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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[Fee required]
For the fiscal year ended March 31, 1998
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[ ] 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, Miami, Florida 33131 33405
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(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:
Common Stock, $.012 par value
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Title of Class
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 X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
The issuer's revenues for its most recent fiscal year: $4,846,984
The aggregate market value of the voting stock held by non-affiliates of the
Company was approximately $ 850,513 on the average bid and asked price of $.05
on April 30, 1999
As of March 31, 1998 the Company had a total of 20,266,693 shares of Common
Stock outstanding.
Transitional Small Business Disclosure format (check one):
Yes No x
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PART I
Item 1. Description of Business.
(a) Business Development
ECOS Group, Inc. (the "Company") has been in the environmental business
since 1993. In January of 1993, Evans Environmental Corp., a Florida corporation
was purchased by CBLX Holdings, Inc., a Colorado corporation, in a reverse
acquisition. The name of CBLX Holdings, Inc. was changed to Evans Environmental
Corp. to reflect the new line of business of the Company.
In July of 1996, the Company purchased American Remedial Technologies,
Inc. ("ART"), a Florida corporation which was engaged in the remediation of
contaminated soils. The Company then changed its name to ECOS Group, Inc. to
reflect the broader business interests of the Company with its new subsidiary.
In October of 1997, the Company disposed of ART to cure the defaults
incurred on loans which had supported ART. This subsidiary had never achieved
the projections, which had been prepared for this subsidiary. The Company
currently operates with one active subsidiary, Evans Environmental and
Geosciences (EE&G).
(b) Business of Issuer
The Company is a holding company, which currently has EE&G as its only
operating subsidiary. EE&G is a regional supplier of environmental consulting,
testing and engineering services to both private clients and various levels of
government clients, emphasizing the three major practice areas of asbestos,
hazardous substances, and indoor air quality. The market for environmental
consulting, testing, and engineering developed in response to, and is driven by,
regulatory and civil liability. The environmental field grew rapidly through the
decade of the 1980's, but, in the opinion of Management, the growth has
drastically diminished yielding to a relatively mature market.
Within the broad scope of environmental consulting, testing, and
engineering services, EE&G offers specialized services in three practice areas:
asbestos, hazardous substances, and indoor air quality. While management is
constantly evaluating opportunities in other lines of business, expansion plans
for this year focus primarily on increasing market share within the Company's
existing market (primarily Florida) and also expanding EE&G's geographic reach,
enabling it to supply its current scope of services over a larger geographic
region.
The Asbestos Practice
EE&G provides a comprehensive suite of asbestos consulting services,
including:
o building inspections and assessments,
o laboratory analysis of building materials,
o abatement design specifications,
o contractor performance and compliance monitoring,
o air quality testing,
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o training, and
o expert witness testimony.
This practice area currently supplies approximately 45% of EE&G's total
revenues. In the early 1990's, asbestos supplied nearly 90% of EE&G's revenues.
The percentage of EE&G's revenues supplied by the asbestos practice has
decreased dramatically in the last three years. This decrease in the percentage
of asbestos revenues is attributable to a lack of growth in the asbestos
practice compared with solid growth in the hazardous materials practice.
Management sees little opportunity for significant growth within the
State of Florida in the asbestos practice area. An aggressive state enforcement
program in the early part of this decade combined with the limited use of
asbestos products in Florida construction both due to the mild climate and youth
of many of the buildings has had a negative impact on this market. Management
believes that greater opportunities for growth in this practice area are to be
found in geographic areas where the cities and their infrastructure are older
and the climate is harsher. Accordingly, Management is currently working toward
expanding into the Northeastern portion of the United States.
In March of 1998, Management laid the beginning groundwork for
expansion of its asbestos practice into Europe through the sale of intellectual
property to a privately held, development stage, French company based outside of
Paris. Management will also supply professional services to this Company and
lease certain equipment to this French company. In return for the above
described goods and services, EE&G will receive 5% ownership in the French
company in addition to a 2-1/2% royalty on revenue for three years, monthly
lease payments and monthly payments for services. The French company is also
responsible for establishing a French corporation, to be known as EE&G Europe,
SARL, including the initial capitalization of that corporation as required by
French law. EE&G will own 80% of the newly established French corporation.
Management views the opportunity in Europe for asbestos work to be
significant based on the recent dramatic expansion of the European asbestos
market in response to sweeping legislation enacted over the last few years. EE&G
is limited in its ability to capitalize on European opportunities by its limited
expertise in European languages and business customs, but hopes to acquire such
expertise either by hiring qualified personnel or locating a strategic partner
and/or acquisition in Europe.
The Hazardous Substance Practice
EE&G's Hazardous Substance (HS) practice area comprised nearly 45% of
EE&G's gross revenues in FY 1998. The HS practice is the fastest growing segment
of the firm's business, as it has nearly doubled in size over the previous year,
when it only comprised approximately 25% of EE&G's gross revenues. This growth
is attributable to renewed focus in this market segment due to the hiring of
Timothy R. Gipe in August 1996, whose area of primary expertise and client
network were in the HS market area. Additionally, the newly appointed practice
director of the Hazardous Practice has provided strong leadership and direction
to the group, with a focus on growth and business development.
The HS practice consists of professional employees with backgrounds
predominantly in geology, engineering, biology, and other natural sciences. The
staff includes a variety of registered
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professionals, including Professional Geologists, Professional Engineers, and a
Certified Hazardous Materials Manager. The primary project types in which the HS
practice area earns its revenues are as follows:
o Soil and Groundwater Assessment and remediation. The largest source
of revenue in the HS practice area in FY 1998 was the assessment and
remediation of soil and groundwater contamination incidents in
municipal, commercial, and industrial facilities. Due to the
sensitivity of the groundwater aquifer system in Florida and
increased regulatory pressures, EE&G clients continued to pursue
investigation and remediation of soil and groundwater on their
properties that had been contaminated with petroleum hydrocarbons,
chlorinated solvents, heavy metals, and pesticides and PCBs. EE&G
performed numerous design/build services for clients, performing the
engineering design, construction management, and actual construction
and operation and maintenance of remediation systems.
o Real Estate Transaction Audits/Due-Diligence Audits. Since the
Superfund Amendments Reauthorization Act (SARA) of 1986 potential
buyers, financers, mortgagers, etc. of commercial property are
advised to conduct an environmental audit of the property prior to
closing. This is often referred to as the "Buyer Beware" rule. Since
the national economy continued to be strong throughout FY 1998, the
HS practice continued to see significant revenues from environmental
audits relative to real estate transactions.
o Petroleum Storage Tank Management. As the December 31, 1998 Federal
and State deadline for required upgrades to underground storage tank
(UST) systems approached in FY 1998, EE&G continued to obtain a fair
amount of business in the assessment, remediation, closure, design,
and installation of UST and aboveground storage tank (AST) systems.
As this deadline is now passed, management anticipates a decline in
the demand for this service.
o Compliance Audits. EE&G was active in performance of compliance
audits in FY 1998, primarily for its industrial/manufacturing
clients. In today's commercial world, it pays for waste generators
to be environmentally pro-active. EE&G assisted its clients by
bringing their facilities into compliance with environmental
regulations and best management practices, which typically result in
waste minimization and costs savings to the client.
o Engineering/Design. EE&G continued to expand its engineering
capabilities in FY 1998 through the addition of two full time
AutoCADD designers. EE&G engineers completed projects involving soil
and groundwater remediation systems, storm water management systems,
sanitary sewer systems, pollution prevention equipment, and various
types of permitting.
