SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the quarterly period ended October 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the Transition period from __________ to __________.
Commission File Number: 0-17072
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2844247
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
72B Cabot Street, West Babylon, New York 11704
(Address of principle executive offices) (Zip Code)
(516) 694-7060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.0001 9,103,477
(Title of Each Class) (Outstanding at December 20, 1996)
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
---------
ASSETS
October 31, April 30,
1996 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 516,085 $ 282,933
Contracts receivable, net of allowance for
doubtful contracts of $195,000 at
October 31, 1996 and April 30, 1996 2,777,597 2,043,740
Current portion of note receivable 20,940 --
Inventories and prepaid supplies 370,065 265,065
Prepaid expenses 185,617 --
Deferred income taxes 680,000 680,000
Other current assets 190,046 148,557
----------- -----------
Total Current Assets 4,740,350 3,420,295
----------- -----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 3,262,552 3,143,477
----------- -----------
OTHER ASSETS
Note Receivable 254,060 --
Investment in non-marketable securities, net of
valuation allowance of $3,936,000 and $5,993,841
at October 31, 1996 and April 30, 1996, respectively 100,000 628,000
Goodwill, net of accumulated amortization 28,594 30,590
Deferred acquisition costs, net of
accumulated amortization 97,010 100,580
Deferred income taxes 1,904,000 1,904,000
Deferred restructuring costs 792,000 --
Other assets 95,630 62,447
----------- -----------
Total Other Assets 3,271,294 2,725,617
----------- -----------
TOTAL ASSETS $11,274,196 $ 9,289,389
=========== ===========
</TABLE>
(Continued)
1
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, April 30,
1996 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 312,898 $ 260,952
Accounts payable and accrued expenses 1,233,372 1,335,287
Note payable 100,000 --
Deposit -- 150,000
Income taxes payable 34,603 59,080
Other current liabilities 235,602 228,591
----------- -----------
Total Current Liabilities 1,916,475 2,033,910
OTHER LIABILITIES
Long-term debt, net of current portion 469,347 382,324
----------- -----------
Total Liabilities 2,385,822 2,416,234
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized,
No shares issued or outstanding -- --
Common stock, $.0001 par value,
50,000,000 shares authorized,
9,103,477 issued less 20,000
treasury shares 910 617
Additional paid-in capital 26,052,509 24,727,377
Treasury stock (10,000) (58,000)
Stock subscription receivable (46,988)
Deficit (17,155,045) (17,749,851)
----------- -----------
Total Stockholders' Equity 8,888,374 6,873,155
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,274,196 $ 9,289,389
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
UNAUDITED
---------
SIX MONTHS ENDED
----------------
October 31, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 8,254,724 $ 6,371,661
Cost of revenues 5,566,768 3,893,219
----------- -----------
Gross profit 2,687,956 2,478,442
Selling, general and administrative expenses 2,132,931 2,474,940
----------- -----------
Income (loss) before other income (expense) 555,025 3,502
----------- -----------
Other income (expense):
Management restructuring costs (401,000) --
Settlement of legal claims, net 246,654 (17,500)
Income from joint venture -- 22,512
Gain on sale of marketable security -- 63,999
Gain on sale of assets, net 221,710 --
Realized gain on sale of building 188,624
Interest expense (29,131) --
Interest and dividend income 1,548 39,732
----------- -----------
Total other income (expense) 39,781 297,367
----------- -----------
Income before income taxes 594,806 300,869
Income taxes -- --
----------- -----------
Net income $ 594,806 $ 300,869
=========== ===========
Earnings per common share $ .07 $ .07
=========== ===========
Weighted average number of
common shares outstanding 8,331,449 4,419,095
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
UNAUDITED
---------
THREE MONTHS ENDED
------------------
October 31, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 3,181,322 $ 2,601,913
Cost of revenues 2,131,412 1,675,792
----------- -----------
Gross profit 1,049,910 926,121
Selling, general and administrative expenses 965,422 998,295
----------- -----------
Income (loss) before other income(expense) 84,488 (72,174)
----------- -----------
Other income (expense):
Management restructuring costs (401,000) --
Settlement of legal claims, net 246,654 --
Income from joint venture -- 22,512
Gain on sale of marketable security -- 63,999
Gain on sales of assets, net 221,710 --
Interest Expense (13,236) --
Interest and dividend income 709 39,732
----------- -----------
Total other income (expense) 54,837 126,243
----------- -----------
Income before income taxes 139,325 54,069
Income taxes -- --
----------- -----------
Net income $ 139,325 $ 54,069
=========== ===========
