SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[Fee required]
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No fee required]
Commission File Number 0-16322
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ECOS Group, Inc.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-1061207
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
99 Southeast Fifth Street, 4th floor. Miami, Florida 33131
- ------------------------------------- -------------- -----
(Address of Principal Executive Offices) (Zip Code)
(305) 374-8300
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Issuer's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
As of September 30, 1998 the Company had a total of 20,266,693 shares of $.012
par value Common Stock outstanding.
Transitional Small Business Disclosure format (check one):
Yes No [X]
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ECOS GROUP, INC.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Pages
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PART I: Financial Statements:
Item 1: Consolidated Balance Sheet F-1
September 30, 1998 and March 31, 1998
Consolidated Statements of Operations F-2
Three and six months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows F-3 to F-4
Six months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements F-5 to F-7
Item 2: Management's Discussion and Analysis F-8 to F-9
PART II: Other Information
Item 1: Legal Proceedings *
Item 2: Changes in Securities *
Item 3: Defaults Upon senior Securities *
Item 4: Submission of Matters to a Vote of Security Holders *
Item 5: Other Information *
Item 6: Exhibits and Reports on Form 8K F-10
SIGNATURES F-10
* Substantially the same information as previously reported in March 31, 1998
10-KSB
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ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1998 March 31, 1998
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ASSETS
CURRENT ASSETS
Cash and equivalents $ 170,730 $ 68,902
Accounts receivable, net of allowance
of $123,000 and $113,000 941,868 1,018,456
Notes receivable 23,878 23,878
Prepaid expenses & other assets 71,268 54,119
--------------- ---------------
TOTAL CURRENT ASSETS 1,207,744 1,165,355
Amounts due under state reimbursement program 189,947 189,947
Property and equipment, net 58,755 69,429
Goodwill, net of accumulated amortization of $263,346
and $242,277 326,607 347,677
--------------- ---------------
TOTAL ASSETS $ 1,783,053 $ 1,772,408
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 945,603 $ 1,145,206
Accrued expenses 493,220 630,589
Current portion of related party notes payable 554,779 573,841
Notes payable 284,202 283,202
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TOTAL CURRENT LIABILITIES 2,277,804 2,632,838
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Long-term debt - related party notes payable, less current portion 434,620 487,869
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Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock ($.75 liquidation value):
Series A; $.001 par value, 5,000,000 authorized,
None issued and outstanding
Series B convertible; $.001 par value,
1,000,000 authorized, issued and outstanding 1,000 1,000
Common stock, $.012 par value; 75,000,000 authorized,
20,266,693 issued and outstanding 243,199 243,199
Additional paid in capital 16,592,898 16,592,898
Accumulated deficit (17,766,468) (18,185,396)
--------------- ---------------
TOTAL STOCKHOLDERS' DEFICIT (929,371) (1,348,299)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 1,783,053 $ 1,772,408
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-1
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<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months ended September 30, 1998 and 1997
(Unaudited)
Three months ended Six months ended
1998 1997 1998 1997
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REVENUE
Consulting services $ 1,274,886 $ 1,160,368 $ 2,697,539 $ 2,478,227
------------ ------------- ------------ -----------
COSTS OF CONSULTING SERVICES
Subcontractorexpenses 289,856 139,609 635,183 431,891
Other direct costs and expenses 465,543 492,867 931,685 986,322
------------ ------------- ------------ -----------
TOTAL DIRECT COSTS AND EXPENSES 755,399 632,476 1,566,868 1,418,213
------------ ------------- ------------ -----------
GROSS PROFIT 519,487 527,892 1,130,671 1,060,014
------------ ------------- ------------ -----------
OTHER COSTS AND EXPENSES
General, administrative and other operating costs 465,310 834,553 906,194 1,530,445
------------ ------------- ------------ -----------
TOTAL OTHER COSTS AND EXPENSES 465,310 834,553 906,194 1,530,445
------------ ------------- ------------ -----------
OPERATING INCOME (LOSS) 54,177 (306,661) 224,477 (470,431)
------------ ------------- ------------ -----------
OTHER INCOME (EXPENSE)
Interest, net (17,906) (32,913) (36,592) (71,037)
Accounts Payable Settlement 230,668 230,668
Gain on sale of laboratory assets -- 40,000
Other income (expense), net 375 4,882 375 8,545
------------ ------------- ------------ -----------
TOTAL OTHER INCOME (EXPENSE) 213,137 (28,031) 194,451 (22,492)
------------ ------------- ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 267,314 (334,692) 418,928 (492,923)
============ ============= ============ ===========
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of $0 taxes (316,210) (666,240)
Loss from discontinued operations, net of $0 taxes -- (6,449,306) (6,449,306)