The Indoor Air Quality Practice
Industrial Hygiene is defined as the recognition, evaluation and
control of workplace hazards. This definition has recently expanded to include
non-traditional issues in work environments in which industrial hygiene has not
traditionally been practiced. EE&G's industrial hygiene (IH) practice area
accounted for 10% of the Company's gross revenue in FY 1998. Since the end of FY
1998, this practice area has grown in net fees earned (gross revenues minus
subcontactor fees) by approximately 25%. This rapid growth has occurred in the
absence of any
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significant new regulations, or market shifts, but can be attributed to a
general increase of awareness among existing clients, as well as an increase in
worker compensation and third party liability arising from cases of "sick
building syndrome."
The IH practice area currently employs only two full time
professionals, a Certified Industrial Hygienist and a Senior Project
Professional. Additionally, the practice area utilizes a professional mechanical
engineer (PE) and registered architect (RA) on a part time basis and draws on
the technical personnel of the other practice areas who are trained in
industrial hygiene techniques.
The primary project types in which the IH practice earns revenues are
as follows:
o Industrial Hygiene Evaluations. This typically involves the
collection of air sample data for specific chemical or physical
agents, and relating them to established exposure standards. This
type of work is driven by the Occupational Safety and Health
Administration (OSHA), and takes place in industrial facilities
where employees are exposed in the normal course of their work.
These projects account for less than 20% of the revenues for the
practice area, and is not considered to have significant growth
potential. This limited growth potential is due to limited
enforcement, a lack of unions in Florida, few "smoke stack"
industries in Florida, and competition from insurance companies who
offer similar services to their clients.
o Indoor Air Quality Services (IAQ). These projects involve the
investigation of unknown agents primarily in commercial and
municipal buildings that are resulting in occupant illness and
discomfort. EE&G conducts initial IAQ investigations, and offers
comprehensive design solutions to remediate IAQ issues. Currently
there are no regulations driving these projects, and there are few
established standards to compare and evaluate data. Increased public
awareness, combined with several large legal cases involving "sick
building syndrome" has resulted in a significant increase in the
demand for IAQ services. Management anticipates that this growth
will continue at a moderate pace (approximately 15% annually) during
FY 1999. IAQ projects currently account for approximately 60% of
revenues for the practice area.
o Lead-Based Paint (LBP) Services. LBP was applied to a wide variety
of surfaces for many years. The presence of LBP now represents a
potential source of environmental pollution if the paint is either
in poor condition, or is improperly removed and disposed of. EE&G
offers LBP inspection services utilizing state-of-the-art
instrumentation, as well as complete design and construction
management services for LBP abatement projects. LBP services
currently account for approximately 25% of revenues for the practice
area. There are several regulations that impact this type of work,
and a general increase of awareness among existing clients has
resulted in a 25% growth of LBP services in FY 1998. This growth is
expected to increase to 50% in FY 1999, and it is anticipated that
LBP services will account for s 40% of total revenues for the
practice area in FY 1999. There are currently several proposed
regulations that, if passed, may create a significantly increased
demand for LBP inspections. EE&G is monitoring legislative progress
in this area so as to be prepared to meet a sudden increase in
demand for these services.
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Marketing
Marketing and sales efforts by EE&G to attract and maintain its client
base include the concentrated efforts of two full-time marketing and sales
people who respond to requests for proposals as well as seek and follow-up on
new sales leads. Each of EE&G's professional staff members also has
responsibility for both establishing new business contacts and maintaining
existing client relationships through excellent customer service. EE&G's
principals also play an active marketing and customer service role. They have a
combined thirty years of experience and have developed a significant client base
over their years in the consulting business.
Customers
EE&G maintains a diverse client base, consisting of both government and
private sector (non-governmental) clients. EE&G's private sector customers range
in size from Fortune 500 companies to small family run businesses. The customer
base is primarily within Florida, but EE&G's larger customers frequently provide
work throughout the Eastern United States and occasionally outside the United
States.
EE&G's governmental clients include a variety of federal government
agencies as well as state, county and city governments. In particular, EE&G is a
significant provider of asbestos consulting and testing services to school
systems throughout Florida.
For the Fiscal Year ended March 31, 1998, no one customer accounted for
greater than 10% of revenue or receivables.
Backlog
The majority of EE&G's work is done under multi-year, indefinite
delivery contracts. These contracts rarely guarantee a minimum quantity of work,
except as specified on any one work or purchase order issued under such a
contract. Most projects under individual work or purchase orders are completed
within 90 days of issuance of the order to commence. Because of the above
described contractual arrangements, EE&G recognizes very little backlog at any
point in time.
Competition
EE&G operates in a highly competitive industry in which there are many
companies with greater resources and facilities and also numerous independent
operators that can collaborate with other companies to provide similar services.
EE&G has been successful in competing with both large and small organizations
and has maintained and/or expanded its practices despite the high level of
competition. EE&G derives a significant competitive advantage from a large
regional presence in Florida and its twelve years of successful work in this
region.
Government Regulation
The Company is subject to extensive and evolving government regulations
administered by various state and federal agencies and authorities. In many
respects, these regulations both govern the operation of the Company and
contribute to the demand for its services. Although the Company's customers
remain responsible by law for their environmental problems, the Company must
comply with the requirements of those laws applicable to its services. The
relevant laws and regulations that may affect the Company's operations include
the U.S. Environmental Protection Agency regulations and state regulations
regarding asbestos consulting, regarding professional
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engineering, professional geology, federal and state regulations governing the
generation, treatment, transportation and disposal of hazardous wastes, the
clean-up of hazardous waste sites and those governing workers in the workplace.
Many of these areas are both relatively new and rapidly developing and,
therefore, the Company cannot predict the extent to which the Company's
operations may be affected by changes to enforcement policies applied pursuant
to current laws or by the enactment of new environmental laws and regulations.
The Company's Florida operations are currently conducted under the
following protocols and maintain the following certifications and/or
accreditations:
o Florida Department of Business and Professional Regulation ("DBPR")
licenses individuals who practice as asbestos consultants,
engineers, geologists and professional scientists.
o The National Institute of Standards and Technology's National
Voluntary Laboratory Accreditation Program ("NVLAP").
o Florida Department of Health & Rehabilitative Services ("HRS"). The
Company is an HRS certified laboratory for the analysis of asbestos
in drinking water and airborne radon.
Until the spring of 1995, the Company provided a number of
environmental consulting services, including the assessment and remediation of
contaminated sites related to discharges of petroleum products from petroleum
storage systems that are eligible for reimbursement of cleanup costs under the
State of Florida's Inland Protection Trust Fund program (the "FIPT"). The
Company entered into contracts from time to time with third parties for the
purpose of funding such remediation work, subject to payment of a markup or
handling fee to such funders. In the event the State of Florida were to
determine that certain costs are not reimbursable, such contracts generally
provide that the Company is required to bear all costs not reimbursed. There can
be no assurance that the State of Florida will fully reimburse costs submitted
in the pending applications for reimbursement of costs.
The State of Florida ceased the processing of applications for new work
under the Petroleum Contamination Reimbursement Program with 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.
