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TMTM MERGER CO. - 10KSB/A - 19970716 - LIQUIDITY_CAPITAL
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $2,156,954 at March 31,
1997, compared with a working capital deficit of $2,206,090 at March 31, 1996.
This modest decrease in deficit of $49,136 reflects a working capital ratio of
.56 at March 31, 1997 from .54 at March 31, 1996.
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Net cash increased during Fiscal 97 by $271,661 compared to a decrease
during Fiscal 96 of $122,622. Cash used by continuing operations was $2,196,656
and $1,059,102, respectively, for Fiscals 97 and 96. The net cash used from
operations for Fiscal 97 resulted primarily from the Company's additional
expenditure from restructuring its Consulting Division and Corporate overhead
and, lack of profitability of its Remedial Division. To fund the operational
cash drain in Fiscal 97, additional borrowings of approximately $1.6 million
were received from related parties.
Purchases of equipment increased from Fiscal 96 by $443,052 to $497,806
in Fiscal 97. Management believes that in the year ended March 31, 1998, it must
slightly increase equipment purchases to remain competitive in the marketplace.
During Fiscal 97, the Company completed a stock offering from the sale
of 9,000,000 shares of Common Stock at an offering price of $0.90 per share
generating net proceeds of approximately $7.3 million (net of issuance costs).
The majority of these proceeds were used to fund the acquisition of ART
($6,000,000) and payment to the IRS for an Offer in Compromise agreement
settling all outstanding issues and disputes or delinquent taxes.
The net proceeds generated from the sale of its Cable Products Division
in April 1996 of approximately $1,300,000 were used principally to repay the
outstanding loan balance of $1,139,000 with its then senior lender.
For Fiscal 97 the Company received $337,500 from the exercise of
warrants outstanding with an unrelated company.
The Company continues to review all current operations and assets for
potential reorganizations, sale or liquidation in order to raise additional
capital or lower costs.
The Company sold receivables, which for financial reporting purposes has
been reported as a borrowing transaction, aggregating $623,482, eligible for
reimbursement under the FIPT. Under two similar master funding and
indemnification agreements, Sirrom Resource Funding, L.L.C. and its affiliates
("Sirrom") have lent $150,561 at March 31, 1997 to the Company via the funding
of eligible receivables. The agreements provide that in the event Sirrom is not
reimbursed within 24 months of an advance, the Company is obligated to
repurchase the receivable. This obligation is presented as a note payable in the
accompanying financial statements. The Company maintains a cash escrow for the
benefit of Sirrom in the event of a reimbursement shortfall. If the shortfall
exceeds the escrow amount, the Company must pay Sirrom within 15 days of
notification.
The Company also entered into subcontractor finance agreements with
Environmental Corporation of America, Inc. ("ECA") and Tier Environmental
Services, Inc. ("Tier"). Under these agreements ECA and Tier have funded
$334,958 and $137,963, respectively of receivables eligible for reimbursement
under the FIPT. Under these agreements, the Company must prepay interest for 12
months based on the published prime rate at the time of funding. Also, at the
time of funding the Company must prepay additional interest at a rate of 5% to a
reserve account for months 13 through 18. If reimbursement from the FIPT takes
more than 18 months, then interest must be prepaid on a quarterly basis at the
rate of prime plus 3%. The Company is liable to ECA and Tier for any
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reimbursement denials. The Company must pay any denied reimbursements within 10
days of notification.
The Company continues to monitor the recent governmental activities in
Florida with respect to changes in the FIPT, see Item 1. Description of Business
- Governmental Regulation, above. As of March 31, 1997, the Company had claims
submitted to the FIPT totaling $650,158, net of reserves.
The Company intends to fund its current operations from a combination of
cash on hand, cash generated from operations, potential new equity or a sale of
assets. These sources of capital are expected to fund the Company's current
operations through March 31, 1998. Management expects a return to profitability
in Fiscal 1998. However, if the Company does not return to profitability and
absent alternative sources of financing, there would be a material adverse
effect on the financial condition, operations and business prospects of the
Company. The Company has no arrangements in place for alternative sources of
financing, and no assurance can be given that such financing will be available
at all or on terms acceptable to the Company.
ITEM 7. FINANCIAL STATEMENTS.
The Company's audited consolidated financial statements immediately
follow the signature page to this Form 10-KSB/A.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company as of July 8, 1997
are as follows:
IN OFFICE
NAME AGE POSITION(S) SINCE
---- --- ----------- ---------
COMMON STOCK DIRECTORS:
Wendell R. Anderson 64 Director 1994
Luis De la Cruz 44 Director 1996
Leon S. Eplan 68 Director 1993
Dr. Charles C. Evans 40 Chairman of the Board of Directors 1993
Raimundo Lopez-Lima Levi 35 Director 1996
John B. McCracken 51 Director 1996
Joseph F. Startari 49 Director 1996
SERIES B PREFERRED STOCK DIRECTORS:
Antonio L. Contreras, Jr. 46 Director 1996
Michael S. Klein 41 Director 1996
Enrique A. Tomeu 42 President, Chief Executive Officer 1996
and Director
Enrique J. Tomeu 64 Director 1996
Carlos M. Vergara 35 Director 1996
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EXECUTIVE OFFICERS:
Michael G. Baker 38 Vice President and Secretary 1996
David C. Langle 47 Chief Financial Officer 1996
Mark Patton 33 Vice President 1996
Enrique A. Tomeu 42 President, Chief Executive Officer 1996
and Director
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BUSINESS EXPERIENCE:
WENDELL R. ANDERSON was appointed to the Board in 1994. He has been of
Counsel to the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd., based in
Minnesota, since 1979. He also serves as a director of the following public
companies: Fingerhut Corp. (since 1991), National City Bank Corporation (since
1981) and Super Mail International (since 1994).
LUIS DE LA CRUZ has been president and shareholder of De la Cruz &
Cutler, P.A., a law firm in Coral Gables, Florida since 1990. His principal
areas of practice are real estate and commercial transactions. He has a BS
degree in civil engineering and a JD degree from the University of Florida.
LEON S. EPLAN has been a member of the Board since April 1993. He heads
EplanConsulting, an Atlanta-based firm providng client services to governments
and private companies in urban and strategic planning, economic base analysis,
real estate development and growth management. Until September, 1996, Mr. Eplan
was Commissioner of Planning and Development for the City of Atlanta and played
a major role in preparing the City for its hosting of the 1996 Summer Olympic
Games. In addition, Mr. Eplan is an adjunct faculty member both of the Graduate
City Planning Program at the Georgia Institute of Technology, and the Graduate
Institute of the Liberal Arts at Emory University. Twice elected President of
the American Institute of Planners, the professional society of city planners,
he has served as advisor to the White House domestic policy staff, was a member
of the U.S. Delegation to the U.N. Seminar on Transportation, and recently
completed service on the National Commission on Intermodal Transportation, to
which he was appointed by the U.S. Senate.
DR. CHARLES C. EVANS joined the Company as Chairman of the Board of
Directors in January 1993. Until March 1995, Dr. Evans served as the President
and Chief Executive Officer of the Company, and also as the President of Evans
Environmental. Since 1986 and until March 1995 Dr. Evans had been continuously
employed as President of one or more of Evans Environmental's subsidiaries.
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RAIMUNDO LOPEZ-LIMA LEVI has been the managing partner of Lopez Levi &
Associates, P.A., CPA, a public accounting firm in Miami, Florida. From 1985 to
1991 Mr. Levi was in the tax division of Arthur Andersen & Co.
JOHN B. MCCRACKEN is a graduate of Tufts University and of Vanderbilt
University School of Law. He is a member of the Florida Bar and a partner in the
law firm of Jones, Foster, Johnston & Stubbs, P.A. in West Palm Beach, Florida.
His areas of practice are corporate, real estate, and estate planning. Mr.
McCracken has served as president of the Palm Beach County Bar Association and
as president of the Young Lawyers Section of the Palm Beach County Bar
Association. He has also twice served as chairman of the Florida Bar Grievance
(disciplinary) Committee and as a member of the Board of Governors of the Young
Lawyers Section of the Florida Bar. He has served as commissioner of the Port of
Palm Beach, chairman of the Young Friends of St. Mary's Hospital, and as Senior
Warden of Holy Trinity Episcopal Church.
JOSEPH F. STARTARI from December, 1995 has been president and CEO of
Biotechna Environmental Limited, an environmental technology company, traded on
the stock exchange in Alberta, Canada. From June, 1978 until December, 1995 Mr.
Startari worked in a variety of positions in the Ordinance Division of Olin
Corporation, a defense contractor. Most recently, from February, 1995 until he
left Olin Corporation, he was Vice President-Recovery Systems and Executive Vice
President of Olin Services, Inc.
ANTONIO L. CONTRERAS, JR. joined Sugar Cane Growers Cooperative of
Florida in 1984 and is currently the Vice President of Marketing and Legislative
Affairs. Prior to joining the cooperative, Mr. Contreras spent 11 years in the
sugar division of Gulf Western Industries, Inc. Mr. Contreras is also on the
Board of Directors and the Executive Committee of Florida Sugar Marketing &
Terminal Assn. He is past president and currently a Director of the Florida
Molasses Exchange, Inc. Mr. Contreras is a past director of the Florida Sugar
Cane League. Mr. Contreras is a graduate of the University of Miami where he
obtained his Bachelor's degree in Business Administration. He has a Masters'
degree in International Marketing from Thunderbird Graduate School of
International Management at Glendale, Arizona.
MICHAEL S. KLEIN from 1987 to 1995 was chairman and chief executive
officer of ViTel International, a company specializing in network facsimile
services. Since January, 1995 Mr. Klein has devoted his time to a variety of
public service and environmental conservation activities.
ENRIQUE A. TOMEU became a member of the board in July 1996, at which
time he was elected President and Chief Executive Officer. Mr. Tomeu was the
sole owner and founder of ART and has over 15 years of experience in
construction and environmental industries. Since July 1991 he has owned and been
a principal of several construction, fertilizer, chemical manufacturing,
entertainment, and agribusiness companies located principally in Florida and
South America. Mr. Tomeu attended the University of Florida and General Motors
Institute.
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ENRIQUE J. TOMEU has owned and operated fertilizer and chemical plants
for over 35 years. He is currently a principal in several fertilizer trading and
plant operations in four countries in North and South America. Mr. Tomeu has
built six fertilizer bulk blending plants. He founded, operated and sold
companies in the agribusiness, trucking and mining industries, in the last four
decades. Mr. Tomeu has served on the Board of Directors of Flagship Bank and
Suburban Bank Shares.