------------ ------------- ------------ -----------
NET INCOME (LOSS) $ 267,314 $(7,100,208) $ 418,928 $(7,608,469)
============ ============= ============ ===========
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .01 $ (0.02) $ 0.02 $ (0.03)
------------ ------------- ------------ -----------
Discontinued operations $ -- $ (0.38) $ -- $ (0.40)
------------ ------------- ------------ -----------
NET INCOME (LOSS) PER COMMON SHARE $ .01 $ (0.40) $ 0.02 $ (0.43)
============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
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<TABLE>
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ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
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OPERATING ACTIVITIES:
Net income (loss) $ 418,928 $(7,608,469)
----------- -----------
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Depreciation & amortization 115,383 415,047
Accounts payable settlements (230,668) --
Gain on sale of laboratory assets -- (40,000)
Increase (decrease) in provision for bad debts and potential loss on
State reimbursement program 10,045 14,925
(Gain) loss from discontinued operations -- 314,364
Write down of net assets of discontinued operations -- 6,384,966
Changes in operating assets & liabilities, net of effects from
purchase of American Remedial Technologies, Inc.:
Accounts receivable 66,543 97,572
Prepaid expenses & other (88,766) (6,431)
Amounts due under state reimbursement program -- (9,839)
Accounts payable and accrued expenses (106,304) 44,807
Related party notes -- 133,266
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Total adjustments (233,767) 7,348,677
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Net cash provided (used) by operating activities of:
Continuing operations 185,161 (259,792)
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Net cash provided (used) by operating activities 185,161 (259,792)
----------- -----------
Investing activities:
Restricted cash -- (4,779)
Decrease in notes receivable -- 196,120
Purchases of equipment (12,022) (8,756)
Proceeds from sale of equipment --
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Net cash provided by (used in) investing activities (12,022) 182,585
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
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<TABLE>
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ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
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Financing activities:
Proceeds from exercise of warrants/options -- 697
Proceeds from notes payable 22,000 --
Proceeds from related party notes payable -- 1,144,000
Payments on notes payable and capital lease obligations (21,000) (257,968)
Payments on related party notes payable (72,311) (1,025,000)
----------- -----------
Net cash provided by (used in) financing activities (71,311) (138,271)
----------- -----------
Net increase (decrease) in cash 101,828 (215,478)
Cash, beginning of period 68,902 449,782
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Cash, end of period $ 170,730 $ 234,304
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for Interest $ 37,147 $ 24,518
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
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ECOS GROUP, INC
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Ecos Group, Inc. ("The Company") is engaged, through its wholly-owned
subsidiary, Evans Environmental and Geological Science and Management,
Inc., in environmental consulting and other environmental related services.
Prior to the sale of American Remedial Technologies, Inc. on October 22,
1997, the Company provided soil remediation services. Until April 3, 1996,
the Company was also engaged in the production and sale of cable products
("The Cable Products Division").
2. Significant Accounting Policies
Interim Financial Statements: The accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form
10-QSB and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The consolidated balance sheet as of March 31, 1998 has been derived from
the audited financial statements as of the period ended March 31, 1998, but
does not include all disclosures required by generally accepted accounting
principles. Certain amounts previously reported in both the September 30,
1997 Consolidated Statement of Operations and Consolidated Statement of
Cash Flows have been reclassified to conform to the 1998 financial
statement presentation. In the opinion of management, these statements
reflect all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation for the periods presented.
Operating results for the six months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ended March 31, 1999. These statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the period ended March 31, 1998.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All
inter-company 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.
Goodwill In connection with the Company's periodic review, the consulting
division's closing of certain offices, and its disposition of certain
operations during the 1998 fiscal year, the Company wrote off approximately
$5,863,000 of goodwill during the year ended March 31, 1998.
Revenue Recognition: Consulting revenue is recognized as services are
performed. Soil remediation revenues were recognized as soil was processed.
The Company's soil remediation division was disposed of during October,
1997.