The Company has claims, as of March 31,1998 submitted totaling, net of
reserves, of approximately $189,947, under the FIPT's prior program. As of March
31, 1998 the Company does not have any material claims remaining to be submitted
under the new program. The company has no plans at this time for future
participation in this program.
Intellectual Property Rights
The Company has no present patent application pending nor does it
recognize intellectual property as an asset on its balance sheet. The company
has sold certain intellectual property as described in Item 1 (b) - "The
Asbestos Practice"
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Research and Development
For the fiscal year ended March 31, 1998, the Company did not expend
any significant funds on research and development activities
Environmental Considerations
While it does not generate or assume ownership of hazardous waste, the
Company does, through its laboratories and field services, handle potentially
hazardous materials as samples submitted for analysis. These samples are
disposed of under State-approved plans for the temporary storage, transport and
disposal of such materials. All hazardous waste is stored in appropriate drums
and packaged for shipping according to Federal Department of Transportation
regulations to an approved waste disposal site by an approved hazardous waste
hauler. The Company's costs of compliance with environmental laws and
regulations is approximately $5,000 per year, primarily for hazardous waste
disposal. See "Governmental Regulation" for a discussion of other environmental
laws and regulations to which the Company is subject and the effects of
compliance with such laws and regulations on the Company.
Seasonality
The Company's consulting revenue increase during the second quarter of
each fiscal year, due to the work done for school district clients. This is the
time of the year when schools are partly vacant and most remediation work is
scheduled. Other than this item, there is no seasonality with respect to the
Company's business.
Sources and Availability of Raw Materials
The raw materials, including the products used by the Company are
believed by the Company to be in wide supply and available from a number of
sources.
Inflation
Management believes that inflation does not materially affect the
operations of the Company.
Employees
As of March 31, 1998 the Company employed 50 full time employees. No
employees are members of a collective bargaining unit under a union
representation contract. Management believes its relations with its employees
are good.
Item 2. Description of Property
The Company owns no real property. The Company leases 11,888 square
feet for its Miami laboratory facility and operating offices. The Company
maintains offices throughout Florida, the combined costs of these leases are
approximately $240,000 annually. The Company would not be materially adversely
affected if it were necessary to relocate any of its offices. The Company
believes that its facilities are more than adequate for its current operations.
Item 3. Legal Proceedings.
The Company is not a party to any litigation not incidental to its
business and operations.
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Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended March 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock trades on the Over the Counter Bulletin
Board of the National Association of Securities Dealers Automated Quotation
System (NASDAQ) under the symbol ECOS. The Company's shares were delisted from
the NASDAQ SmallCap marketplace effective January 2, 1998. The quotations set
forth below are inter-dealer quotations obtained from NASDAQ, do not reflect
retail mark-ups, mark-downs or commissions, and do not necessarily represent
actual transactions. The Company's Common Stock also began trading under the
symbol EVE April 20, 1995 on the Freiverhehr (over-the-counter market) of the
Berlin Stock Exchange, Berlin Germany and under the same symbol in 1997 on the
Frankfurter Wertpaperborse (over-the-counter market) of the Frankfurt Stock
Exchange in Frankfurt, Germany.
The Company had 306 shareholders of record as of April 30, 1999 and
believes there are approximately 1,100 additional beneficial holders of its
securities who hold such shares in "street" or nominee name.
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Quarter Ended High Bid Low Bid
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Fiscal 1998:
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March 31, 1998 $0.125 $0.125
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December 31, 1997 $0.425 $0.15
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September 30, 1997 $0.325 $0.225
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June 30, 1997 $0.5625 $0.325
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Fiscal 1997:
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March 31, 1997 $0.719 $0.469
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December 31, 1996 $0.875 $0.563
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September 30, 1996 $1.109 $0.875
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June 30, 1996 $2.250 $1.25
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Dividends
The Company has not declared or paid any cash dividends on its Common
Stock, and presently has no plans to do so.
The Company's current policy is to retain all earnings, if any, for
business use. The payment of cash dividends, if any, will be at the discretion
of the Board of Directors and will depend upon earnings, financial requirements
of the Company and such other factors as the Board of Directors may deem
relevant. Payment of dividends on Common Stock is subject to prior payment of
accrued and unpaid dividends on outstanding shares of Preferred Stock.
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Item 6. Management's Discussion and Analysis
Results of Operations
Introduction
Through fiscal year 1997, ART showed significant operating losses.
Management's plan to generate profits within ART centered around developing a
system to process biosolids with the waste heat from the thermal treatment
process.
In June of 1997, management borrowed $500,000.00 from a private lender
as a bridge loan until the Company could complete a contemplated equity offering
to raise $2,000,000.00. This $2,000,000.00 was to fund the continued operation
of ART pending the approval of a biosolids processing permit and the ramp-up
period to operating at full capacity. In late August of 1997, the Company
received notice that the biosolids permit would not be considered until January
1998, and the Company was unable to successfully complete the anticipated equity
offering. The result of the above left the Company unable to fulfill its
obligations to its lender, consequently the lender declared the Company in
default under the terms of the loans and foreclosed on the collateral.
The above described actions led the Board of Directors to discontinue
acceptance of contaminated soil at the ART facility and to begin burning off the
inventory. The Board further instructed Management to explore any and all means
to minimize the financial damage to the Company from the loss of ART. The
results of Management's efforts were the forfeiture of the thermal remediation
plant at the Port of Los Angeles to satisfy the note secured by that equipment,
the forfeiture of the stock in ART to satisfy the note secured by that stock,
the conversion of a note for $464,000.00 plus accrued interest to equity, and
the retention of $608,000.00 in debt by the Company with the receivables of EE&G
as security for this new note.
In September 1997, Mr. David Langle, the CFO, resigned. Mr. Langle was
replaced by Mr. Michael Baker, formerly a Vice President of the Company. In
February of 1998, Enrique Tomeu, the CEO of ECOS Group, Inc. took a leave of
absence from the Company. Mr. Tomeu was replaced by Dr. Charles Evans, the
Company's Chairman, as Interim CEO.
Fiscal 98 Compared to Fiscal 97
During the fiscal year ended March 31, 1998 ("Fiscal 98"), the Company
experienced a net loss of $9,155,369 as compared to a loss of $1,912,392 for the
fiscal year ended March 31, 1997 ("Fiscal 97").
The Company, under new management, took certain significant cost saving
actions during Fiscal 98 and Fiscal 97 and will continue to do so, including
significant labor reductions, restructuring of under-performing consulting
offices, closing of unprofitable consulting offices, reductions of corporate
overhead and other measures. Although the cost saving measures have not yet
returned the Company to profitability as of March 31, 1998, management believes
that the Company can return to sustained and profitable revenue growth, although
no assurances can be given.
The Company has broadened its service areas offered to clients by the
addition of several new senior professionals to the existing management staff of
EE&G and realigning it's organizational structure from an office based to a
practice based structure. This realignment is
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expected to increase cooperation among EE&G's operating areas and improve the
ability to market all aspects of EE&G to clients.
The Company's revenues decreased from $5,902,771 for Fiscal 97 to
$4,846,819 for Fiscal 98, a decrease of $1,055,982 or approximately 18%. Fiscal
Year 1997 revenues, however, contained $1,535,000 of non-recurring revenues
associated with Federally funded clean-up efforts of the damage caused by
Hurricane Fran. Excluding this project, the revenues of the Consulting Division
increased $479,213 or nearly 11% from fiscal 1997.
