower (the "Original Loans")
as evidenced by certain Secured Promissory Notes as more fully described herein;
and
WHEREAS, Lender and Borrower previously executed that Loan Agreement dated
March 12, 1996, (the "Loan Agreement"); and
WHEREAS, Borrower and Lender desire to amend the Loan 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. Capitalized terms used herein but not otherwise defined shall have the
meanings ascribed thereto in the Loan Agreement.
2. The Recitals on page one (1) of the Loan Agreement are hereby amended to
read in their entirety as follows:
WHEREAS, Borrower has requested that Lender make available to
Borrower a term loan in the original principal amount of Two Million
Five Hundred Thousand and No/100 Dollars ($2,500,000) (the "Loan") on
the terms and conditions hereinafter set forth, and for the purpose(s)
hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower,
Borrower has made certain representations to Lender; and
1
<PAGE>
WHEREAS, Lender, in reliance upon the representations and
inducements of Borrower, has agreed to make the Loan upon the terms and
conditions hereinafter set forth.
2
<PAGE>
3. The second sentence of Section 1.1 of the Loan Agreement is hereby
amended to read in its entirety as follows:
The Loan shall be evidenced by (i) a Consolidated, Amended and
Restated Secured Promissory Note (the "Note") in the original principal
amount of Two Million and No/100 Dollars ($2,000,000.00), dated as of
November 15, 1998, executed by Borrower in favor of Lender,
substantially in the form attached hereto as Exhibit A and incorporated
herein by this reference (the "Amended Note"), and (ii) a Secured
Promissory Note (the "Secured Note") in the original principal amount of
Five Hundred Thousand and No/100 Dollars ($500,000.00), dated as of July
17, 1997, executed by Borrower in favor of Lender, as amended by that
First Amendment to Promissory Note dated as of June 16, 1998, that
Second Amendment to Promissory Note dated as of August 16, 1998, and
that Third Amendment to Promissory Note dated as of November 15, 1998,
substantially in the form attached hereto as Exhibit A and incorporated
herein by this reference. (The Amended Note and the Secured Note are
hereinafter referred to collectively as the "Note")
4. The obligations of Lender hereunder are subject to the fulfillment of
each of the following conditions:
(a) Borrower shall have delivered to Lender this Agreement;
(b) Borrower shall have delivered to Lender a Consolidated,
Amended and Restated Secured Promissory Note executed by Borrower
in the original principal amount of $2,000,000.00;
(c) Borrower shall have delivered to Lender a Third Amendment to
Stock Purchase Warrant;
(d) Borrower shall have delivered to Lender a Third Amendment to
Secured Promissory Note;
(e) Borrower shall have delivered to Lender certified copies of
the corporate charter, bylaws and amendments for Borrower;
3
<PAGE>
(f) Borrower shall have delivered to Lender certificate of
Existence or Good Standing, as applicable, for Borrower;
(g) Borrower shall have delivered to Lender certified copies of
Resolutions of the Directors of Borrower authorizing the
execution, delivery and performance hereof and of the related
documents;
(h) Borrower shall have delivered to Lender an opinion of
Borrower's counsel in form and substance satisfactory to Lender's
counsel; and
(i) Borrower shall have paid Lender a processing fee in the
amount of $5,000.00 and all reasonable fees and expenses incurred
by Lender in connection with the preparation and negotiation of
this Agreement.
5. Borrower hereby represents and warrants to Lender that all of the
representations made in Section 2 of the Loan Agreement are true and correct as
of the date hereof, except as modified or supplemented by Exhibit A attached
hereto and incorporated herein by this reference.
6. Borrower hereby represents and warrants to Lender that the
address(es) set forth on Exhibit B attached hereto and incorporated herein by
this reference is the principal place of Borrower's business and the location of
all tangible collateral and the place where the records concerning all
intangible collateral are kept and/or maintained.
7. Borrower warrants and represents that (a) the Loan Documents are
valid, binding and enforceable against Borrower according to their terms,
subject to principles of equity and laws applicable to the rights of creditors
generally, including bankruptcy laws, (b) no default or Event of Default
presently exists under the Loan Documents and no condition presently exists
which, with the giving of notice, the passing of time, or both, would cause such
a default or Event of Default. Borrower further acknowledges that Borrower's
obligations evidenced by the Loan Documents are not subject to any counterclaim,
defense or right of setoff, and Borrower hereby releases Lender from any claim,
known or unknown, that Borrower may have against Lender as of the execution of
this Amendment.
8. The terms "Loan Document" and "Loan Documents" as defined in the Loan
Agreement are amended to include this Amendment.
4
<PAGE>
9. This Amendment may be executed in any number of counterparts and by
different parties to this Amendment 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 Amendment.
10. Except as modified and amended hereby, the Loan Agreement shall
remain in full force and effect.
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.
5
<PAGE>
BORROWER:
CONSUMAT ENVIRONMENTAL SYSTEMS, INC.,
a Virginia corporation
By:______________________________
Title:________________________
LENDER:
SIRROM INVESTMENTS, INC.,
a Tennessee corporation
By:_______________________________
Title:__________________________
6
<PAGE>
EXHIBIT A
Modifications of and Supplements to
Representations and Warranties
7
<PAGE>
EXHIBIT B
Location of Principal Place
of Business and Collateral
8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 362
<ALLOWANCES> 11
<INVENTORY> 139
<CURRENT-ASSETS> 606
<PP&E> 3,109
<DEPRECIATION> 2,736
<TOTAL-ASSETS> 1,079
<CURRENT-LIABILITIES> 834
<BONDS> 0
0
0
<COMMON> 1,014
<OTHER-SE> (3,084)
<TOTAL-LIABILITY-AND-EQUITY> 1,079
<SALES> 3,183
<TOTAL-REVENUES> 3,183
<CGS> 2,502
<TOTAL-COSTS> 2,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394
<INCOME-PRETAX> (1,738)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,738)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