F-5
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ECOS GROUP, INC
NOTES TO FINANCIAL STATEMENTS
Net Income per Share: Net income per share computations are based on the
weighted average common shares outstanding of 20,266,693 and 17,598,826 for
the quarters ended June 30, 1998 and 1997, respectively. Potential common
shares have not been included in the weighted average common shares
outstanding as they are anti-dilutive for all periods presented.
Discontinued Operations: During fiscal year ended March 31, 1998, certain
wholly-owned subsidiary ceased operations and disposed of all operating
assets. As such, the Company has treated this subsidiary as discontinued
operations for all periods presented. 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.
3. Commitments and Contingencies 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 made 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.
NASDAQ Delisting The Company shares were delisted from the NASDAQ Small Cap
Market effective January 2, 1998. The Company did not meet NASDAQ
requirements for total capital and surplus of $2,000,000. The Company's
plan for maintaining compliance with NASDAQ listing requirements was
rejected and the Company received notification of delisting December 17,
1997.
4. Related Party 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 balance of this note is $25,000 at
September 30, 1998
During 1997, the Company's remediation division had 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 is payable
monthly and a balloon payment of the principal is due June, 1999. The
balance of this note as of September 30, 1998 is $354,337 including accrued
interest.
F-6
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ECOS GROUP, INC
NOTES TO FINANCIAL STATEMENTS
On December 31, 1996, the Company borrowed $1,000,000 from a
shareholder/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 principal and interest were required until maturity in
December, 1997, and the note was secured by all trade accounts receivable
of the Company. This note was repaid on May 5, 1997 from proceeds of a
$1,000,000 loan received from the father of the shareholder. This latter
note was modified to a three month promissory note maturing on August 5,
1997, with monthly interest only payable at 12% per annum. The note was
secured by all trade receivables of the Company. On September 23, 1997, the
Company received a notice of its default on this note for nonpayment of
principal and interest. The Company settled its default on this note by
delivering a $608,000 promissory note dated October 29, 1997 in favor of
the shareholder's father, bearing interest at 12% per annum with quarterly
principal and interest payments of $40,867, and agreeing to issue 2,666,667
shares of the Company's Common Stock. The new note and the agreement to
issue stock extinguishes the $1,000,000 promissory note dated May 5, 1997.
The balance of this note is $538,062 at September 30, 1998.
In May, 1997, the Company borrowed $72,000 from the mother of a former
director and shareholder of the Company. The loan is due upon demand and
bears interest at 12% per annum. The balance of this loan is $72,000 at
September 30, 1998.
5. 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, 1998 and 1997 and currently has a working capital
deficiency. 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. Continued limited support of funds from related parties as discussed
herein.
2. Continue cost reduction measures in the consulting division.
Management is implementing its plans. These measures, if successful, are
expected to result in an improved working capital position for the year
ended March 31, 1999. However, actual results may differ from management's
plans.
F-7
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ECOS GROUP, INC
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS:
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and
development activities and similar matters. With respect to this Quarterly
report, statements included in Management's Discussion and Analysis or Plan
of Operation and in the Notes to the Consolidated Financial Statements
which are not historical in nature, are intended to be and are hereby
identified as "forward looking statements" for purposes of the safe harbor
by the Private Securities Litigation Reform Act of 1995. In order to comply
with the terms of the safe harbor, the Company notes that a variety of
factors could cause the company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following: (i) changes in legislative
enforcement and direction, (ii) unusually bad weather conditions, (iii)
unanticipated delays in contract execution, (iv) sudden loss of key
personnel, (v) abrupt changes in competition, and (vi) decisions by the
Company's lenders to demand the Company's indebtedness.
RESULTS OF OPERATIONS:
Revenues for the six months ended September 30, 1998 (the "98 to date")
increased by $219,312 or 8.8% to $2,697,539 from $2,478,227 for the
corresponding six months ended June 30, 1997 (the "97 to date"). For the
quarter ended September 30, 1998 (the "98 Quarter") and September 30, 1997,
comparable revenues increased $114,518 or 9.9% from $1,160,368 to
$1,274,886.
Direct costs were $1,566,868 in 98 to date versus $1,418,213 in 97 to date,
a $148,655 or 10.5% increase. For the 98 quarter direct costs were
$755,399, a $122,923 increase over $632,476 in the 97 quarter. Direct costs
consist of all professional and technical labor, subcontractor, supplies
and other revenue generating expenses. Gross profit as a percentage of
revenue was 41% and 45.0% in the 98 quarter and 97 quarters, respectively.