Direct costs were $2,780,068 for Fiscal 98 versus $3,387,800 for Fiscal
97 representing a decrease of $607,732 or approximately 18%. The Company's gross
margin remained constant at 42.6% in both Fiscal 98 and Fiscal 97.
General, administrative and other costs decreased $341,788 or 10% to
$3,218,424 for Fiscal 98 compared to $3,560,212 for Fiscal 97.
The operating loss for Fiscal 98 was $1,151,673 a decrease of $748,902
or 39% from the Fiscal 97 operating loss of $1,900,575.
The loss before income taxes and discontinued operations of $1,676,588
for Fiscal 98 was $535,543 or over 24%, less than the $2,212,131 loss for Fiscal
97 and can be summarized as follows:
<TABLE>
<CAPTION>
Fiscal 98 Fiscal 97
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<S> <C> <C>
Income from consulting offices $ 2,066,751 $ 2,514,971
Corporate overhead (3,218,424) (3,560,212)
Other Income (expense) (524,915) (1,166,890)
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Loss before income taxes and discontinued operations $(1,676,588) $(2,212,131)
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</TABLE>
Fiscal 1997 also includes several non-recurring operating transactions
and extraordinary items totaling $1,735,001. On April 3, 1996, the company sold
all of the operating assets and ceased operations of ABC Cable Products, Inc.
("Cable Products Division"), a wholly-owned subsidiary, for an aggregate of
$550,000 in cash and a promissory note in the amount of $1,000,000. In addition,
the purchaser assumed certain liabilities of ABC aggregating $595,049. The
Company recorded a $509,037 net gain on disposal from this transaction in Fiscal
97. On June 28, 1997, the consulting division completed an Offer in Compromise
Agreement with the IRS settling all outstanding issues and disputes related to
delinquent payroll taxes. As a direct result of this settlement, the Company
reported a net gain of $939,091, net of professional fees and costs. Also during
Fiscal 1997, the Company reached a settlement with certain of its trade
creditors who accepted a payout of $.20 for each $1.00 of their allowed claim.
This settlement resulted in a net gain of $286,873 for the Consulting Division
in Fiscal 97.
Liquidity and Capital Resources
The Company had a working capital deficit of $1,467,483 at March 31,
1998, compared with a working capital deficit of $2,156,954 at March 31, 1997.
This decrease in deficit of $689,471 reflects a working capital ratio of .44 at
March 31, 1998 from .56 at March 31, 1997.
Net cash decreased during Fiscal 98 by $380,880 compared to an increase
during Fiscal 97 of $271,661. Cash used by continuing operations was $86,992 and
$2,196,656, respectively, for
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Fiscal 98 and 97. The net cash used from financing activities of $161,931
resulted primarily from the Company's paydown of past obligations.
Purchase of equipment decreased from $497,806 in Fiscal 97 by $486,216
to $11,590 in Fiscal 98. Management believes that in the year ended March 31,
1999, it must slightly increase equipment purchases to maintain profitable
operations.
The Company sold receivables, which for financial reporting purposes
has been reported as a borrowing transaction, aggregating $866,205, 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 $347,489 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 was presented as a note payable in prior year's
financial statements. The obligations to Sirrom have all been extinguished as of
March 31, 1998.
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
receivables amounting to $380,753 and $137,963, for fiscal years 1998 and 1997,
respectively, 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 reimbursement denials. The Company must pay any
denied reimbursements within 10 days of notification. The Company has
outstanding balances of $137,963 and 113,113 with Tier and ECA, respectively.
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, 1998, the Company had
claims submitted to the FIPT totaling $189,947 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, 1999. Management expects a return to profitability
in Fiscal 1999. However, if the Company does not return to profitability, or
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.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the fiscal year ended March 31, 1998 the Company's accounting
firm was PricewatershouseCoopers. Subsequent to the year end, the Company
elected to change accounting
12
<PAGE>
firms and retained DeCarlo and Associates as the Company's accountants. The
Company later dismissed DeCarlo and Associates and retained Morrison, Brown,
Argiz, and Company.
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 April 30,
1999 are as follows:
<TABLE>
<CAPTION>
In Office
Name Age Position(s) Since
---- --- ----------- ---------
<S> <C> <C> <C>
Wendell R. Anderson 66 Director 1994
Luis De la Cruz 46 Director 1996
Leon S. Eplan 70 Director 1993
Dr. Charles C. Evans 42 Chairman of the Board of Directors 1993
Interim Chief Executive Officer 1998
Joseph F. Startari 51 Director 1996
</TABLE>
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 Turbodyne Technologies, Inc. (since 1996).
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, who has been a member of the Board since April, 1993,
heads Eplan Consulting, an Atlanta based firm providing client services in urban
planning and revitalization, urban economic analysis, real estate development,
and growth management. Mr. Eplan serves on the Audit Committee of the Board of
Directors. In addition, he was formerly the Commissioner of Planning and
Development of the City of Atlanta, where, among other duties, he was
responsible for developing the program that guided the city's preparations for
the 1996 Summer Olympic Games. He has also served as Director of the Graduate
City Planning Program at the Georgia Institute of Technology.
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. In
February of 1998, Dr. Evans was appointed interim Chief Executive Officer of
13
<PAGE>
the Company, and in June of 1998, was appointed to Chief Executive Officer under
a one year agreement.
Joseph F. Startari is president, Chief Executive Officer and chairman
of Biotechna Environmental Technologies Corporation, an
environmental/biotechnology company, and president and Chief Executive Officer
of Biotechna USA, Inc. a majority owned subsidiary. Mr. Startari joined the
Biotechna group in December of 1995. Biotechna Environmental Technologies
Corporation is a publicly owned reporting issuer in Alberta, Canada which does
not trade publicly. Prior to joining Biotechna Mr. Startari worked a variety of
positions for Olin Corporation from June of 1978 through December of 1995 in its
Ordinance Division, a defense contractor. Mr. Startari was Vice President -
Recovery Systems and Executive Vice President Olin Services, Inc. at the time he
left Olin.
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 death, resignation, removal or
disqualification of the director. The officers are elected annually by the
directors.
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee, of
which Mr. Wendell Anderson, Mr. Luis de la Cruz 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. De la Cruz.
The Board of Directors has also established an Audit Committee of which
Mr. Joseph F. Startari, Chairman, Mr. Leon Eplan, and Dr. Charles Evans 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.
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, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with.
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, 1998 and March
31, 1997 to the Company's Chief Executive Officer, the only employee whose
aggregate compensation exceeded $100,000 for either of the two fiscal years.
14
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
----------------------
- ------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards
------------------- ------
- ------------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus Securities
Position Underlying Options
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Enrique A. Tomeu, 1998 $66,730 0 0
President and Chief
Executive Officer
- ------------------------------------------------------------------------------------------------------------------
Enrique A. Tomeu, 1997 $102,800 0 0
President and Chief
Executive Officer
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Option Grants In Last Fiscal Year
The person mentioned in the summary compensation table received no
option grants in Fiscal Year 1998.
Compensation Arrangements
Employment Agreement
Enrique A. Tomeu was 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 was 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 could have been 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 would have been entitled to
convert any Series B Convertible Preferred Stock, which he then may have owned,
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 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.
15
<PAGE>
In June of 1998, Dr. Evans' existing agreements were deferred in lieu
of a one year agreement to serve as Chief Executive Officer of the Company.