CARLOS M. VERGARA graduated with a degree in Political Science from the
American College in Paris. He is currently the President of Gargrove, Inc.,
Chairman of the Board of Kakaho Corporation, and majority stockholder in a 1300
acre citrus grove located in Vero Beach, Florida. Mr. Vergara is a partner in
Sovereign Capital Group, Coral Gables, Florida a registered SEC investment
advisory company. Previously he was Executive Vice President of Totalbank
Leasing Corp., of Miami Florida.
MICHAEL G. BAKER was hired as the Vice President of Operations in July,
1996 and appointed as the Corporate Secretary on November 25, 1996 upon the
resignation of Claire E. Lardner. He has over 16 years of operation and sales
management experience in the environmental services industry. Mr. Baker has six
years experience as Director of Business Development and Director of Treatment
Technology for Laidlaw Environmental Services. Mr. Baker has managed a division
encompassing six facilities that performed waste water treatment services with
$43 million in revenues and $13 million in earnings. Mr. Baker has managed
facilities in Massachusetts, Maryland, Ohio, Tennessee, South Carolina, and
Canada. Mr. Baker has experience in landfill operations, waste water treatment
operations, transfer operations, remedial services, fuel blending operations and
MIS.
DAVID C. LANGLE has 16 years of experience in Public and Private
Accounting and Business Management. Prior to his employment with American
Remedial, Mr. Langle served in various senior management capacities as Vice
President, Chief Financial Officer and Director for two Florida based Nasdaq
listed public companies, Solar Financial Services, Inc. (1993 to 1995) and
Frenchtex, Inc. (1991 to 1993). During Mr. Langle's tenure at Frenchtex, he also
served as Financial Director and Acting General Manager of the Company's
European manufacturing subsidiary. From 1982 to 1991, Mr. Langle was employed by
the Miami office of Spicer & Oppenheim, CPA's, an international accounting and
consulting firm where he completed his tenure as an Audit Partner. His
educational background includes a BS in Accounting and Business Administration
from the University of Illinois at Chicago and he maintains professional
registration as a Certified Public Accountant in the State of Florida.
MARK PATTON was hired as the Vice President, Sales and Program
Development Manager in July 1996. Mr. Patton has over 10 years in the chemical
and environmental industries, working extensively in the areas of
project/business development and strategic planning with a focus on remediation
projects for major oil and aerospace industries. From October 1993 to July 1995
Mr. Patton was Program Development Manager with OHM Remediation Services, Inc.
and Rust Remedial Services, Inc., a division of WMX Technologies. From August
1988 to October 1993 Mr. Patton was Program Manager-Special Projects with
Chemical Waste Management, Inc. His educational background is a Chemical
Engineering degree from the University of Southern California.
Directors are elected annually at the Company's annual shareholders'
meeting. Each director of the Company serves until his successor is elected and
qualified or until the earlier of
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death, resignation, removal or disqualification of the director. The officers
are elected annually by the directors.
Enrique J. Tomeu and Enrique A. Tomeu, are father and son, respectively.
Enrique A. Tomeu, Carlos Vergara and Tony Contreras are brothers-in-law. Carlos
Vergara and Tony Contreras are the son-in-laws of Enrique J. Tomeu. Other than
the foregoing, there are no family relationships between or among any of the
directors or executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee, of
which Mr. Michael Klein and Dr. Charles Evans are members. The functions of the
Compensation Committee are to review and approve annual salaries and bonuses for
all executive officers and review, approve and recommend to the Board of
Directors the terms and conditions of all employee benefit plans or changes
thereto, including the granting of stock options pursuant to the Company's stock
option plans. The chairman of the Compensation Committee is Mr. Michael Klein.
The Board of Directors has also established an Audit Committee of which Mr.
Raimundo Lopez-Lima Levi, Chairman, Mr. Carlos Vergara, Mr. Tony Contreras, and
Mr. Joseph F. Startari are members. The functions of the Audit Committee are to
oversee the Company's Chief Financial Officer, meet periodically with the
Company's outside auditors, and generally be responsible for the Company's
financial and accounting policies. Additionally, the Board of Directors
established an Executive Committee comprised of Enrique A. Tomeu, Chairman, Dr.
Charles C. Evans and Mr. John B. McCracken. The responsibilities of the
Executive Committee are to assist management on behalf of the Board in the
evaluation and decisions of any agreements, contracts, loans, debentures or
transactions for any amounts less than $3,000,000, which would otherwise require
Board approval.
SECTION 16(A) REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who beneficially own more than 10%
of the Company's Common Stock, to file reports of securities ownership and
changes in such ownership with the Securities and Exchange Commission (the
"SEC"). Officers, directors and greater than 10% beneficial owners also are
required by rules promulgated by the SEC to furnish the Company with copies of
all Section 16(a) forms they file. Based solely upon a review of the copies of
such forms furnished to the Company and written representations that no other
reports were required, the Company believes that, for the fiscal year ended
March 31, 1997, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with;
except that Dr. Charles Evans and Antonio L. Contreras, Jr. did not file timely
Forms 4 with respect to an aggregate of 43,200 shares sold during Fiscal 97 and,
Dr. Charles Evans, Leon Eplan and Wendell Anderson all of which did not file
any Forms 4 and 5 with respect to an aggregate of 256,250 options and 8,750
options, which they received during Fiscal 97 and Fiscal 96, respectively.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information about the compensation paid
or accrued by the Company during the fiscal years ended March 31, 1997, 1996 and
1995 to the Company's Chief Executive Officer, the only employee whose aggregate
compensation exceeded $100,000 for the fiscal year ended March 31, 1997.
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ---------------------
NAME AND SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
---------------------------- ---- -------- ----- ---------------------
Enrique A. Tomeu, 1997 $102,800 $0 $ 0
President and Chief Executive
Officer
John C. "Jack" Reynolds, 1997 $ 52,500 $0 0
Interim President and Chief 1996 $164,500 $0 200,000
Executive Officer(1) 1995 $ 7,000 $0 31,250
--------------
(1) John C. "Jack" Reynolds was employed as Interim President of the Company
through July 11, 1996 pursuant to a consulting arrangement with R.J.
Quintero & Co. ("Quintero"). None of the above compensation was paid to
Mr. Reynolds. All compensation payments and option issuances were made to
directly Quintero.
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OPTION GRANTS IN LAST FISCAL YEAR
No options were granted during the fiscal year ended March 31, 1997
for those persons named in the Summary Compensation Table.
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AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised stock options at the end of the 1997 fiscal year for those persons
named in the Summary Compensation Table.
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT FISCAL
ACQUIRED ON VALUE FISCAL YEAR END YEAR END ($)
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
John C. "Jack" Reynolds(1) 0 0 231,250 / 0 $98,581/ $0
------------
(1) John C. "Jack" Reynolds is employed as Interim President of the Company
pursuant to a consulting arrangement with Quintero. None of the above
options were issued to Mr. Reynolds, but were issued directly to Quintero.
Mr. Reynolds is not a shareholder, officer or director of Quintero.
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COMPENSATION ARRANGEMENTS
EMPLOYMENT AGREEMENT
Enrique A. Tomeu is employed as the Chief Executive Officer and
President of ECOS pursuant to a four year employment agreement dated as of July
8, 1996. As compensation thereunder, Mr. Tomeu is entitled to receive an annual
salary of $150,000; a luxury automobile; a $900 per month non-accountable
expense allowance; an expense account for business travel and other expenses;
six weeks' paid vacation annually; health insurance for himself and his family;
and a $3,000,000 life insurance policy on his life payable to his designees. In
addition, Mr. Tomeu may be entitled to a bonus based on the performance of the
Company, at the discretion of the Board of Directors. Upon termination of his
employment with the Company by virtue of his involuntary resignation, permanent
disability (as defined in the agreement) or dismissal for other than cause (as
defined in the agreement), Mr. Tomeu is entitled to convert any Series B
Convertible Preferred Stock which he then may own to Common Stock as though the
applicable earnouts had been earned. As a part of his employment agreement, Mr.
Tomeu has agreed not to compete with the Company's business for a period of one
year following his voluntary resignation or the termination of his employment
for cause.
Effective July 3, 1996, Dr. Evans, Chairman of the Board has been
employed by the Company pursuant to a new three year employment agreement and a
new three year consulting agreement. The new employment agreement provides for
an annual salary of $24,000; a $500 auto
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allowance; an expense account for business travel and other expenses; and eight
weeks' paid vacation annually. The consulting agreement provides for annual fees
of $50,000 and an expense account for business travel and other expenses. In
addition, Dr. Evans may be entitled to a bonus based on the performance of the
Company at the discretion of the Board of Directors. Dr. Evans has agreed not to
compete with the Company's business for a period of one year following his
voluntary resignation or the termination of his employment with the Company for
cause.
John C. "Jack" Reynolds was previously employed as Interim President
through July 11, 1996 pursuant to a consulting arrangement with Quintero. In
consideration for these services, Quintero received a weekly payment of $3,500
and options to purchase 31,250 shares of Common Stock, to be awarded in advance
each quarter. In addition, Quintero was reimbursed for all reasonable and
necessary out-of-pocket expenses. The Agreement has been canceled effective July
28, 1996. Mr. Reynolds is not a shareholder, officer or director of Quintero.
COMPENSATION OF DIRECTORS
Each director who is not an executive officer or employee of the Company
is entitled to a fee of $300 per meeting. Further, for serving on the Board of
Directors, directors received mandatory stock option grants under the 1993 Stock
Option Plan through April 1, 1996 and are entitled to additional compensation
duly authorized by the Board of Directors. The Board of Directors has
temporarily postponed any further Compensation for directors subject to a
study of equitable and comparable Director Compensation packages among the
Company's industry and recommendation by the designated Compensation Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of July 8, 1997,
regarding the Company's Common Stock owned of record or beneficially by (i) each
stockholder who is known by the Company to beneficially own in excess of 5% of
the outstanding shares of Common Stock, (ii) each director and executive officer
named in the Summary Compensation Table above and (iii) all directors and
executive officers as a group. Except as otherwise indicated, each stockholder
listed below has sole voting and investment power with respect to shares
beneficially owned by such person.
In accordance with Rule 13d-3, promulgated under The Securities Exchange
Act of 1934, shares that are not outstanding but that are issuable within 60
days upon exercise of outstanding options, warrants, rights or conversion
privileges or which are otherwise required by Rule 13d-3 to be included have
been deemed to be outstanding for the purpose of computing the percentage of
outstanding shares owned by the person owning such right, but have not been
deemed outstanding for the purpose of computing the percentage for any other
person. As of July 8, 1997, there were 17,600,026 shares of Common Stock issued
and outstanding and 1,000,000 shares of Series B Preferred Stock issued and
outstanding.