Earnings per common share $ .02 $ .01
=========== ===========
Weighted average number of
common shares outstanding 9,065,977 5,427,366
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
UNAUDITED
---------
Common Stock
------------ Additional Stock
Number of Par Paid-in Treasury Subscription Accumulated
Shares Value Capital Stock Receivable Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 30, 1996 6,097,366 $ 617 $24,727,377 $(58,000) $(46,988) $(17,749,851) $ 6,873,155
Private placements of
common stock 2,600,000 260 1,084,165 1,084,425
Issuance of common
stock for services 261,111 26 205,974 206,000
Issuance of treasury stock
to settle legal obligations 70,000 58,000 58,000
Return of common stock as
part of legal settlement (20,000) (10,000) (10,000)
Collection of stock subscription
receivable 46,988 46,988
Issuance of common stock for
partial payment of management
restructuring charges 75,000 7 34,993 35,000
Net Income 594,806 594,806
--------- ----- ----------- -------- -------- ------------- -----------
Balance - October 31, 1996 9,083,477 $ 910 $26,052,509 $(10,000) $ -- $ (17,155,045) $ 8,888,374
========= ===== =========== ======== ======== ============= ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
UNAUDITED
---------
October 31, October 31
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 594,806 $ 300,869
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 321,329 121,033
Gain on sale of building -- (188,624)
Issuance of common stock for services 206,000 442,250
Income from joint venture -- (22,512)
Management restructuring costs 211,000 --
Gain on sale of assets, net (221,710) --
Settlement of legal claims, net (255,000) --
Changes in operating assets and liabilities:
Accounts receivable (733,857) (540,593)
Inventories and prepaid supplies (105,000) (274,667)
Prepaid expenses (185,617) --
Note receivable -- 50,000
Other current assets (41,489) (214,535)
Other assets (33,183) (48,405)
Accounts payable and accrued expenses (101,915) 696,533
Current Income taxes (24,477) 5,636
Other current liabilities 7,011 33,105
Deferred income taxes -- 42,000
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (362,102) 402,090
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for investment in subsidiary -- (10,000)
Reserve for contingencies -- (367,309)
Deposits advanced -- 397,943
Proceeds from the sale of assets -- 221,710
Deferred restructuring costs (792,000) --
Investment on non-marketable securities 528,000 --
Acquisition of fixed assets (434,838) (1,528,552)
Deferred acquisition costs, net -- (103,938)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (477,128) (1,611,856)
----------- -----------
</TABLE>
(Continued)
6
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
UNAUDITED
---------
October 31, October 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 100,000 --
Proceeds from long-term debt 223,000 --
Principal payments of long-term debt (232,031) (99,407)
Payment of note payable -- (75,000)
Proceeds from issuance of common stock, net
Of advance deposits 934,425 3,137,784
Stock subscription receivable 46,988 (534,920)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,072,382 2,428,457
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 233,152 1,218,691
CASH AND EQUIVALENTS-BEGINNING 282,933 648,023
----------- -----------
CASH AND EQUIVALENTS-ENDING $ 516,085 $ 1,866,714
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of restricted common shares for
the investment in New York Testing Laboratories, Inc.,
and Subsidiaries $ -- $ 67,500
=========== ===========
Step-up in basis of property and equipment resulting from
the allocated purchase price in excess of net assets
acquired from New York Testing Laboratories, Inc.
and Subsidiaries $ -- $ 328,681
=========== ===========
Issuance of common shares in exchanged for
services $ 206,000 $ 442,250
=========== ===========
Note receivable and return of common stock accepted
as partial consideration in settlement of a
legal claim $ 285,000 $ --
=========== ===========
Issuance of long-term debt in connection with the partial
settlement of a legal claim and separate consulting
agreement $ 155,000 $ --
=========== ===========
SUPPLEMENTAL INFORMATION
Interest Paid $ 29,131 $ 24,256
=========== ===========
Taxes Paid $ 346 $ 224
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
7
<PAGE>
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED OCTOBER 31, 1996
UNAUDITED
(1) The consolidated balance sheet at the end of the preceding fiscal year
has been derived from the audited consolidated balance sheet contained
in the Company's Form 10-K and is presented for comparative purposes.
All other financial statements are unaudited. All unaudited amounts are
subject to year-end adjustments and audit, but the Company believes all
adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the financial position, results of
operations and changes in cash flows for all interim periods presented
have been made. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10-K for the most
recent fiscal year.