Pursuant to this agreement, Dr. Evans is to receive a salary of $100,000 per
year, a car allowance of $600 per month, a performance based bonus of up to
$15,000 per year, reimbursement for business travel and expenses an eight weeks
paid vacation per year.
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 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 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 April 30,
1999, 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 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 Exchange Act,
shares that are not outstanding but that are issuable upon exercise of
outstanding options, warrants, rights or conversion privileges 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 April 30, 1999, there were 20,266,693 shares of Common Stock issued and
outstanding.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
Amount and Nature of Amount and Nature of
Beneficial % of Beneficial % of
Name and Address Ownership Class Ownership Class
---------------- -------------------- ----- -------------------- -----
<S> <C> <C> <C> <C>
Enrique A. Tomeu (1) 1,900,000 7.59%
1000 Southern Blvd., Ste 300
West Palm Beach, Florida 33405
Michael Klein (2) 827,723 3.30% 275,880 27.59%
100 Shoreline Highway, Ste A190
Mill Valley, California 94941
Strategica Capital Corporation (3) 2,540,196 10.14% -- --
1221 Brickell Avenue, Ste 2600
Miami, Florida 33131
16
<PAGE>
Common Stock Preferred Stock
------------ ---------------
Amount and Nature of Amount and Nature of
Beneficial % of Beneficial % of
Name and Address Ownership Class Ownership Class
---------------- -------------------- ----- -------------------- -----
<S> <C> <C> <C> <C>
Charles C. Evans (4) 461,200 1.84% -- --
99 S.E. 5th St., 4th Flr.
Miami, Florida 33131
Leon S. Eplan (5) 37,500 * -- --
55 Trinity Ave., S.W., Suite 1450
Atlanta, GA 30335
Wendell R. Anderson, Esq. (6) 30,000 * -- --
720 Baker Building
Minneapolis, MN 55403
All Directors, Executive Officers 3,256,423 13.00% 275,880 27.59%
and nominees as a Group
(11 persons) (7)
</TABLE>
- --------------
* Less than 1%.
(1) 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.
(2) Includes 275,880 shares of convertible Preferred Stock which is convertible
at 10 shares of common stock for each share of Preferred Stock. The
conversion is based on an earn-out formula driven by company profitability.
(3) 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.
(4) Includes options to purchase 11,200 shares of Common Stock.
(5) Includes options to purchase 37,500 shares of Common Stock.
(6) Includes options to purchase 30,000 shares of Common Stock.
(7) Includes options to purchase 78,700 shares of Common Stock and 275,880
shares of convertible Preferred Stock.
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 balance of this note is $50,000 at March 31, 1998.
17
<PAGE>
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 for nonpayment of principal and interest, 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 June 1996, ART 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 Mr. Sam Klein, the father of one of the
company's directors and shareholders, pursuant to a demand note for $515,000
bearing interest at 12% per annum. This note was secured by the acquired plant.
The outstanding balance as of March 31, 1997 was $515,000. On September 23, 1997
the note was declared in default for nonpayment of principal and interest. The
obligations of this note were assumed by the acquirer of ART.
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.
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 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).
On June 18, 1997, ART obtained a $500,000 promissory note from Sam
Klein to fund its continuing operations. This note, bearing interest at 12% per
annum, was due on June 18, 1998. The note was secured by all of the Common Stock
of ART and was required to be repaid from expected proceeds from a $2,200,000
convertible equity offering the Company was pursuing. The convertible equity
offering never materialized. On September 23, 1997 ART was notified that this
$500,000 note was in default for nonpayment of interest. On October 23, 1997,
Sam Klein sold the note to a third party. In settlement of all amounts owed
under the note, the Company transferred all the common stock of ART to the
holder of the note, thereby effectively disposing of ART and extinguishing the
obligation.
On October 23, 1997, the Company disposed of its remediation subsidiary
American Remedial Technologies, Inc. ("ART") by transferring all of the Common
Stock of ART to Messrs. Mark Patton, Fred Miller and Joe Torres Jr., the
holders of a $500,000 promissory note owed by the Company in order to settle
default on a note (see below). The Company originally purchased ART for
$7,500,000.
18
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
3.1 Restated Articles of Incorporation, as amended.
3.2 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.
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.
10.3 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.
19
<PAGE>
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.
10.10 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.
10.13 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.
10.18 The Company's 1996 Stock Option Plan, incorporated by reference from
the Company's Proxy Statement for the Annual Meeting of Shareholders
held on October 18, 1996.
(b) Reports on Form 8-K
-------------------
Resignation of Raimundo Lopez Levi and David Langle
Announcement of NASDAQ delisting
Announcement of leave of absence of Tomeu
20
<PAGE>
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
Date: April 30, 1999
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/ CHARLES C. EVANS Director April 30, 1999
- ------------------------
Dr. Charles C. Evans
/S/ WENDELL R. ANDERSON Director April 30, 1999
- ------------------------
Wendell Anderson
/S/ LEON S. EPLAN Director April 30, 1999
- ------------------------
Leon S. Eplan
/S/LUIS DE LA CRUZ Director April 30, 1999
- ------------------------
Luis De la Cruz
/S/JOSEPH F. STARTARI Director April 30, 1999
- ------------------------
Joseph F. Startari
21
<PAGE>
ECOS GROUP, INC.
----------------
REPORTS ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
as of March 31, 1998
and for the years ended March 31, 1998 and 1997
ECOS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Independent Auditor's Report F-1(a) to F-1(b)
Financial Statements:
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4 to F-5
Consolidated Statements of Stockholders'
Equity (Deficit) F-6
Notes to Consolidated Financial Statements F-7 to F-28
22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Ecos Group, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Ecos Group, Inc.
and Subsidiary as of March 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
March 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
statements of operations and stockholders' equity (deficit) and cash flows for
Ecos Group, Inc. and Subsidiary for the year ended March 31, 1997, were audited
by other auditors whose report dated July 15, 1997 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ecos Group, Inc. and
Subsidiary as of March 31, 1998, and the results of their operations and their
cash flows for the year ended March 31, 1998 in conformity with generally
accepted accounting principles.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
Miami, Florida
December 4, 1998
F-1(a)
<PAGE>
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 the year then ended. 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 audit 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 audit provides 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 and the consolidated results of their
operations and their cash flows for the year then ended 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 3 to the
consolidated financial statements, the Company has suffered significant losses
for the year ended March 31, 1997 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 3. 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.