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COMMON STOCK PREFERRED STOCK
-------------------------- -------------------------
AMOUNT AND NATURE AMOUNT AND NATURE
OF BENEFICIAL % OF OF BENEFICIAL % OF
NAME AND ADDRESS OWNERSHIP CLASS OWNERSHIP CLASS
---------------- ----------------- ----- ----------------- -----
5% HOLDER:
Strategica Capital Corporation (1) 2,540,196 12.66% -- --
1221 Brickell Avenue, Ste 2600
Miami, Florida 33131
COMMON STOCK DIRECTORS:
Charles C. Evans (2) 450,000 2.62% -- --
1000 Southern Blvd. # 200
West Palm Beach, FL 33405
Leon S. Eplan (3) 37,500 * -- --
One Barksdale Drive N.E.
Atlanta, GA 30309
Wendell R. Anderson, Esq. (4) 30,000 * -- --
720 Baker Building
Minneapolis, MN 55403
John B. McCracken, Esq. -- -- -- --
1000 Southern Blvd., Ste. 300
West Palm Beach, Florida 33405
Luis De la Cruz -- -- -- --
241 Sevilla Avenue #805
Coral Gables, FL 33134
Raimundo Lopez-Lima Levi -- -- -- --
815 N.W. 57th Avenue #304
Miami, FL 33126
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COMMON STOCK PREFERRED STOCK
-------------------------- -------------------------
AMOUNT AND NATURE AMOUNT AND NATURE
OF BENEFICIAL % OF OF BENEFICIAL % OF
NAME AND ADDRESS OWNERSHIP CLASS OWNERSHIP CLASS
---------------- ----------------- ----- ----------------- -----
Joseph F. Startari -- -- -- --
2468 Stag Run Boulevard
Clearwater, FL 33765
SERIES B PREFERRED
STOCK DIRECTORS:
Enrique A. Tomeu (5) 8,233,650 34.41% 633,365 63.34%
1000 Southern Blvd., Ste 300
West Palm Beach, Florida 33405
Michael Klein (5) 3,585,723 17.62% 275,880 27.59%
100 Shoreline Highway, Ste A190
Mill Valley, California 94941
Antonio L. Contreras, Jr. -- -- -- --
1000 Southern Blvd., Ste. 300
West Palm Beach, Florida 33405
Enrique J. Tomeu -- -- -- --
1000 Southern Blvd., Ste. 300
West Palm Beach, Florida 33405
Carlos M. Vergara -- -- -- --
1000 Southern Blvd., Ste. 300
West Palm Beach, Florida 33405
EXECUTIVE OFFICERS:
John C. "Jack" Reynolds(6) -- -- -- --
R.G. Quintero & Co.
145 Fourth Avenue
New York, NY 10003
All Directors, Executive Officers 12,498,073 46.43% 909,245 90.92%
and nominees as a Group
(16 persons) (7)
------------
* Less than 1%.
(1) Includes (i) 175,500 shares of Common Stock issuable under currently
exercisable warrants granted to a predecessor corporation and (ii) 761,731
shares of Series A Convertible Preferred Stock issuable under currently
exercisable warrants. The shares of Series A Convertible Preferred Stock are
convertible into 2,285,193 shares of Common Stock.
(2) Includes options to purchase 11,200 shares of Common Stock.
(3) Includes options to purchase 37,500 shares of Common Stock.
(4) Includes options to purchase 30,000 shares of Common Stock.
(5) Includes conversion of Preferred Stock. Does not include 122,277 shares of
Common Stock owned of record by Mr. Tomeu's mother as to which shares Mr.
Tomeu disclaims beneficial ownership.
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(6) Does not include 231,250 shares of Common Stock issuable under options
granted Quintera, an accounting and consulting firm of which Mr. Reynolds
is an employee.
(7) Includes options to purchase 228,700 shares of Common Stock and conversion
of 909,245 shares of Preferred Stock.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In July 1995, the Company borrowed $85,000 from the spouse of the
Chairman of the Board of Directors. The note is due upon demand and bears
interest at 12% per annum. The Chairman disclaims any beneficial interest in the
loan. The highest balance due under the note during the year ended March 31,
1997 and the balance outstanding on March 31, 1997 was $85,000 and $75,000,
respectively.
In June 1996, the Company's Remediation Division acquired a used thermal
desorption plant located at the Port of Los Angeles for a purchase price of
$600,000. This equipment was acquired on behalf of the company by Sam Klein, the
father of one of the company's directors and shareholders Michael Klein pursuant
to a demand note for $515,000 bearing interest at 12% per annum, secured by the
acquired plant. The balance outstanding as of March 31, 1997 was $515,000.
The Company's Remediation Division also has a note payable dated June
30, 1996 to an affiliated company under common ownership of the Company's Chief
Executive Officer with an original balance of $495,000 bearing a 13.5% per annum
interest rate. Interest is payable monthly and a balloon payment of the
principal is due in June 1999. The loan is collateralized by accounts
receivable. The balance outstanding as of March 31, 1997 was $303,000.
On December 31, 1996 the Company borrowed $1,000,000 from Michael Klein
a shareholder and director of the Company pursuant to a one year promissory note
bearing interest at 14% per annum. For the first three months of the note, while
the Company sought alternative long-term financing, the note was unsecured with
interest only payable monthly. Commencing March 1997, monthly payments of
principle and interest were required until maturity in December 1997, and the
note was secured with all trade accounts receivable of the Company. This note
was subsequently repaid on May 5, 1997 from proceeds of a loan received from Sam
Klein the father of the director and shareholder. The loan was modified as a
three month promissory note maturing on August 5, 1997, with interest only
payable monthly at 12% per annum and secured by all trade receivables of the
Company.
The Company pays a monthly management fee of $2,500 to an affiliated
company under common ownership of the Company's Chief Executive Officer for the
utilization of administrative services,
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office space and accounting services. The management fee expense for the period
ended March 31, 1997, which is included in selling, general and administrative
expenses, aggregated $22,500.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
3(I) Restated Articles of Incorporation, as amended.
3(ii) Bylaws.
4.1 Warrant Agreement dated July 11, 1994 between the Company and Strategica
Group, Inc. incorporated by reference from Exhibit 4.1 of Registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995
dated February 12, 1996.
4.2 Warrant Agreement dated July 11, 1994 between the Company and Strategica
Capital Corporation incorporated by reference from Exhibit 4.1 of
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.3 Warrant Agreement dated April 4, 1995 between the Company and Strategica
Capital Corporation incorporated by reference from Exhibit 4.1 of
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.4 Additional Warrant Agreement dated April 4, 1995 between the Company and
Strategica Capital Corporation incorporated by reference from Exhibit 4.1
of Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.5 Amendment to Warrant Agreement between the Company and Strategica Capital
Corporation dated April 4, 1995 incorporated by reference from Exhibit 4.1
of Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.6 Amendment to Warrant Agreement between the Company and Strategica Group,
Inc. dated April 4, 1995 incorporated by reference from Exhibit 4.1 of
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.7 Warrant Agreement dated July 8, 1996 between the Company and Clubb Capital
Ltd.
4.8 Warrant Agreement dated July 8, 1996 between the Company and Karl Spoddig.
Items 10.1, 10.2, 10.3, and 10.4 are the Company's executive compensation
plans and arrangements.
-31-
10.1 Employment Agreement between Evans Environmental Corporation and Charles
Evans dated June 26, 1992 incorporated by reference from Exhibit 10.19 of
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March
31, 1993 dated July 14, 1993.
10.2 Consulting Agreement between the Company and R.G. Quintero & Co. dated
March 14, 1995 incorporated by reference from Exhibit 10.2 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995
dated August 18, 1995.
10.3 Evans Environmental Corporation 1993 Stock Option Plan incorporated by
reference from Exhibit 10.3 of Registrant's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1995 dated August 18, 1995.
10.4 Employment Agreement between Evans Environmental Corporation and Enrique
A. Tomeu dated July 8, 1996.
10.5 Amended and Restated Share Exchange Agreement between the Company and
Sector Investments, Inc. dated October 29, 1993 incorporated by reference
from Exhibit 10.3 of Registrant's Form SB-2, No. 33-85072, dated October
13, 1994.
10.6 Restated and Amended Stock Purchase and Settlement Agreement between the
Company and GGL Industries, Inc., Enviropact Consultants, Inc., Sector
Investments, Inc. and Enviropact, Inc. dated October 29, 1993 incorporated
by reference from Exhibit 10.4 of Registrant's Form SB-2, No. 33-85072,
dated October 13, 1994.
10.7 Licensing Agreement between BioSystems Technology, Inc. and the Company
dated June 14, 1994 incorporated by reference from Exhibit 10.7 of the
Registrant's Form SB-2, No. 33-85072, dated October 13, 1994.
10.8 Advisory Agreement between the Company and Strategica Group, Inc. dated
June 16, 1994 incorporated by reference from Exhibit 10.8 of the
Registrant's Form SB-2, No. 33-85072, dated October 13, 1994.
10.9 Master Funding and Indemnification Agreement between the Company and
Sirrom Resources Group, Inc. dated August 1, 1994 incorporated by
reference from Exhibit 10.9 of the Registrant's Form SB-2, No. 33-85072,
dated October 13, 1994.
|
10.10 Credit Agreement, dated as of July 11, 1994 incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-KSB for the fiscal year ended
March 31, 1994, dated July 14, 1994.
10.11 Amendment to Advisory Agreement between the Company and Strategica Group,
Inc. dated April 4, 1995 incorporated by reference from Exhibit 10.12 of
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March
31, 1995 dated August 18, 1995.
10.12 Agreement by and between Evans BioSystems Corporation and PDG Delaware,
Inc. dated as of November 8, 1994 incorporated by reference from Exhibit
10.13 of Registrant's
-32-
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995
dated August 18, 1995.
10.13 Stock Sale Agreement between the Company and Enrique A. Tomeu dated March
15, 1996, as amended.
10.14 Agency Agreement between the Company and Clubb Capital Ltd dated July 8,
1996.
10.15 Asset Purchase Agreement between the Company, ABC Cable Products, Inc. and
ICX International, Inc. dated April 3, 1996.
10.16 Promissory Note between the Company and Lisa L. Robbins dated May 1, 1995.
10.17 Corporate Relations Agreement, dated August 13, 1996, between the Company
and Corporate Relations Group, Inc. incorporated by reference as filed
under Exhibit 10.2 of Registration Statement on Form S-3 dated October 9,
1996.
10.18 The Company's 1996 Stock Option Plan, incorporated by reference as filed
under Exhibit 10.3 of Registration Statement on Form S-3 dated October 9,
1996.