(2) As part of the management restructuring during September 1996, the
Company entered into separate termination agreements with the former
Chief Executive Officer("CEO"), Chief Operating Officer("COO") and
Special Securities Counsel("SSC") to the Company. These agreements
call for pay-outs of existing compensation arrangements plus
additional benefits in the form of transferring an investment in
non-marketable securities of $528,000, issuing stock options and other
miscellaneous benefits. Included in Management Restructuring Costs on
the Consolidated Statements of Income are the accrued costs related to
the former CEO and SSC for $216,000 and $35,000, respectively. As a
result of the indictment in October 1996 against the former COO and
SSC, the Company has not accrued for the termination agreement with
the former COO totaling approximately $1,450,000. Included on the
Consolidated Balance Sheet under Deferred Restructuring Costs are
amounts actually paid and the value of the non-marketable securities
transferred at closing of the termination agreement with the former
COO totaling $792,000. Even if the indictments and the allegations
contained therein are proven not to be true, there was still a lack of
fiduciary responsibility to the Company by both the former COO and
SSC. In light of the facts and circumstances, the Company has already
made formal demands to the COO and SSC for the return of all
consideration paid and assets transferred pursuant to the termination
agreements through the date of the indictment and is vigorously
pursuing this matter. The Company has also formally cancelled all
option certificates previously issued in connection with the
termination agreements. In addition, Management Restructuring Costs
include approximately $150,000 of legal and professional fees incurred
in connection with these agreements and the subsequent matters
resulting from the indictment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Core operations for the six months showed revenues and net income of $8,255,000
and $595,000, respectively, versus $6,372,000 and $301,000 respectively, for the
same period last year. This represents an increase of 30% and 98%, respectively,
from the prior year.
Cost of revenues increased $1,674,000 or 43% from the first six months last year
but, as a percentage of revenues, increased from 61% to 67% when compared to the
first six months of last year to this year.
Gross profit increased $210,000 or 8% from the first six months of fiscal 1996
to 1997. As a percentage of revenues, the gross profit decreased to 32% compared
to 39% for the first six months of fiscal 1996. This decrease results from a
change in the mix of work compared to last year as well as certain larger
contracts that normally carry a slightly lower gross profit margin.
Selling, general and administrative expenses decreased approximately 342,000
from the first six months of last year compared to the first six months of this
year. As a percentage of revenues, these expenses were approximately 39% and 26%
for the six months ended October 31, 1995 and 1996, respectively. This is the
direct result of management is continued efforts to streamline overhead and
build a more efficient operation.
8
<PAGE>
A provision for taxes was not required for the current fiscal quarter because
sufficient reserves exist against the deferred tax assets recognized in prior
periods to off-set such provision. Management believes that the reversal of such
reserves is appropriate in light of the current growth in revenues and earnings
from core operations.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at October 31, 1996 including cash, was $2,824,000 an increase
of $1,438,000 or 104% from April 30, 1996. Cash and accounts receivable
increased by $233,000 and $734,000, respectively from April 30, 1996. As of
October 31, 996, the current ratio was 2:47:1. This represents a substantial
improvement in liquidity from April 30, 1996 where such ratio was 1:68:1. It is
managements continued goal to maintain low levels of long-term debt financing.
However, management is actively seeking a working capital credit facility to
finance accounts receivable that will enhance cash flow and business growth.
The Company believes that the current levels of working capital and liquidity
will not be sufficient to support the continued increase in its revenue base and
scope of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Pending Litigation
In November, 1994, the Company commenced an action in New York State Supreme
Court to recover monies advanced to Mohave Shores Development, Inc. ("Mohave")
in anticipation of developing land on an Indian reservation in Arizona. The
Company seeks the return of its $250,000 deposit plus legal fees and punitive
damages. In addition, it is hopeful that a declaratory judgement will be
obtained for all water rights contained in the ground lease entered into by
Mohave with the reservation. Management intends to continue aggressively
pursuing this matter.
In an action that commenced in August 1995 in United States District Court, the
Company and various current and prior officers and directors have been named in
a lawsuit with certain shareholders which contains various allegations.
Management denies any wrong doing, asserts that the complaint is without merit
and continues to vigorously defend these claims.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
9
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K
Reports filed on Form 8-K dated September 12, 1996 and
September 26, 1996 are hereby incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: December 20, 1996
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
By:/s/ Michael O'Reilly
----------------------------------
MICHAEL O'REILLY, Chairman and
Chief Executive Officer
By /s/ David R. Behanna
----------------------------------
DAVID R. BEHANNA, CPA
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 516,085
<SECURITIES> 0
<RECEIVABLES> 2,777,597
<ALLOWANCES> 0
<INVENTORY> 370,065
<CURRENT-ASSETS> 4,740,350
<PP&E> 3,262,552
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,274,196
<CURRENT-LIABILITIES> 1,916,475
<BONDS> 0
0
0
<COMMON> 910
<OTHER-SE> 26,052,509
<TOTAL-LIABILITY-AND-EQUITY> 11,274,196
<SALES> 8,254,724
<TOTAL-REVENUES> 8,254,724
<CGS> 5,566,786
<TOTAL-COSTS> 7,699,699
<OTHER-EXPENSES> (39,781)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,131
<INCOME-PRETAX> 594,806
<INCOME-TAX> 0
<INCOME-CONTINUING> 594,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 594,806
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