PricewaterhouseCoopers LLP
Miami, Florida
July 15, 1997
F-1(b)
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents (Note 2) $ 68,902
Accounts receivable, net of allowance
of $113,000 1,018,456
Notes receivable (Note 16) 23,878
Prepaid expenses & other assets 54,119
------------
TOTAL CURRENT ASSETS 1,165,355
Amounts due under state reimbursement program (Note 5) 189,947
Property and equipment, net (Notes 2, 6) 69,429
Goodwill, net of accumulated amortization of $242,277 (Note 2) 347,677
------------
TOTAL ASSETS $ 1,772,408
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,145,206
Accrued expenses (Note 7) 630,589
Current portion of related party notes payable (Note 10) 573,841
Notes payable (Note 8) 283,202
------------
TOTAL CURRENT LIABILITIES 2,632,838
Long-term debt - related party notes payable, less current portion 487,869
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT (Note 12)
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
Common stock, $.012 par value; 75,000,000 authorized,
20,266,693 issued and outstanding 243,199
Additional paid in capital 16,592,898
Accumulated deficit (18,185,396)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,348,299)
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 1,772,408
============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUE
Consulting services $ 4,846,819 $ 5,902,771
----------- -----------
COSTS OF CONSULTING SERVICES
Direct labor and employee benefit costs 1,470,332 2,062,331
Other direct costs and expenses 1,309,736 1,325,469
----------- -----------
TOTAL DIRECT COSTS AND EXPENSES 2,780,068 3,387,800
----------- -----------
GROSS PROFIT 2,066,751 2,514,971
----------- -----------
OTHER COSTS AND EXPENSES
General, administrative and other operating costs 3,218,424 3,560,212
Stock compensation expense for services - 505,334
Reserve for restructuring - 350,000
----------- -----------
TOTAL OTHER COSTS AND EXPENSES 3,218,424 4,415,546
----------- -----------
OPERATING LOSS (1,151,673) (1,900,575)
----------- -----------
OTHER INCOME (EXPENSE)
Interest, net (131,243) (106,536)
Loss in value of marketable securities - (200,000)
Loss on disposal of marketable securities (150,000) -
Gain on sale of laboratory assets 40,000 -
Other income (expense), net 53,266 (5,020)
Loss on disposal of fixed assets (336,938) -
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (524,915) (311,556)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (1,676,588) (2,212,131)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of $0 taxes (666,240) (1,435,262)
Gain (loss) on disposal, net of $0 taxes (6,812,541) 509,037
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (9,155,369) (3,138,356)
EXTRAORDINARY ITEMS, net of $0 taxes (Note 18) - 1,225,964
----------- -----------
NET LOSS $(9,155,369) $(1,912,392)
=========== ===========
BASIC LOSS PER COMMON SHARE:
Continuing operations $ (.09) $ (0.15)
----------- -----------
Discontinued operations $ (.40) $ (0.07)
----------- -----------
Extraordinary items $ - $ 0.09
----------- -----------
NET LOSS PER COMMON SHARE $ (.49) $ (0.13)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(9,155,369) $(1,912,392)
----------- -----------
Adjustments to reconcile net loss to
net cash used by operating activities:
Extraordinary items - (1,225,964)
Depreciation & amortization 601,924 865,719
Gain on sale of laboratory assets (40,000) -
Loss on sale/disposal of equipment 336,938 10,545
Services paid with common stock - 505,334
Increase (decrease) in provision for bad debts and potential loss on
state reimbursement program (146,393) 173,104
Write down in marketable securities 150,000 200,000
(Gain) loss from discontinued operations 314,364 (509,037)
Write down of net assets of discontinued operations 6,757,313 -
Changes in operating assets & liabilities, net of effects from purchase of
American Remedial Technologies, Inc.:
Accounts receivable 9,497 (412,504)
Prepaid expenses & other 67,196 333,634
Amounts due under state reimbursement program 17,143 (122,840)
Other assets - 21,655
Accounts payable and accrued expenses 495,731 (423,910)
Deferred revenues - 300,000
Increase in related party notes 97,560 -
----------- -----------
Total adjustments 8,661,273 (284,264)
----------- -----------
Net cash used by operating activities of:
Continuing operations (86,992) (2,196,656)
Discontinued operations (407,104) -
----------- -----------
Net cash used by operating activities (494,096) (2,196,656)
----------- -----------
Investing activities:
Restricted cash 9,080 145,669
Decrease in notes receivable 266,122 -
Purchases of equipment (11,573) (497,806)
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 11,518 -
----------- -----------
Net cash provided by (used in) investing activities 275,147 (5,038,814)
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended March 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Financing activities:
Issuance of common stock - 8,100,000
Proceeds from exercise of warrants/options 697 337,500
Costs associated with issuance of stock - (797,014)
Proceeds from notes payable - 562,860
Proceeds from related party notes payable 1,144,000 1,645,000
Payments on notes payable and capital lease obligations (259,000) (1,496,215)
Payments on related party notes payable (1,047,626) (845,000)
----------- -----------
Net cash provided by (used in) financing activities (161,931) 7,507,131
----------- -----------
Net increase (decrease) in cash (380,880) 271,661
Cash, beginning of period 449,782 178,121
----------- -----------
Cash, end of period $ 68,902 $ 449,782
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 126,006 $ 233,315
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
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 - -
Book 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
=========== ===========
On October 29, 1997, the Company issued 2,666,667 shares of common stock to
settle outstanding debt plus accrued interest in conjunction with the
disposition of a subsidiary. The stock was valued at: $ 500,000 $ -
=========== ===========
On March 5, 1998, the Company sold certain equipment in exchange for a
promissory note and an executed service agreement for free lab services. The
note and lab services were valued at: $ 93,878 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Net Unrealized
Shares of Shares of Series B Additional Loss on
Common Series B Preferred Common Paid-in Marketable Accumulated
Stock Preferred Stock Stock capital Securities Deficit Total
--------- --------- --------- ------ ---------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances 4/1/96 4,590,126 $ - $ 55,082 $ 6,635,498 $ - $ (7,117,635) $ (427,055)
------------------------------------------------------------------------------------------------------
Exercise of warrants 450,000 - - 5,400 332,100 337,500
Issuance of stock in
offering (net of
placement costs) 9,000,000 108,000 7,244,500 7,352,500
Issuance of stock for
Acquisition of
American Remedial
Technologies, Inc. 3,000,000 1,000,000 1,000 36,000 1,463,000 1,500,000
Costs associated with
issuance of stock (49,514) (49,514)
Issuance of stock
for services 557,500 6,690 498,644 505,334
Change in market
value of marketable
securities (10,000) (10,000)
Net loss (1,912,392) (1,912,392)
-----------------------------------------------------------------------------------------------------
Balances 3/31/97 17,597,626 1,000,000 1,000 211,172 16,124,228 (10,000) (9,030,027) 7,296,373
-----------------------------------------------------------------------------------------------------
Issuance of Stock
(conversion of debt) 2,666,667 32,000 468,000 500,000
Options exercised 2,400 27 670 697
Write-off marketable
securities 10,000 10,000
Net Loss (9,155,369) (9,155,369)
-----------------------------------------------------------------------------------------------------
Balances 3/31/98 20,266,693 1,000,000 $1,000 $243,199 $16,592,898 $ - $(18,185,396) $(1,348,299)
-----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-6
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED 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").
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. ECOS Group, Inc. is a Colorado corporation with its principal office
in Miami, Florida.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. 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.
Marketable Securities
The Company classified its investments in marketable securities as
available-for-sale and reported them 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 had
F-7
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
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. During
fiscal year ending March 31, 1998, one of the Company's two marketable
securities investments sustained a permanent decline in market value below
the cost of $75,000. Consequently, the Company has reflected the decline in
market value in current operations. The other marketable securities
investments consisted of securities in Dawson Science. During the fiscal
year March 31, 1998, the Company attempted to sell the securities and was
informed by the transfer agent that the share certificates had been
reported lost by one of Dawson Science's directors. While the Company has
sought legal counsel, the Company believes that pursuing further legal
action would prove cost prohibitive. Therefore, the Company's investment in
Dawson Science of $75,000 was written off and reflected in current
operations.