10.19 Joint Venture agreement dated October 10, 1996 between American Remedial
Technologies, Inc. and Marbi, Inc., incorporated by reference, as filed
with Form 10-QSB for the quarterly period ended September 30, 1996.
10.20 Promissory Note of $1,000,000 dated December 20, 1996 between the Company
and Mr. Michael Klein, incorporated by reference, as filed with Form
10-QSB for the quarterly period dated December 31, 1996.
10.21 Promissory Note of $1,000,000 dated May 5, 1997 between the Company and
Mr. Sam Klein.
21 Subsidiaries of the Company.
23.1 Consent of Independent Accountants
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter ended March
31, 1997.
-33-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ECOS GROUP, INC.
By: /s/ CHARLES C. EVANS
--------------------------
Charles C. Evans, Chairman
Date: July 15, 1997
|
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ENRIQUE A. TOMEU President, Executive Officer July 15, 1997
----------------------- and Director (Principal
Enrique A. Tomeu Executive Officer)
/s/ DAVID C. LANGLE Chief Financial Officer July 15, 1997
----------------------- (Principal Accounting
David C. Langle Officer)
/s/ CHARLES C. EVANS Director July 15, 1997
-----------------------
Dr. Charles C. Evans
/s/ WENDELL R. ANDERSON Director July 15, 1997
-----------------------
Wendell Anderson
/s/ LEON S. EPLAN Director July 15, 1997
-----------------------
Leon S. Eplan
/s/ ANTONIO L. CONTRERAS, JR. Director July 15, 1997
-----------------------
Antonio L. Contreras, Jr.
/s/ LUIS DE LA CRUZ Director July 15, 1997
-----------------------
Luis De la Cruz
-34-
|
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL KLEIN Director July 15, 1997
----------------------------
Michael Klein
/s/ RAIMUNDO LOPEZ-LIMA LEVI Director July 15, 1997
----------------------------
Raimundo Lopez-Lima Levi
/s/ JOHN B. MCCRACKEN Director July 15, 1997
----------------------------
John McCracken
/s/ JOSEPH F. STARTARI Director July 15, 1997
----------------------------
Joseph F. Startari
/s/ ENRIQUE J. TOMEU Director July 15, 1997
----------------------------
Enrique J. Tomeu
/s/ CARLOS M. VERGARA Director July 15, 1997
----------------------------
Carlos M. Vergara
|
-35-
ECOS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGES
Report of Independent Accountants F-1
Financial Statements:
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4 to F-6
Consolidated Statements of Stockholders'
Equity (Deficit) F-7
Notes to Consolidated Financial Statements F-8 to F-30
|
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
ECOS Group, Inc.
We have audited the accompanying consolidated balance sheet of ECOS Group, Inc.
and subsidiaries (the "Company") as of March 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 consolidated financial position of ECOS Group,
Inc. and subsidiaries as of March 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 20 to
the consolidated financial statements, the Company has suffered significant
losses for the years ended March 31, 1997 and 1996 and, at March 31, 1997, it
had a working capital deficiency. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 20. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ Coopers & Lybrand L.L.P.
Miami, Florida
July 15, 1997
|
F-1
ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
ASSETS
Current assets:
Cash and equivalents $ 449,782
Restricted cash 9,080
Marketable securities 140,000
Accounts receivable, net of allowance of $460,106 1,618,120
Note receivable 250,000
Prepaid expenses & other 248,490
-----------
Total current assets 2,715,472
Amounts due under
state reimbursement program 650,158
Property & equipment, net 2,851,798
Goodwill, net of amortization of $869,295 6,509,328
Other assets 428,026
-----------
Total assets $13,154,782
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,941,521
Accrued expenses 678,594
Related party notes payable 1,625,363
Current portion of capital
lease obligation & notes payable 326,948
Deferred revenues 300,000
-----------
Total current liabilities 4,872,426
-----------
Notes payable, net of current portion 682,983
-----------
Note payable to affiliated company 303,000
-----------
Commitments & contingencies -
Stockholders' equity:
Preferred stock:
Series A,$.001 par value, 5,000,000 authorized,
none issued and outstanding -
Series B convertible, $.01 par value,
1,000,000 authorized, issued and outstanding -
Common stock:
$.012 par value, 75,000,000 authorized,
17,597,626 issued and outstanding 211,172
Additional paid-in capital 16,125,228
Net unrealized loss on marketable
securities (10,000)
Accumulated deficit (9,030,027)
-----------
Total stockholders' equity 7,296,373
-----------
Total liabilities & stockholders' equity $13,154,782
===========
|
The accompanying notes are an integral part
of these financial statements
F-2
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
----------- -----------
Revenue:
Consulting services $ 5,902,771 $ 5,721,221
Soil remediation 2,653,056 --
----------- -----------
Total revenue 8,555,827 5,721,221
----------- -----------
Costs of consulting services:
Direct labor & employee benefit costs 2,062,331 1,990,786
Other direct costs & expenses 1,325,469 1,306,325
----------- -----------
3,387,800 3,297,111
Costs of soil remediation 3,102,136 --
----------- -----------
Total direct costs & expenses 6,489,936 3,297,111
----------- -----------
Gross profit 2,065,891 2,424,110
----------- -----------
Other costs & expenses:
General, administrative &
other operating costs 4,509,218 3,352,980
Stock compensation expense for services 505,334 --
Reserve for restructuring 350,000 --
Write down for closed offices -- 629,518
Provision for potential loss on
state reimbursement program -- 345,706
Loss on disposal of laboratory assets -- 198,997
Other costs -- 151,766
----------- -----------
Total operating and other costs & expenses 5,364,552 4,678,967
----------- -----------
Operating loss (3,298,661) (2,254,857)
----------- -----------
Other income (expense):
Interest, net (121,618) (187,688)
Loss in value of marketable securities (200,000) --
Other income (expense), net (27,114) 300
----------- -----------
(348,732) (187,388)
----------- -----------
Loss from continuing operations (3,647,393) (2,442,245)
Discontinued operations:
Income from discontinued operations,
net of $0 taxes -- 390,880
Gain on disposal, net of $0 taxes 509,037 --
----------- -----------
Loss before extraordinary items (3,138,356) (2,051,365)
Extraordinary items, net of $0 taxes 1,225,964 --
----------- -----------
Net loss $(1,912,392) $(2,051,365)
=========== ===========
Income (loss) per share from:
Continuing operations $ (0.26) $ (0.60)
----------- -----------
Discontinued operations $ 0.04 $ .10
----------- -----------
Extraordinary items $ 0.09 $ --
----------- -----------
$ (0.13) $ (0.50)
=========== ===========
|
The accompanying notes are an integral part
of these financial statements
F-3
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
------------ -----------
Operating activities:
Net loss $(1,912,392) $(2,051,365)
Adjustments to reconcile net loss to
net cash used by continuing operations:
Depreciation & amortization 445,654 178,390
(Gain) loss on sale\disposal of equipment 10,545 (300)
Services paid with common stock 505,334 40,500
Other -- 9,563
Increase in provision for bad debts and
potential loss on state reimbursement
program 173,104 293,869
Write down in marketable securities 200,000 --
Write down for closed offices -- 526,278
Discontinued operations (509,037) (390,880)
Extraordinary items (1,225,964) --
Goodwill amortization 420,065 132,988
Changes in operating assets
& liabilities, net of effects from
purchase of American Remedial
Technologies, Inc.:
Accounts receivable (412,504) 520,962
Prepaid expenses & other 333,634 (37,651)
Amounts due under state
reimbursement program (122,840) (131,703)
Other assets 21,655 1,256
Accounts payable (159,938) 266,043
Accrued expenses (263,972) (417,052)
Deferred revenue 300,000 --
----------- -----------
Net cash provided (used) by operating activities of:
Continuing operations (2,196,656) (1,059,102)
Discontinued operations -- 41,794
----------- -----------
Net cash used by operating activities (2,196,656) (1,017,308)
----------- -----------
|
F-4
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
----------- -----------
Investing activities:
Restricted cash 145,669 (113,020)
Sales of marketable securities -- 150,000
Purchases of equipment (497,806) (54,754)
Payments for purchase of American
Remedial Technologies, Inc., net
of cash acquired (5,983,677) --
Proceeds from sale of discontinued
operations, net of expenses 1,297,000 --
Proceeds from sale of equipment -- 300
----------- -----------
Net cash used by investing activities (5,038,814) (17,474)
----------- -----------
Financing activities:
Issuance of common stock 8,100,000 476,500
Proceeds from warrant exercise 337,500 --
Costs associated with issuance
of stock (797,014) (125,546)
Proceeds from notes payable 562,860 619,518
Proceeds from related party notes payable 1,645,000 85,000
Payments on notes payable and capital
lease obligations (1,496,215) (125,338)
Payments on related party notes payable (845,000) (17,974)
----------- -----------
Net cash provided by financing activities 7,507,131 912,160
----------- -----------
Net increase (decrease) in cash and equivalents 271,661 (122,622)
Cash and equivalents, beginning of period 178,121 300,743
----------- -----------
Cash and equivalents, end of period $ 449,782 $ 178,121
=========== ===========
|
F-5
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
----------- --------
Supplemental Disclosure of Cash Flows
Information:
Cash paid during the period for:
Interest $ 233,315 $295,394
=========== ========
Income taxes $ - $ 6,403
=========== ========
Supplemental Schedule of noncash
investing and financing:
On July 8, 1996 the Company acquired 100%
of the outstanding stock of American
Remedial Technologies, Inc.
Details of the acquisition are:
Common stock issued $1,500,000
Convertible preferred stock issued -
Value of assets acquired 3,106,127
Liabilities assumed 1,466,844
Cash paid for acquisition $6,000,000
Cost of acquisition 46,836
Less cash acquired 63,159
----------
Net cash paid $5,983,677
On August 20, 1996 the Company issued
545,000 shares of common stock for
services to be performed in connection
with a public relations consulting agreement.
