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 June 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.
(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
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(Address of Principal Executive Offices) (Zip Code)
(305) 374-8300
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 June 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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PART I: Financial Statements:
Item 1: Consolidated Balance Sheet F-1
June 30, 1998 and March 31, 1998
Consolidated Statements of Operations F-2
Three months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows F-3 to F-4
Three months ended June 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
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* Substantially the same information as previously reported in March 31, 1998
10-KSB
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ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 1998 March 31, 1998
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ASSETS
CURRENT ASSETS
Cash and equivalents $ 86,361 $ 68,902
Accounts receivable, net of allowance
of $127,000 and $113,000 1,157,241 1,018,456
Notes receivable 23,878 23,878
Prepaid expenses & other assets 80,708 54,119
---------------- ---------------
TOTAL CURRENT ASSETS 1,348,188 1,165,355
Amounts due under state reimbursement program 189,947 189,947
Property and equipment, net 61,012 69,429
Goodwill, net of accumulated amortization of $252,811
and $242,277 337,142 347,677
---------------- ---------------
TOTAL ASSETS $ 1,936,289 $ 1,772,408
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,286,745 $ 1,145,206
Accrued expenses 543,623 630,589
Current portion of related party notes payable 566,766 573,841
Notes payable 274,202 283,202
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TOTAL CURRENT LIABILITIES 2,671,336 2,632,838
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Long-term debt - related party notes payable, less current portion 461,638 487,869
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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 (18,033,782) (18,185,396)
---------------- ---------------
TOTAL STOCKHOLDERS' DEFICIT (1,196,685) (1,348,299)
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 1,936,289 $ 1,772,408
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-1
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ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 1998 and 1997
(Unaudited)
1998 1997
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REVENUE
Consulting services $ 1,422,653 $ 1,317,859
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COSTS OF CONSULTING SERVICES
Direct labor and employee benefit costs 345,327 428,783
Other direct costs and expenses 466,142 356,954
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TOTAL DIRECT COSTS AND EXPENSES 811,469 785,737
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GROSS PROFIT 611,184 532,122
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OTHER COSTS AND EXPENSES
General, administrative and other operating costs 440,884 695,892
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TOTAL OTHER COSTS AND EXPENSES 440,884 695,892
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OPERATING INCOME (LOSS) 170,300 (163,770)
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OTHER INCOME (EXPENSE)
Interest, net (18,686) (38,124)
Gain on sale of laboratory assets -- 40,000
Other income (expense), net -- 3,663
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TOTAL OTHER INCOME (EXPENSE) (18,686) 5,539
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INCOME (LOSS) FROM CONTINUING OPERATIONS 151,614 (158,231)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of $0 taxes -- (350,030)
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NET INCOME (LOSS) $ 151,614 $ (508,261)
=========== ===========
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .01 $ (0.01)
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Discontinued operations $ -- $ (0.02)
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NET INCOME (LOSS) PER COMMON SHARE $ .01 $ (0.03)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
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ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 1998 and 1997
(Unaudited)
1998 1997*
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OPERATING ACTIVITIES:
Net income (loss) $ 151,614 $(508,261)
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Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation & amortization 57,734 268,287
Loss on sale/disposal of equipment -- (95,230)
Increase (decrease) in provision for bad debts and potential loss on
state reimbursement program 13,800 --
Changes in operating assets & liabilities, net of effects from
purchase of American Remedial Technologies, Inc.:
Accounts receivable (152,585) (6,761)
Prepaid expenses & other (62,554) (80,062)
Other assets -- (47,106)
Accounts payable and accrued expenses 54,573 5,132
Deferred revenues -- (61,806)
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Total adjustments (89,032) (17,546)
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Net cash provided (used) by operating activities of:
Continuing operations 62,582 (525,807)
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Net cash provided (used) by operating activities 62,582 (525,807)
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Investing activities:
Restricted cash (4779)
Purchases of equipment (2,817) (49,176)
Proceeds from sale of discontinued operations, net of expenses -- 250,000
Proceeds from sale of equipment -- 10,000
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Net cash provided by (used in) investing activities (2,817) 206,045
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* See Note #2: "Significant Accounting Policies - Discontinued Operations"
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
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ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three months ended June 30, 1998 and 1997
(Unaudited)
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1998 1997*
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Financing activities:
Proceeds from exercise of warrants/options -- 696
Proceeds from related party notes payable -- 639,266
Payments on notes payable and capital lease obligations (9,000) (263,550)
Payments on related party notes payable (33,306) --
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Net cash provided by (used in) financing activities (42,306) 376,412
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Net increase (decrease) in cash 17,459 56,650
Cash, beginning of period 68,902 449,782
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Cash, end of period $ 86,361 $ 506,432
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for Interest $ 18,924 $ 17,972
========= =========
</TABLE>
* See Note #2: "Significant Accounting Policies - Discontinued Operations"
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. 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 three months ended June 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 17,597,652 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 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 except in the statement of cash flows. 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 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.