The comparable to date gross profit percentages were 42% and 43%,
respectively. The decreased gross profit percentage is attributed to the
higher direct costs during 98 to date.
General, administrative and other operating costs decreased $369,243, or
44% to $465,310 for the 98 Quarter compared to $834,553 for the 97 Quarter.
The reduced costs are also reflected in the 98 to date of $906,194 compared
to $1,530,445 for the 97 Quarter, a $624,251 or 41% improvement. Operating
costs show continued improvement because of the restructuring efforts
implemented by the Company's new management over the past twenty-one
months.
Other income for the 98 Quarter and year to date reflects the $230,668
favorable effect of a settlement agreement for a claim payable to one of
the Company's attorneys. Discontinued operations for the 97 Quarter and
year to date includes the unfavorable results of $6,765,516 effect of
discontinued operations of the Remediation Division, which was disposed of
during the 97 quarter.
F-8
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ECOS GROUP, INC
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
Net income for the 98 Quarter of $267,314 improved significantly by
$7,367,522 over the $7,100,208 loss in the 97 Quarter. The 97 Quarter
includes Loss from discontinued operations of $6,765,516. The 98 Quarter
includes an Accounts Payable settlement of $230,668. Excluding both of
these large non-recurring items, the 98 Quarter improved as compared to the
97 Quarter by $371,338.
Cumulatively, Net income for the 98 to date was $418,928 compared to a
$7,608,469 loss for 97 to date. The 97 to date includes Loss from
discontinued operation of $7,115,546. The 98 to date includes an Accounts
Payable settlement of $230,668. Excluding both of these large non-recurring
items, the 98 quarter improved as compared to the 97 Quarter by $681,183.
LIQUIDITY AND CAPITAL RESOURCES:
The company had a working capital deficit of $1,070,060 at September 30,
1998 compared to $1,467,483 at March 31, 1998. This working capital
decrease in deficit of $397,423 reflects a working capital ratio of .53 at
September 30, 1998 from .44 at March 31, 1998. Historically the Company has
experienced capital and liquidity problems and no assurances can be given
that such shortages will not negatively impact the Company's operations in
the future.
The Company's cash flow was $101,828 in the 98 to date compared to $215,478
cash decrease in the 97 to date. The major cash inflow in the 98 to date
was $185,161 from operating activities. The Company's control of
expenditures during 98 to date is reflected in the small amount ($12,022)
of cash used in investing activities. The cash generated in the 98 quarter
was used to pay its obligations in the amount of $71,311. The Financing
activities in the 97 to date include the effects of the loans related to
the Remediation division which was disposed in the 97 Quarter.
The Company has no major material commitments for capital expenditures.
The Company intends to continue to fund its current operations from the
combination of cash on hand, cash generated from operations, cost savings
generated from its continued cost reduction measures, as well as potential
sale of equity. These sources of capital are expected to largely fund the
Company's current operations through March 31, 1999. Management expects to
continue the profitability experienced in the 98 to date in the subsequent
quarters of Fiscal 1999. However, if the Company does continue to operate
profitably, 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 there can be no assurance that any
such financing will be available at all or on terms acceptable to the
Company.
F-9
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ECOS GROUP, INC.
FINANCIAL STATEMENTS
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8K incorporated by reference:
November 6, 1998 Change in registrant's Certifying Accountant
SIGNATURES
In accordance with the requirements 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
------------------------
Dr. Charles C. Evans
Chairman of the Board
By: /s/ Ana Caminas
------------------------
Ana Caminas
Chief Financial Officer
On behalf of the Registrant and as
Principal Accounting Officer
F-10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 170730
<SECURITIES> 0
<RECEIVABLES> 1064868
<ALLOWANCES> 123000
<INVENTORY> 0
<CURRENT-ASSETS> 1207744
<PP&E> 192364
<DEPRECIATION> 133609
<TOTAL-ASSETS> 1783053
<CURRENT-LIABILITIES> 2277804
<BONDS> 0
0
1000
<COMMON> 243199
<OTHER-SE> (1173570)
<TOTAL-LIABILITY-AND-EQUITY> 1783053
<SALES> 2697539
<TOTAL-REVENUES> 2697539
<CGS> 1566868
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 906194
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36592
<INCOME-PRETAX> 418928
<INCOME-TAX> 0
<INCOME-CONTINUING> 418928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418928
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