The stock and related cost of issuance was
valued at: $ 493,881
----------
|
The accompanying notes are an integral part
of these financial statements
F-6
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1997 AND 1996
NET
UNREALIZED
SERIES A SERIES B ADDITIONAL LOSS ON
SHARES OF SHARES OF PREFERRED PREFERRED COMMON PAID IN MARKETABLE ACCUMULATED
COMMON PREFERRED STOCK STOCK STOCK CAPITAL SECURITIES (DEFICIT) TOTAL
--------- --------- --------- --------- -------- ---------- ----------- ------------ -----------
Balance April 1, 1995 3,252,403 - $ - $ - $ 39,029 $5,760,097 - $(5,066,270) $ 732,856
Issuance of stock 499,362 249,745 250 - 5,992 970,258 - - 976,500
Costs associated with
issuance of stock (125,546) (125,546)
Conversion of preferred 749,235 (249,745) (250) 8,991 (8,741) - - -
Issuance of stock for
services 89,000 - - - 1,068 39,432 - - 40,500
Rounding for stock split 126 - - - 2 (2) - - -
Net loss - - - - - - - (2,051,365) (2,051,365)
---------- --------- --------- ------- --------- ----------- -------- ----------- -----------
BALANCE MARCH 31, 1996 4,590,126 - - - 55,082 6,635,498 - (7,117,635) (427,065)
Exercise of warrants 450,000 - - - 5,400 332,100 - - 337,600
Issuance of stock in 9,000,000 - - - 108,000 7,244,500 - - 7,352,500
offering (net of
placement costs)
Issuance of stock for 3,000,000 1,000,000 - - 36,000 1,464,000 - - 1,500,000
acquisition of American
Remedial Technologies
Costs associated with - - - - - (49,514) - - (49,514)
issuance of stock
Issuance of stock for 557,500 - - - 6,690 498,644 - - 505,334
services
Change in value of - - - - - (10,000) - (10,000)
marketable securities
Net loss - - - - - - (1,912,392) (1,912,392)
---------- --------- --------- ------- --------- ----------- -------- ----------- -----------
BALANCE MARCH 31, 1997 17,597,626 1,000,000 $ - $ - $ 211,172 $16,125,228 $(10,000) $(9,030,027) $ 7,296,373
========== ========= ========= ======= ========= =========== ======== =========== ===========
|
The accompanying notes are an integral part
of these financial statements
F-7
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BUSINESS
The Company is engaged, through its wholly-owned subsidiaries, in
environmental consulting and other environmental related services (the
"Consulting Division")and soil remediation (the "Remediation Division").
Until April 3, 1996, the Company was also engaged in the production and sale
of cable products (the "Cable Products Division").
ORGANIZATION
The Company changed its name to ECOS Group, Inc. ("ECOS")(f/k/a Evans
Environmental Corporation, Inc.) effective October 25, 1996 pursuant to a
majority vote at its annual meeting of shareholders held on October 18,
1996. The name change was made because of the Company's expanded activities
in remediation since the acquisition of American Remedial Technologies, Inc.
("American Remedial") in July, 1996, as further discussed below.
2. ACQUISITIONS
On July 8, 1996, the Company acquired all the outstanding stock of American
Remedial which operates a soil remediation facility in Lynwood, California.
F-8
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the acquired assets and assumed liabilities,
based on their respective fair values. The excess (approximately $5,900,000)
of the purchase price over the fair values of assets acquired was recorded
as goodwill and is being amortized over 15 years on a straight line basis.
The initial valuation of the purchase price and related carrying value of
goodwill will be periodically valued by the Company in relation to current
and expected operating results to assess if there has been any permanent
impairment.
The purchase price of American Remedial consisted of a cash payment of
$6,000,000, the issuance of 3,000,000 shares of unregistered Common Stock of
which 272,277 shares were subsequently registered and the issuance of
1,000,000 shares of Series B Preferred Stock. The Series B Preferred Stock
is convertible, subject to an earn-out formula, into a maximum of 10,000,000
shares of Common Stock. Furthermore, American Remedial's President, Mr.
Enrique A. Tomeu, became the Chief Executive Officer of the Company. The
Series B Convertible Preferred Stock, $.001 par value per share (the "Series
B"), is not entitled to receive any dividends and has a liquidation value of
$.75 per share. The holders of the Series B are entitled to elect six
members to the Company's Board of Directors. No value was assigned to the
Series B shares issued in connection with the American Remedial acquisition.
The purchase price was principally funded from a contemporaneous Regulation
S stock offering by the Company as herein discussed.
The pro forma results of operations which follow assume that the acquisition
of American Remedial had occurred at the beginning of each period presented.
In addition to combining the historical results of operation of the two
companies, the pro forma calculations include adjustments for the estimated
effect on the Company's historical results of operations for amortization of
goodwill related to the acquisition.
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
--------------- --------------
Revenues $ 9,460,922 $ 7,224,995
Net Earnings (loss) $ (2,014,696) $ (4,070,298)
|
F-9
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND EQUIVALENTS
The Company classifies as cash and equivalents all highly liquid investments
which present insignificant risk of changes in value and have maturities at
the date of purchase of three months or less. The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts.
F-10
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARKETABLE SECURITIES
The Company classifies its investments in marketable securities as
available-for-sale and reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity. As of March 31, 1997, the Company has classified as
available for sale investments with an original cost of $350,000. During
fiscal year ending March 31, 1997, the Company recorded a write down of
$200,000 for one of its marketable securities as it deemed a decline in
market value below its cost to be other than temporary.
PROPERTY & EQUIPMENT
Property & equipment are recorded at cost and are depreciated using the
straight line method over the estimated useful lives of the assets for
financial reporting purposes and using accelerated methods for income tax
reporting purposes. Amortization of assets recorded under capital leases is
included in depreciation expense.
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized on a straight line basis over 14 and 15 years.
The Company periodically reviews the carrying value of goodwill in relation
to current and expected operating results of the businesses which benefit
therefrom in order to assess whether there has been a permanent impairment
of goodwill.
In connection with its periodic review, the Consulting Division's closing of
certain offices and its disposition of certain operations during fiscal year
March 1996, the Company wrote off an aggregate $452,737 (included in the
write down for closed offices)of goodwill for the year ended March 31, 1996.
REVENUE RECOGNITION
Consulting revenue is recognized as services are performed.
Soil remediation revenues are recognized as soil is processed. The Company
bills customers upon receipt of contaminated soil at its
F-11
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
remediation facility. Amounts billed in excess of revenues recognized are
classified as "Deferred revenues" on the accompanying balance sheet.
INCOME TAXES
The Company utilizes the liability method of accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using tax rates in effect for the year in which the
differences are expected to reverse.
PER SHARE DATA
Per share data is based on the weighted average number of shares of common
stock of 14,212,468 and 4,102,577 for the years ended March 31, 1997 and
1996, respectively. Common stock equivalents have not been included in the
weighted average number of shares as they are anti-dilutive for all periods
presented.
On December 27, 1995 the shareholders of the Company approved a one-for-four
reverse split of common stock effective December 29, 1995. Unless otherwise
noted, all share and per share data of the Company included in the
accompanying financial statements and notes thereto have been adjusted to
give effect to this reverse stock split.
CHANGE IN ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share (FAS 128). FAS 128 specifies new standards designed to improve the EPS
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and
increasing the comparability of EPS data on an international basis. Some of
the changes made to simplify the EPS computations include: (a) eliminating
the presentation of primary EPS and replacing it with basic EPS, with the
principal difference being that common stock equivalents (CSEs) are not
considered in computing basic EPS, (b) eliminating the modified treasury
stock
F-12
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method and the three percent materiality provision, and (c ) revising the
contingent share provisions and the supplemental EPS data requirements. FAS
128 also makes a number of changes to existing disclosure requirements. FAS
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company does not believe
that the impact from the implementation of FAS 128 to be significant on EPS
presentation for the periods presented herein.
DISCONTINUED OPERATIONS
During April 1996, ABC Cable Products, Inc., a wholly-owned subsidiary,
ceased operations and disposed of all of its operating assets. As such, the
Company has treated the Cable Products Division as discontinued operations
for all periods presented. See Note 17, Discontinued Operations.
CUSTOMERS AND CLIENT BASE
The majority of the Consulting and Remedial Divisions' customers are located
in Florida and California, respectively. For the fiscal year ended March 31,
1997, four customers accounted for 44% of the Consulting Division sales and
eight customers accounted for 60% of the Remedial Division's sales. For the
fiscal year ended March 31, 1996, none of the Companies' customers
represented ten percent or more of total revenues.
As of March 31, 1997, the Company had $650,158 of long term receivables
outstanding under the State of Florida Inland Protection Trust Fund program
(the "FIPT"), and two customers comprising approximately 33% of net trade
receivables for the Remedial Division. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
specific clients, historical trends, and other information. See Note 4,
State Reimbursement Program.
PRESENTATION
Certain amounts previously reported have been reclassified to conform to the
1997 financial statement presentation.
F-13
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STATE REIMBURSEMENT PROGRAM RECEIVABLES
The Company continues to monitor governmental activities in Florida with
respect to changes in the Florida Inland Protection Trust Fund (the "FIPT"),
which provides for the remediation of contamination related to the storage
of petroleum and petroleum products. The State of Florida ceased the
processing of applications for new work under the Petroleum Contamination
Reimbursement Program under the FIPT with limited exceptions for certain
active sites. In its place, the State of Florida has implemented, under the
FIPT, a prioritized Petroleum Cleanup Program based upon pre-approved scope
of work and costs.
As of March 31, 1997, the Company had claims submitted to the FIPT, under
the prior program, totaling $650,158, net of reserves of $121,521.
Certain submitted claims have been financed under certain master
funding and subcontractor finance agreements. See Note 7, Notes
Payable.
During the year ended March 31, 1997, the Company provided reserves for
potential unallowed claims, present value discounts on long term
receivables, and actual denials aggregating $80,000.
5. PROPERTY & EQUIPMENT
Property & equipment at March 31, 1997 consists of the following:
Machinery & equipment $ 1,590,048
Automobiles 156,679
Furniture & fixtures 736,437
Leasehold improvements 1,560,196
-----------
4,043,360
Less accumulated depreciation & amortization (1,191,562)
-----------
$ 2,851,798
===========
|
Depreciation and amortization of property & equipment amounted to $387,329
and $178,374 for the years ended March 31, 1997 and 1996, respectively.