Property and Equipment
Property and 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. New useful lives for machinery and equipment
were established effective April 1, 1998 that, in the Company's opinion,
more appropriately reflect the Company's financial results by better
allocating costs of new property over the estimated useful lives of these
assets. As a result of this change in accounting estimate, there was no
effect on the Company's net loss for the year ended March 31, 1998.
The following estimated useful lives are used for financial statement
purposes:
Machinery and equipment 3 years
Automobiles 5 years
Furniture and fixtures 3 years
Leasehold improvements Lesser of 15 years or the term of the lease
Goodwill
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized on a straight line basis over fourteen 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.
F-8
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Goodwill (Continued)
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. (See Note 17 -
Discontinued Operations).
Revenue Recognition
Consulting revenue is recognized as services are performed.
Soil remediation revenues were recognized as soil is processed. The
Company's soil remediation division was disposed of during October, 1997.
(See Note 17 - Discontinued Operations).
Year 2000 Systems Costs
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. The
Company is in the process of evaluating the full scope and related costs to
insure that the Company's systems continue to meet its internal needs and
those of its customers. Anticipated costs for system modifications will be
expensed as incurred and are not expected to have a material impact on the
Company's consolidated results of operations. However, the Company cannot
measure the impact that the Year 2000 issue will have on its vendors,
suppliers, customers and other parties with whom it conducts business.
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 asset and liabilities using tax rates in effect for the year in
which the differences are expected to reverse.
Net Income per Share
The Company computes net income per share in accordance with the provisions
of SFAS No. 128, "Earnings per Share". Net income per share is based upon
the weighted average number of common shares outstanding and excludes the
effect of dilutive potential common stock from the exercise of stock
options. Net income per share, assuming dilution, includes the effect of
dilutive potential common stock from the exercise of stock options using
the treasury stock method. Net income per share computations are based on
the weighted average common shares outstanding of 18,717,508 and 14,212,468
for the years ended March 31, 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.
F-9
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Discontinued Operations
During fiscal March 31, 1998, certain wholly-owned subsidiaries ceased
operations and disposed of all operating assets. As such, the Company has
treated these subsidiaries as discontinued operations for all periods
presented. (See Note 17 - 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).
Relocation of Corporate Offices
In December, 1997, the Company relocated its corporate offices in West Palm
Beach and consolidated its operations with Evans Environmental and
Geological Sciences and Management, Inc. in Miami, Florida. The Company
wrote off $146,543 in leasehold improvements and software development costs
as a result of the closure.
Customers and Client Base
The majority of the Company's customers are located in Florida.
For the fiscal year ended March 31, 1998, two of the Company's customers
combined represented 11% of the Company's revenues and 13% of the Company's
accounts receivable. For the fiscal year ended March 31, 1998, five major
customers accounted for 42% of the Environmental Consulting Division sales.
For the fiscal year ended March 31, 1997, four customers accounted for 44%
of the Environmental Consulting Division sales and eight customers
accounted for 60% of the Soil Remedial Division sales.
Concentrations of credit risk with respect to trade receivables are
generally limited due to the large number of clients comprising the
Company's client base and their diverse industries. However, as of March
31, 1998 and 1997, the Company had $189,947 and $650,158, respectively, of
long term receivables outstanding under the State of Florida Inland
Protection Trust Fund program (the "FIPT"). As of March 31, 1997, two
customers comprised approximately 33% of net trade receivable 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.
F-10
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
New Accounting Pronouncements
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Both are effective for fiscal years beginning after
December 15, 1997. Management is currently studying the impact the new
standards will have on its financial statement disclosures.
Reclassifications
Certain amounts previously reported have been reclassified in the 1997
financial statements to conform to the 1998 financial statement
presentation.
3. Going Concern
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.
3. Sale of its Soil Remediation Division which contributed in a large part
to the Company operating losses during the years ended March 31, 1998
and 1997.
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.
4. Acquisition of American Remedial Technologies, Inc.
On July 8, 1996, the Company acquired all the outstanding stock of American
Remedial Technologies, Inc ("ART"). During this period, ART operated a soil
remediation facility in Lynwood, California, a natural outgrowth of its
current environmental consulting and remediation activities. 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 was being amortized over 15 years on a straight line basis. As
a result of the sale of ART, the goodwill was written-off during 1998. (See
Note 17 - Discontinued Operations).
F-11
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of American Remedial Technologies, Inc. (Continued)
The purchase price of ART 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 Convertible Preferred Stock. The Series B Convertible Preferred
Stock is convertible, subject to an earn-out formula, into a maximum of
10,000,000 shares of Common Stock. 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. ART's President, Mr. Enrique A. Tomeu, became the Chief
Executive Officer of the Company. Only the par value was assigned to the
Series B shares issued in connection with the ART acquisition.
The purchase price was principally funded from a contemporaneous,
Regulation S stock offering by the Company as herein discussed. (See Note
12 - Stockholders' Equity).
On October 23, 1997, ART was sold in exchange for the satisfaction of debt
and other consideration. (See Note 17 - Discontinued Operations).
5. State Reimbursement Program Receivables
The Company continues to monitor governmental activities in Florida with
respect to changes in 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 a pre-approved scope of work and costs.
The FIPT has begun payment of claims under a bond program that discounts
the amount due by 3.5% for each year the payment exceeds the potential time
frame without the bond program. Under this formula, the FIPT is paying the
newest claims first to maximize the effect of the discount. The Company
received payment for certain funded receivables. Currently, the Company is
not aware of when future payments will be forthcoming.
As of March 31, 1998, the Company had claims submitted to the FIPT, under
the prior program, totaling $189,947, net of reserves of approximately
$103,000. During the year ended March 31, 1998, the Company provided
reserves for potential unallowed claims, present value discounts on long
term receivables, and actual denials approximating $71,000.
Certain submitted claims have been financed under certain master funding
and subcontractor finance agreements. (See Note 8 - Notes Payable).
F-12
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property and Equipment
Property and equipment at March 31, 1998 consists of the following:
Computers and equipment $ 68,451
Automobiles 105,237
Furniture & fixtures 2,454
Leasehold improvements 4,200
---------
180,342
Less accumulated depreciation and amortization 110,913
---------
$ 69,429
=========
Depreciation and amortization of property and equipment approximated
$166,000 and $167,000 for the years ended March 31, 1998 and 1997,
respectively.
7. Accrued Expenses
Accrued expenses at March 31, 1998 consist of the following:
Compensation and employee benefits $ 169,289
Self insurance reserve 100,000
Interest 44,725
Professional fees 64,000
Local and payroll taxes 39,144
Restructuring reserve 63,943
Other 149,488
---------
$ 630,589
=========
F-13
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Notes Payable
Notes payable at March 31, 1998 consisted of the following:
Subcontractor finance agreements with recourse, Tier, Inc.,
collateralized by specific receivables in connection with
the FIPT, with interest at prime (8.5% as of March 31, 1998)
per annum for 12 months, 5% 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. $ 137,963
Subcontractor finance agreements with recourse,
Environmental Corporation of America, Inc., collateralized
by specific receivables in connection with the FIPT, with
interest at prime (8.5% as of March 31, 1998) per annum for
12 months, 5% 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. 113,114
Note payable, resulting from the settlement of a claim with
a customer, non-interest bearing, payable in monthly
installments of $3,000 through February, 1999. 32,125
---------
Total (all current) $ 283,202
=========
The Company sold receivables, which for financial reporting purposes have
been reported as a borrowing transaction, aggregating $251,077 at March 31,
1998, eligible for reimbursement under the FIPT. 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 $113,114 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 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 5 - State
Reimbursement Program).