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 $50,000 at
March 31, 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 March 31, 1998 is $354,337 including accrued
interest. (See Note 21 - Subsequent Events for the mutual agreement between
the Company and its chief executive officer to release the Company from its
obligation in exchange for other consideration).
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 $585,373 at March 31, 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
March 31, 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 quarter ended June 30, 1998 (the "98 Quarter") increased
by $104,794 or 8% to $1,422,653 from $1,317,859 of the corresponding prior
quarter ended June 30, 1997 (the "97 Quarter"). This increase in revenue is
attributable to two large short-term projects in the Hazardous Substance
practice area during the 98 Quarter.
Direct costs were $811,469 for the 98 Quarter, representing a marginal
increase of $25,732 or 3% from the $785,737 in the 97 Quarter.
Gross profit as a percentage of revenue was 43.0% and 40.4% in the 98
Quarter and 97 Quarter, respectively, an increase of approximately 6%.
General, administrative and other operating costs decreased $255,008, or
nearly 37% to $440,884 for the 98 Quarter compared to $695,892 for the 97
Quarter. Gross profit and operating costs show continued improvement
because of the restructuring efforts implemented by the Company's new
management over the past eighteen months.
Net income for the 98 Quarter of $151,614 improved by $659,875 over the
$508,261 loss in the 97 Quarter. The 97 Quarter includes Loss from
discontinued operations of $350,030. Excluding the Loss from discontinued
operations in the 97 Quarter, the 98 quarter improved as compared to the 97
Quarter by $309,845.
F-8
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ECOS GROUP, INC
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES:
The company had a working capital deficit of $1,343,148 at June 30, 1998
compared to $1,467,483 at March 31, 1998. This working capital decrease in
deficit of $144,335 reflects a working capital ratio of .50 at June 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 $17,459 in the 98 Quarter compared to $56,650
in the 97 Quarter. The major cash inflow in the 98 Quarter was $62,582 from
operating activities. The Company's control of expenditures during the 98
Quarter is reflected in the $2,817 cash used in investing activities
compared to $206,045 provided from investing activities in the 97 Quarter.
The cash generated in the 98 quarter was used to pay its obligations in the
amount of $42,306.
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 Quarter 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:
May 12, 1998 Dismissal of Certifying Accountant
May 12, 1998 Selection of Certifying Accountant
May 26, 1998 Change in registrant's Certifying Accountant
June 8, 1998 Resignation of Michel Klein from the Board of Directors
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
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 86361
<SECURITIES> 0
<RECEIVABLES> 1284241
<ALLOWANCES> 127000
<INVENTORY> 0
<CURRENT-ASSETS> 1348188
<PP&E> 183158
<DEPRECIATION> 122146
<TOTAL-ASSETS> 1936289
<CURRENT-LIABILITIES> 2671336
<BONDS> 0
0
1000
<COMMON> 243199
<OTHER-SE> (1440884)
<TOTAL-LIABILITY-AND-EQUITY> 1936289
<SALES> 1422653
<TOTAL-REVENUES> 1422653
<CGS> 811469
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 440884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18686
<INCOME-PRETAX> 151614
<INCOME-TAX> 0
<INCOME-CONTINUING> 151614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151614
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