F-14
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses at March 31, 1997 consist of the following:
Compensation and employee benefits $141,865
Interest 27,708
Restructuring reserve 97,103
Professional fees 94,857
Management fees - related party 37,000
Local and payroll taxes 79,184
Other 200,877
--------
$678,594
========
|
7. NOTES PAYABLE
Notes payable at March 31, 1997 consist of the following:
Various notes payable, bank and finance companies, collateralized by
property and equipment, payable in monthly installments ranging from $288
to $2,519 through year 2000, including interest at 12.7% $136,449
Note payable, bank, collateralized by reassignment of letters of credit
received on sale of cable products division and guaranteed by the Company,
interest only payable monthly at prime (8 1/2% at March 31, 1997) plus
1.75%, principal due September 5, 1997. (Subsequently paid May 1997) $250,000
Master funding and indemnification agreements, Sirrom Resource Funding,
L.L.C., collateralized by specific receivables in connection with the FIPT,
with interest at 2% over prime (8-1/2% at March 31, 1997), through 1997 150,561
Subcontractor finance agreements with recourse, Environmental Corporation of
America, Inc., collateralized by specific receivables in connection with
the FIPT, with interest at 8.25%-8.75% per annum for 12 months, 10% per
annum for the following 6 months and 3% over prime thereafter. The notes
will be deemed paid upon the lenders receipt of funds from the FIPT. 334,958
|
F-15
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
Subcontractor finance agreements with recourse, Tier Environmental Services,
Inc., collateralized by specific receivables in connection with the FIPT,
with interest at 8.50%-8.75%. The notes will be deemed paid upon the
lenders receipt of funds from the FIPT. 137,963
----------
1,009,931
Less current portion 326,948
----------
$ 682,983
==========
|
Aggregate maturities of notes payable as of March 31, 1997 are as follows:
YEAR ENDING MARCH 31,
1998 $ 326,948
1999 653,380
2000 27,220
2001 2,383
----------
$1,009,931
==========
|
The Company sold receivables, which for financial reporting purposes has
been reported as a borrowing transaction, aggregating $623,482 at March 31,
1997, eligible for reimbursement under the FIPT. Under two similar master
funding and indemnification agreements, Sirrom Resource Funding, L.L.C. and
its affiliates ("Sirrom") have lent $150,561 at March 31, 1997 to the
Company via the funding of eligible receivables. The agreements provide that
in the event Sirrom is not reimbursed within 24 months of an advance, the
Company is obligated to repurchase the receivable. This obligation is
presented as a note payable in the accompanying financial statements. The
Company maintains a cash escrow for the benefit of Sirrom in the event of a
reimbursement shortfall. If the shortfall exceeds the escrow amount, the
Company must pay Sirrom within 15 days of notification.
The Company also entered into subcontractor finance agreements with
Environmental Corporation of America, Inc. ("ECA") and Tier
Environmental Services, Inc. ("Tier"). Under these agreements ECA and
Tier have funded $334,958 and $137,963, respectively of receivables
eligible for reimbursement under the FIPT. Under these agreements,
the Company must prepay interest for 12 months based on the published
F-16
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
prime rate at the time of funding. Also, at the time of funding the Company
must prepay additional interest at a rate of 5% to a reserve account for
months 13 through 18. If reimbursement from the FIPT takes more than 18
months, then interest must be prepaid on a quarterly basis at the rate of
prime plus 3%. The Company is liable to ECA and Tier for any reimbursement
denials. The Company must pay any denied reimbursements within 10 days of
notification. See Note 4, State Reimbursement Program.
8. COMMITMENTS AND CONTINGENCIES
RENTAL:
The Company leases certain remediation and transportation equipment as well
as office space under operating leases which expire on various dates through
the year 2001. Many of these lease agreements contain options for renewal
and annual rent increases.
Future minimum annual rental payments at March 31, 1997, are as follows:
YEAR ENDING MARCH 31,
1998 $1,039,000
1999 1,052,000
2000 615,000
2001 76,000
----------
Minimum lease payments $2,782,000
==========
|
Total rental expense incurred was $1,019,932 and $305,211 for the years
ended March 31, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS:
The Company's Chief Executive Officer and President is employed pursuant to
a four year employment agreement dated July 8, 1996. The agreement provides
for an annual salary of $150,000, expense allowance for business use and
travel, incentive compensation, life insurance and disability benefits.
Additionally, the Chairman of the Board of the Company is employed pursuant
to a three year employment agreement and a three year consulting agreement
dated July 3, 1996, providing for total compensation of $75,000.
F-17
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENT LIABILITY:
The Company has been involved in various discussions with a former private
senior lender to the Company. The purpose of these discussions has been to
settle all outstanding differences between the former lender and the Company
regarding a variety of matters, including, without limitation, the exercise
price of the former lender's outstanding warrants, amounts claimed to be
owed to the former lender for legal and financial advisory fees, shares
claimed to be owed to the former lender for the loan of funds and services
rendered, and claimed rights to additional shares of the Company's stock.
Although all cash amounts owed to the former lender for principal and
interest were paid in full in July, 1996, the former lender has continued to
make further demands on the Company as well as asserting enforceability of
claimed agreements. Although the Company has rejected the validity of all
such claims it has agreed to reach an accommodation with the former lender
on some of these claims solely for the purpose of reaching a definitive
settlement of all outstanding differences. To date the former lender has not
agreed to any settlement. The Company is unable to foresee the ultimate
outcome of this matter.
9. RELATED PARTY TRANSACTIONS
DEBT:
In July 1995, the Company borrowed $85,000 from the spouse of the Chairman
of the Board of Directors. The note is due upon demand and bears interest at
12% per annum. The Chairman disclaims any beneficial interest in the loan.
The balance of this note is $75,000 at March 31, 1997.
In June 1996, the Company's remediation subsidiary acquired a used thermal
desorption plant located at the Port of Los Angeles for a purchase price of
$600,000. This equipment was acquired on behalf of the Company by the father
of one of the Company's directors and shareholders pursuant to a demand note
bearing interest at 12% per annum, secured by the acquired plant.
The Company's remediation subsidiary also has a note payable to an
affiliated company under common ownership of the Company's chief executive
officer for $303,000 with a 13.5% interest rate. Interest
F-18
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
is payable monthly and a balloon payment of the principal is due in
June 1999. The loan is collateralized by accounts receivable.
On December 31, 1996 the Company borrowed $1,000,000 from a shareholder and
director of the Company pursuant to a one year promissory note bearing
interest at 14% per annum. For the first three months of the note, while the
Company secures alternative long-term financing, the note is unsecured with
interest only payable monthly. Commencing March 1997, monthly payments of
principle and interest are required until maturity in December 1997, and the
note is secured with all trade accounts receivable of the Company. This note
was subsequently repaid on May 5, 1997 from proceeds of a loan received from
the father of the director and shareholder. The loan was modified as a three
month promissory note maturing on August 5, 1997, with interest only payable
monthly at 12% per annum and secured by all trade receivables of the
Company.
MANAGEMENT FEES:
The Company pays a monthly management fee of $2,500 to a related party under
common ownership of the Company's chief executive officer for the
utilization of administrative services, office space and accounting
services. The management fee expense for the period ended March 31, 1997,
which is included in selling, general and administrative expenses,
aggregated $22,500.
10. INCOME TAXES
The Company utilizes the liability method of accounting for deferred income
taxes. There was no provision for income taxes due to operating losses. The
significant components of the deferred taxes as of March 31, 1997 were as
follows:
F-19
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred tax assets:
Bad debt reserves $ 174,000
Other reserves 392,000
Revaluation of assets 431,000
Accrued expenses 40,000
Federal net operating losses carryforward 2,537,000
----------
3,574,000
Valuation allowance (3,494,000)
----------
80,000
----------
Deferred tax liabilities:
Property and equipment 52,000
Prepaid expenses 28,000
----------
80,000
----------
$ -
==========
|
The Company experienced a change in ownership, as defined by Internal
Revenue Code Section 382, related to the issuance of shares of stock in
connection with the acquisition of American Remedial in July 1996. The
changes in ownership resulted in annual limitations on the amount of net
operating losses that can be utilized which were incurred prior to such
ownership changes.
At March 31, 1997, the Company had available approximately $3,144,000 of
pre-change net operating losses which are allowable after application of the
Section 382 limitation, as well as post change net operating losses of
approximately $2,165,000. These net operating losses begin to expire in the
year 2007. The Company's ability to utilize these losses must be deferred
until after the Company has recognized taxable income sufficient to generate
taxes at least equal to the compromised payroll taxes as discussed in Note
18, Settlement of Delinquent Taxes.
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Due to the
payroll tax issue discussed in Note 18 and the history of operating
losses, it is managements' belief that it is more likely than not that the
deferred tax asset will not be realized; and accordingly, the Company has
established a valuation allowance against
F-20
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
deferred tax assets of $3,494,000 at March 31, 1996. The change in the
valuation allowance relates principally to the current year net operating
loss.
11. STOCKHOLDERS' EQUITY
COMMON STOCK
In August 1995, in connection with a settlement of notes receivable received
pursuant to a Regulation S private placement for 750,000 shares of common
stock consummated in October 1994, the Company agreed to revise the purchase
price per share of the stock sold from $3.00 to approximately $.96 and
reduce the number of shares purchased to 625,000. In addition, the Company
issued, at a price of $1.91 per unit, 249,745 units pursuant to Regulation
S, each unit consisting of one share of Series A preferred stock (see
Preferred Stock, below) and 2.5 shares of common stock. Prior to March 31,
1996, all of the preferred stock had been converted into common stock. The
overall effect of this settlement is that the Company issued 1,998,597
shares of common stock at a purchase price of $976,500 or approximately $.49
per share. The Company incurred costs and fees totaling approximately
$351,000 in association with this series of transactions. Additionally, the
Company received a portion of the proceeds in the form of marketable
securities and other assets. For the year ended March 31, 1996, the Company
sold a portion of the marketable securities and generated net cash proceeds
of $150,000.
On July 8, 1996, the Company completed a Regulation S stock offering. The
offering involved a sale of 9,000,000 shares of Common Stock at an offering
price of $.90 per share generating gross proceeds to the Company of
$8,100,000. The offshore placement agent (the "Placement Agent") handling
the offering entered into an agency agreement which provided for a cash
management and selling fee aggregating $607,500, or 7.5% of the gross
proceeds. In addition, the Placement Agent received broker warrants to
purchase 630,000 shares of Common Stock, exercisable at $1.00 per share
until July 8, 1998 and was reimbursed for out-of-pocket expenses of
approximately $140,000. Thus, net cash proceeds of the Company including
other offering costs of approximately $58,000 in connection with this
offering were approximately $7,294,500. The majority of the net proceeds
received
F-21
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
from this offering were utilized for the acquisition of American Remedial
and repayment of debt under an existing line of credit.
During the year ended March 31, 1997, warrants were exercised for 450,000
shares of Common Stock for total proceeds of $337,500.
On August 13, 1996, the Company entered into a five year Lead
Generation/Corporate Relations Agreement with a public relations company,
which was retained to provide certain corporate relations services. As
payment for these corporate relations services, the Company issued to the
public relations company 545,000 shares of Common Stock valued at fair
market value of approximately $494,000 inclusive of related cost.
Additionally, the Company has issued warrants to purchase Common Stock as
follows: (i) 300,000 shares at the exercise price of $2.00 per share,
exercisable within one year form August 13, 1997, (ii) 150,000 shares at
$2.50 per share, exercisable within two years form August 13, 1996; and
(iii) 150, 000 shares at $2.70 per share, exercisable three years from
August 13, 1996. The Company had registered all of the above shares for
resale by the public relations company. Notwithstanding the above, the
public relations company has agreed to return 47,000 shares to the Company
if by the end of the five year term of the agreement the price of the
Company's shares as traded on NASDAQ has not traded at or above $4.50 per
share for any period of ten consecutive days. The company recorded a
non-cash charge to earnings of approximately $494,000 for the foregoing
agreement in the fourth quarter of Fiscal 1997, the period in which services
commenced.
At the Annual Meeting of Shareholders held on October 18, 1996, the majority
of shareholders voted to approve to increase the number of authorized shares
of common stock to 75,000,000.
SERIES A PREFERRED STOCK
The Series A Convertible Preferred Stock(the "Series A"), is entitled to
receive cumulative preferential dividends at the rate of $.0512 per share,
per annum, payable either in cash or in common stock of the Company. Each
share of the Series A is convertible into three shares of the Company's
common stock. The Series A contains certain liquidation rights in the event
of any liquidation, dissolution or winding up of the Company. The
liquidation value is $.64 per share
F-22
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
of Series A, plus any accrued and unpaid dividends. The Company may redeem
the Series A at a price of $.64 per share of Series A, in whole or in part,
at any time commencing two years after its issuance.
SERIES B PREFERRED STOCK
The Series B Convertible Preferred Stock (the "Series B"), 1,000,000 is not
entitled to receive any dividends and has a liquidation value of $.75 per
share. The holders of the Series B, except as provided by law, are not
entitled to vote upon any matters relating to the business or affairs of the
Company except with respect to the election of six directors to the
Company's Board of Directors, such directors designated as Series B
Directors. The Series B stock is convertible, subject to an earn-out
formula, into a maximum of 10,000,000 shares of common stock. All of the
Series B stock shall automatically expire and be canceled if not converted
before March 31, 2000.
12. WARRANTS AND OPTIONS
Warrants and options outstanding to purchase common stock of the Company at
March 31, 1997 consist of the following:
EXPIR- COMMON
ISSUE ATION EXERCISE STOCK
DATE DATE PRICE ISSUABLE
------ ------ -------- --------
Issued in connection with:
Consulting agreement Jun 93 Jun 98 $10.50 75,000
Line of credit Jul 94 Jan 02 $2.70 175,000
Management agreement Mar 95 Sep 97 $0.29 31,250
Line of credit and
consulting agreement Apr 95 Jan 02 (1) 2,285,193
Management agreement Jun 95 Sep 97 $0.29 31,250
Consulting agreement Jun 95 Jun 98 $0.29 6,250
Management agreement Sep 95 Sep 97 $0.29 31,250
Consulting agreement Nov 95 Nov 98 $0.29 15,000
Management agreement Nov 95 Sep 97 $0.29 75,000
Management agreement Dec 95 Sep 97 $0.29 31,250
Consulting agreement Dec 95 Dec 99 $1.00 50,000
Management agreement Mar 96 Sep 97 $0.31 31,250
Management agreement Jul 96 Jun 98 $1.37 75,000
|
F-23
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. WARRANTS AND OPTIONS (CONTINUED)
EXPIR- COMMON
ISSUE ATION EXERCISE STOCK
DATE DATE PRICE ISSUABLE
------ ------ -------- --------
Issued in connection with:
Placement agency
agreement Jul 96 Jul 98 $1.00 630,000
Corporate relations Aug 97- $2.00-
agreement (2) Aug 96 Aug 99 $2.70 600,000
---------
4,142,693
=========
|
(1) Warrants are to purchase 761,731 shares of Series A preferred stock.
The Series A preferred stock are convertible into 2,285,193 shares of
common stock. The exercise price is constantly reset to the 10 day prior
trading average price of the Company's common stock up to a maximum
exercise price of $2.70 for each share of underlying common stock.
(2) See Note 11. Stockholders' Equity.
13. STOCK OPTION PLANS
The Company has a stock option plan (the "1993 Stock Option Plan") under
which the Compensation Committee of the Board of Directors has the
authority to grant incentive stock options and non-qualified stock options
to employees (including directors and executive officers) of the Company
or its subsidiaries. The following table presents information on the 1993
Stock Option Plan:
On August 15, 1996 the Company established a new stock option plan (the
"1996 Stock Option Plan") for directors, officers and key employees which
provides for non-qualified and incentive options. The 1996 Stock Option
Plan provides for the granting of options of up to 2,000,000 shares of the
Company's common stock. The Board of Directors determines the option price
(not to be less than fair market value for incentive options) at date of
grant. The options shall expire not more than 20 years from date of grant
and are exercisable over the period stated in each option. In November
1996, 225,000 options covered by this plan were granted to three key
employees at an exercise price of $1.31 with a two year expiration date.
OTHER STOCK OPTIONS
Outside of the 1993 Stock Option Plan, the Company has also issued an
aggregate 8,125 options to certain senior and middle management at an
exercise price of $0.88 per share. All said options, which are fully
vested, expire in June 1998.
Additionally, in June 1996 the Company issued an aggregate of 550,000
options to certain officers, consultants and directors. These options have
an exercise price of $1.375, vest immediately and expire in June 1998.
F-24
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLANS (continued)
The following table reflects the 1993 and 1996 Plans option
activity for the years ended March 31, 1997 and 1996:
WEIGHTED AVG. WEIGHTED AVG.
1997 EXERCISE PRICE 1996 EXERCISE PRICE
------------ -------------- ----------- ---------------
Options outstanding at
beginning of year 95,233 $ 0.41 84,283 $ 8.09
Granted 791,250 1.34 117,208 0.43
Exercised -- -- -- --
Expired 9,400 $ 0.67 106,258 $ 6.52
------------ ---------- ------------ -------------
Options outstanding at
end of year 877,083 $ 1.21 95,233 $ 0.41
------------ ---------- ------------ -------------
Options exercisable at
end of year 877,083 $ 1.21 55,658 $ 0.48
============ ========== =========== =============
Price range of options
outstanding at end of
year $9.75-$0.29 -- $23.28-$0.29 --
Options available for
future grants at end of
year 1,225,000 $ -- 7,875 --
============ ========== =========== =============
Weighted avg. fair value of
options granted 877,083 $ 1.00 70,089 $ 0.17
============ ========== =========== =============
|
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for the year
ended March 31, 1997. This pronouncement encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. The Company has determined not to recognize such compensation expense for
grants of stock options to employees. The compensation expense, if recognized,
would have resulted in the pro forma amounts indicated below for the years ended
March 31, 1997 and 1996.
1997 1996
----------- -----------
Net loss - as reported $(1,912,392) $(2,051,365)
Net loss - pro forma (2,789,475) (2,129,454)
Net loss per common share - as reported (0.13) (0.50)
Net loss per common share - pro forma (0.20) (0.52)
|
The fair value of each option grant was estimated as of the date of grant using
the Black Sholes Option Pricing Model with the following weighted average
assumptions: no expected dividends; expected volatility of 147%; risk-free
interest rate of $6.65%; and expected life of three years.
F-25
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESERVE FOR RESTRUCTURING
During the first quarter of Fiscal 1997, the Company recorded a special
charge of $350,000 for the restructuring of its operations and integration
with American Remedial, which was acquired on July 1996. These costs
included accruals for severance pay, real and personal property lease
terminations, relocation costs for certain offices and other costs
associated with the streamlining of operations and administrative
functions. As of March 31, 1997, approximately $97,000 of the charge has
not yet been utilized.
15. WRITEDOWN FOR CLOSED OFFICES
During the year ended March 31, 1996, the Company closed its Yonkers, New
York office and wrote down an aggregate $629,518 in connection with the
closing. The write down included:
Write down of:
Goodwill $ 452,738
Property & equipment, net 73,540
Deposits 9,167
Reserve for:
Accounts receivable 63,483
Expenses 30,590
---------
$ 629,518
=========
16. LOSS ON DISPOSAL OF LABORATORY ASSETS
|
In May 1995, the Company divested itself of the wet chemistry laboratory
operations of the Consulting Division. The purchaser bought all the assets
and essentially all operating liabilities of the laboratory operations.
The Company had, since March 1995, been planning to sell or liquidate its
laboratory operations and therefore provided for a reserve of $1,030,736
in the year ended March 31, 1995. The purchaser was to provide the Company
with free lab services valued at $100,000 and remit, out of the purchased
receivables, $143,000 to the Company's secured creditor to reduce the
Company's outstanding loan. During the year ended March 31, 1997, the
purchaser provided the Company with free laboratory services valued at
$62,147 and remitted $40,907 to reduce the Company's outstanding loan.
Subsequently, the purchaser filed for protection under Chapter 11 of the
United States Bankruptcy Code. While the Company continues to pursue all
legal rights and attempts to enforce its secured position it has provided
an additional loss reserve of $198,997 in the year ended March 31, 1996.
F-26
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. DISCONTINUED OPERATIONS
SALE OF CABLE PRODUCTS DIVISION
On April 3, 1996, ABC Cable Products, Inc., a wholly-owned subsidiary,
ceased operations and sold all of its operating assets for an aggregate of
$550,000 in cash and a promissory note in the amount of $1,000,000. In
addition, at closing, the purchaser assumed certain liabilities of ABC
aggregating $595,049. The promissory note, which is fully collateralized
by certain irrevocable letters of credit, has payment dates of July 1,
1996 ($500,000), March 5, 1997 ($250,000) and September 5, 1997
($250,000). The September 5, 1997 payment will automatically accelerate if
certain of the underlying letters of credit are not renewed.
In April 1996, the Company recorded a gain of approximately $510,000, net
of costs associated with the transaction, on the sale of its Cable
Products Division.
For all years presented, the Company has shown the results of the Cable
Products Division separately as discontinued operations in the
consolidated financial statements. Summarized results of the Cable
Products Division for the years ended March 31, 1997 and 1996 were as
follows:
1997 1996
---------- ----------
Revenues $ - $5,515,622
Cost of Goods Sold - 4,241,030
---------- ----------
Gross Margin $ - $1,274,592
========== ==========
18. EXTRAORDINARY ITEMS
VENDOR SETTLEMENTS
|
During April 1996, the Company executed a Composition Agreement with
certain of its trade creditors. The Company, due to its limited cash flow
situation, began negotiating with these creditors in September 1995. These
creditors formed an Informal Creditors Committee, who hired both legal and
accounting professionals. Negotiations were finalized in April 1996, with
over 75% of the creditors accepting a payout of $.20 for each $1.00 of
their allowed claim. The payout was made in April 1996 from funds that the
Company had previously put into escrow. The Company continues to negotiate
with the creditors who
F-27
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. EXTRAORDINARY ITEMS (CONTINUED)
rejected the Company's offer. The Company recorded a benefit, net of
expenses, of approximately $287,000 related to completed vendor
settlements.
SETTLEMENT OF DELINQUENT PAYROLL TAXES
On June 28, 1996, the Consulting Division and the IRS completed an Offer
in Compromise Agreement settling all outstanding issues and disputes. As
of March 31, 1996, the Company had accrued approximately $1,381,000 to the
Internal Revenue Services for delinquent payroll taxes, interest and
penalties. In connection with the settlement the Consulting Division paid
the IRS an aggregate of $350,000 and agreed to waive certain net operating
tax loss carryforwards. The net operating loss carry forwards waived would
have been available to offset future taxable income. As a direct result of
this settlement the Company recorded a gain of approximately $940,000, net
of professional fees and costs. The Company, including the Consulting
Division, has no other outstanding disputes with the IRS or delinquent
payroll taxes.
19. SUBSEQUENT EVENTS
RELATED PARTY BORROWINGS:
In May 1997 the Company borrowed $1,000,000 from the father of one of the
Company's directors and shareholders as discussed herein in Note 9 Related
Party Transactions. In June 1997, this same individual and the mother of
the Company's Chief Executive Officer and major shareholder provided the
Company with additional borrowings aggregating $644,000, the financing
terms which are still being negotiated.
SALE OF LABORATORY ASSETS:
On June 6, 1997, the Company sold its secured claim to all assets from a
previously disposed wet chemistry laboratory operation for total
consideration of $110,000 to an unrelated company. (See Note 16 Loss of
Disposal of Laboratory Assets.) The total sales price is payable $10,000
at closing, a promissory note in the principal amount of $30,000, which
note bears interest at 9% per annum payable in equal
F-28
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUBSEQUENT EVENTS (CONTINUED)
monthly installments over 12 months from the closing date and an executed
service agreement for free lab services valued at $70,000. The note and
service agreement are secured by the assets acquired.
20. GOING CONCERN CONSIDERATION
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has suffered significant net losses for the years ended March 31, 1997 and
1996 and at March 31, 1997 its current liabilities exceeded its current
assets. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
Management has developed a plan that will include, but is not limited to,
the following actions to fund its working capital requirements and raise
capital to achieve its growth.
1. Engage an investment banker to raise capital through an additional
equity/convertible debt offering.
2. Continued limited support of funds from related parties as discussed
herein.
3. Developed a marketing strategy to stabilize selling prices at its
Remedial Division.
4. Initiate production of Biosolid treatment program creating a new
revenue stream for the Remedial Division.
F-29
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. GOING CONCERN CONSIDERATION (CONTINUED)
5. Continue cost reduction measures at all operating divisions.
Management has begun the implementation of its foregoing plans. These
measures, if successful are expected to result in positive working capital
for the year ended March 31, 1998. However, actual results may differ from
management's plans.
In the absence of obtaining profitable operations or obtaining additional
debt or equity financing the Company may not have sufficient funds to
continue operations through the fiscal year ended March 31, 1998.
F-30
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
10.21 Promissory Note of $1,000,000 dated May 5, 1997 between
the Company and Mr. Sam Klein.
21 List of Subsidiaries
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule (For SEC Use Only)
|
EXHIBIT 10.21
PROMISSORY NOTE
1,000,000 WEST PALM BEACH, FLORIDA
MAY 5, 1997
FOR VALUE RECEIVED, the undersigned, ECOS GROUP, INC., a Florida
corporation ("Marker"), promises to pay to the order of SAM W. KLEIN ("Holder")
at 5200 Town Center Circle, Suite 302, Boca Raton, FL 33486, or at such other
place or places as Holder may designate in writing, in lawful funds of the
United States of America, the principal sum of ONE MILLION DOLLARS ($1,000,000),
together with interest on the unpaid principal balance, at a rate of TWELVE
(12%) PERCENT PER ANNUM, with said interest calculated to begin as of MAY 5,
1997 OR AS OF DATE OF RECEIPT OF LOAN PROCEEDS until this note has been paid in
full. This Note and the records of Maker, shall serve as conclusive evidence of
the unpaid principal balance hereof, accrued interest heron, and all payments
made in respect thereof, absent manifest error. THE NOTE IS SECURED BY ALL TRADE
ACCOUNTS RECEIVABLE OF ECOS GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARIES.
INTEREST ONLY will be due on this note for the first 90 days from MAY
5, 1997 until AUGUST 6, 1997. After AUGUST 6, 1997 at which time any unpaid
principal together with interest thereon, and all other sums due pursuant to
this Note shall be due and payable in full. On AUGUST 7, 1997 or earlier, the
holder of this note shall have the right to review the terms of this loan for
possible extension and/or modification subject to approval by both parties. In
the event any payment of interest exceed the Maximum Rate (as defined herein
below) allowed by law, such amount exceeding said Maximum Rate, shall be applied
to the reduction of the unpaid principal and not to the payment of interest.
This Note may be prepaid, in whole or in part, at any time without premium or
penalty.
Maker hereby waives in connection with the delivery, acceptance,
performance, default, or enforcement of the payment of this Note; presentment;
demand and protest; notice of presentment; dishonor; notice of intent to
accelerate; and notice of acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension, waiver, and renewal of any or all
other notices.
No delay or omission on the part of Holder is exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note. No waiver of any right shall be effective unless in writing and
signed by Holder, nor shall any waiver on one occasion be construed as a bar to,
or waiver of, any such right on any future occasion.
An "Event of Default" shall exist hereunder if any one or more of the
following events shall have occurred: (i) default shall be made in the due and
punctual payment of this Note when and as it shall become due and payable; (ii)
a court of competent jurisdiction shall enter an order, judgment or decree
appointing a receiver of Maker or of the whole or any substantial part of
Maker's property, or approving a petition filed against Maker under the federal
bankruptcy laws or any other applicable law or statue of the United States of
America or any state thereof, and as it shall become due and payable and in the
event that this note shall at any time after maturity or an Event of Default be
placed with an attorney for collection, Maker agrees to pay, in addition to the
entire remaining principal balance and any interest due hereunder, reasonable
attorney's/paralegal' fees, costs, and disbursements, through appeal. No remedy
herein conferred upon Holder is intended to be exclusive of any other remedy and
each and every such remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or not or hereafter existing at law or in equity or
by statue or otherwise.
TO THE FULLEST EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE
WAIVED, MAKER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND OR CLARIFY ANY RIGHT, POWER, REMEDY OR DEFENSE ARISING OUT OF
OR RELATED TO THIS NOTE, OR THE TRANSACTIONS CONTEMPLATED HEREIN, WHETHER
SOUNDING IN TORT OR CONTRACT OR OTHERWISE , OR WITH RESPECT TO ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
ANY PARTY; AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
JUDGE AND NOT BEFORE A JURY. SUCH WAIVER SHALL NOT AFFECT IN ANY WAY THE
HOLDER'S RIGHT TO DEMAND A JURY TRIAL. MAKER FURTHER WAIVED ANY RIGHT TO SEEK TO
CONSOLIDATE ANY SUCH LITIGATION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY
OTHER LITIGATION IN WHICH A JURY TRAIL CANNOT OR HAS NOT BEEN WAIVED. FURTHER,
MAKER HEREBY CERTIFIED THAT NO REPRESENTATIVE OR AGENT OF HOLDER, NOR HOLDER'S
COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT HOLDER WOULD NOT, IN THE
EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION, MAKER ACKNOWLEDGES THAT THE PROVISIONS OF THIS PARAGRAPH ARE A
MATERIAL INDUCEMENT TO THE HOLDER'S ACCEPTANCE OF THIS NOTE.
IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as
of the date first above written.
ECOS GROUP, INC. THIS NOTE IS ACCEPTED BY:
BY: /S/DAVID C. LANGLE By: /S/SAM W. KLEIN
------------------ ---------------
DAVID C. LANGLE SAM W. KLEIN
CHIEF FINANCIAL OFFICER
|
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
ECOS Holdings of Florida, Inc. (f/k/a Evans Environmental Corporation, Florida)
Evans Environmental & Geological Science and Management, Inc. of Florida
American Remedial Technologies, Inc., Florida
Evans Management Co., Inc., Florida
Evans Habitat Restoration, Inc., Florida (Dissolved)
Evans BioSystems, Inc., Florida (Dissolved)
Geos, Inc., Florida
Enviropact Consultants, Inc., Florida (Inactive)
PTV Corp., Colorado
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
ECOS Group, Inc. and subsidiaries on Forms S-3 and S-8 (File No.'s 333-13921
and 333-13191, respectively) of our report dated July 11, 1997, on our audits of
the consolidated financial statements of ECOS Group, Inc. and subsidiaries as of
March 31, 1997, and for the years ended March 31, 1997 and 1996, which report is
included in the Company's Annual Report on Form 10-KSB for the year ended March
31, 1997.
/s/ COOPERS & LYBRAND L.L.P.
Miami, Florida
July 15, 1997
|
|
|
|
PERIOD TYPE
|
YEAR
|
|
FISCAL YEAR END
|
MAR 31 1997
|
|
PERIOD END
|
MAR 31 1997
|
|
CASH
|
449,782
|
|
SECURITIES
|
140,000
|
|
RECEIVABLES
|
2,078,226
|
|
ALLOWANCES
|
460,106
|
|
INVENTORY
|
0
|
|
CURRENT ASSETS
|
2,715,472
|
|
PP&E
|
2,851,798
|
|
DEPRECIATION
|
0
|
|
TOTAL ASSETS
|
13,154,782
|
|
CURRENT LIABILITIES
|
4,872,426
|
|
BONDS
|
0
|
|
PREFERRED MANDATORY
|
0
|
|
PREFERRED
|
0
|
|
COMMON
|
211,172
|
|
OTHER SE
|
16,125,228
|
|
TOTAL LIABILITY AND EQUITY
|
13,154,792
|
|
SALES
|
8,555,827
|
|
TOTAL REVENUES
|
8,555,827
|
|
CGS
|
6,489,936
|
|
TOTAL COSTS
|
11,854,488
|
|
OTHER EXPENSES
|
27,114
|
|
LOSS PROVISION
|
200,000
|
|
INTEREST EXPENSE
|
121,618
|
|
INCOME PRETAX
|
(3,647,393)
|
|
INCOME TAX
|
0
|
|
INCOME CONTINUING
|
(3,647,393)
|
|
DISCONTINUED
|
509,037
|
|
EXTRAORDINARY
|
1,225,964
|
|
CHANGES
|
0
|
|
NET INCOME
|
(1,912,392)
|
|
EPS PRIMARY
|
(.13)
|
|
EPS DILUTED
|
0
|
|
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