F-14
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
Rental
The Company leases certain office equipment, transportation equipment and
office space under operating leases which expire on various dates through
the fiscal year 2002. Many of these lease agreements contain annual rent
increases.
Future minimum annual rental payments are as follows:
Year ending March 31,
---------------------
1999 $ 270,404
2000 205,312
2001 29,075
2002 4,793
---------
Total $ 509,584
=========
Total rental expense incurred approximated $302,000 and $308,000 for the
years ended March 31, 1998 and 1997, respectively.
Employment Agreement
The Company's Chief Executive Officer and President was employed pursuant
to a four year employment agreement dated July 8, 1996. The agreement
provided for an annual salary of $150,000, expense allowance for business
use and travel, incentive compensation, life insurance and disability
benefits. On November 17, 1998, the Officer's employment was terminated in
exchange for valuable consideration received by the Company. (See Note 21 -
Subsequent Events).
F-15
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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.
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.
Litigation
The Company is exposed to various asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
the resolution of these matters will not have a material effect on the
Company's financial position or the results of operations of the Company.
10. 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 $50,000 at March 31, 1998.
F-16
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions (Continued)
Debt (Continued)
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).
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.
The aggregate maturities of related party notes payable are as follows:
Years ended March 31,
1999 $ 573,841
2000 109,741
2001 123,514
2002 139,017
2003 115,597
-----------
$ 1,061,710
===========
F-17
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions (Continued)
Settlements of Debt in Exchange for Stock
During October, 1997, the Company agreed to convert certain debt
outstanding to equity securities of the Company. The debt outstanding was
originally payable to the father of one of the Company's major
stockholders. This transaction resulted in a gain, net of expenses of
$25,461.
11. 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, 1998 were as
follows:
Deferred tax assets:
Bad debt reserves $ 40,000
Other reserves 22,000
Accrued expenses 35,000
Federal net operating and
capital loss carryforward 5,235,000
Valuation allowance (5,318,000)
------------
$ 14,000
============
Deferred tax liabilities:
Property and equipment $ 14,000
============
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 ART 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 in ownership" net operating losses which are allowable after
application of the Section 382 limitation, as well as "post-change in
ownership" net operating and capital losses of approximately $11,557,000
(after considering the settlement with the Internal Revenue Service). 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 Payroll Taxes.
F-18
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (Continued)
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 management's 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 deferred tax assets of $5,318,000
at March 31, 1998. The change in the valuation allowance during the year
ending March 31, 1998 relates principally to the current year net operating
and capital losses.
12. Stockholders' Equity
Common Stock
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 from this offering were utilized for the acquisition of ART and
repayment of debt under an existing line of credit.
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 from August 13, 1997, (ii) 150,000 shares at
$2.50 per share, exercisable within two years from 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 year 1997, the period in which
services commenced.
F-19
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stockholders' Equity (Continued)
Common Stock (Continued)
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.
During the year ended March 31, 1997, warrants were exercised for 450,000
shares of Common Stock for total proceeds of $337,500.
On October 29, 1997, the Company issued 2,666,667 shares of common stock in
exchange of an outstanding debt of $464,000 plus accrued interest in
conjunction with the disposal of American Remedial Technologies, Inc. (see
Note 17 - Discontinued Operations). The shares were issued to Sam W. Klein,
the father of a shareholder/director of the Company. As a result, the
Company recorded a gain of $25,641. The total exchange price was $525,461.
As of March 31, 1998, the Company has not registered these shares with the
U.S. Securities and Exchange Commission. However, the Company does intend
to register these shares once it becomes current in its financial reporting
with the SEC and when the registering no longer presents an undue financial
burden on the Company. (See Note 10 - Related Party Transactions)
During the year ended March 31, 1998, options were exercised for 2,400
shares of Common Stock for total proceeds of $697.
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 non-voting, preferred stock is convertible into five
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 $.75 per share of Series A,
plus any accrued and unpaid dividends. The Company may redeem the Series A
Preferred Stock at a price of $.75 per share, in whole or in part, at any
time commencing two years after its issuance. The Company's Series A
stockholders have preference over Series B and common stockholders in
dividends and liquidation rights. At March 31, 1998 and 1997, respectively,
there were no Series A preferred shares issued or outstanding.
F-20
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stockholders' Equity (Continued)
Earnings per Share
<TABLE>
<CAPTION>
For the Year Ended March 31, 1998 For the Year Ended March 31, 1997
----------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
Amount (Numerator) (Denominator) Amount (Numerator) (Denominator)
<S> <C> <C> <C> <C> <C> <C>
Loss before discontinued
operations and extraordinary
item $(1,676,588) $(2,212,131)
Less: Preferred stock dividends - -
----------- -----------
Basic EPS
Loss allocable to common
stockholders $(1,676,588) 18,717,508 $ (.09) $(2,212,131) 14,212,468 $ (.15)
=========== ========== ======== =========== ========== =======
</TABLE>
Securities which could potentially dilute basic EPS in the future were not
included in the computation of diluted EPS as they are anti-dilutive for
all periods presented. The securities consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
----------------------------------- -----------------------------------
Price Per-Share Shares Price Per-Share Shares
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Potentially issuable common
shares from the exercise of:
Warrants and options $.29-$10.50 3,911,443 $.29 - $10.50 4,142,693
Employee stock options $1.25 868,208 $1.00 877,083
Series B convertible preferred stock (1) 10,000,000 (1) 10,000,000
</TABLE>
(1) Series B Convertible Preferred Stock price per-share is subject to an
earn-out formula.
Series B Preferred Stock
The Series B Convertible Preferred Stock (the "Series B") is not entitled to
receive any dividends and has a liquidation value of $.75 per share. The
Company's Series A stockholders shall rank senior to the Company's Series B
stockholders of any liquidation. At March 31, 1998 and 1997, respectively, there
were no Series A preferred shares issued or outstanding. Series B stockholders
have preference over common stockholders in liquidation rights. 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.
F-21
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Warrants and Options
Warrants and options outstanding to purchase common stock of the Company at
March 31, 1998 consist of the following:
<TABLE>
<CAPTION>
Expir- Common
Issue ation Exercise Stock
Date Date Price Issuable
------ ------- -------- ---------
<S> <C> <C> <C> <C>
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
Line of credit and
consulting agreement Apr 95 Jan 02 (1) 2,285,193
Consulting agreement Jun 95 Jun 98 $0.29 6,250
Consulting agreement Nov 95 Nov 98 $0.29 15,000
Consulting agreement Dec 95 Dec 99 $1.00 50,000
Management agreement Jul 96 Jun 98 $1.37 75,000
Placement agency agreement Jul 96 Jul 98 $1.00 630,000
Corporate relations agreement (2) Aug 97- $2.00-
Aug 96 Aug 99 $2.70 600,000
---------
3,911,443
=========
</TABLE>
(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 12 - Stockholders' Equity.
14. 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.
F-22
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Stock Option Plans (Continued)
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 personnel
at an exercise price of $0.88 per share. All said options expired unused in
June, 1998.
Additionally, in June, 1996 the Company issued an aggregate of 550,000
options to certain officers, consultants and directors. These options had
expired unused in June, 1998.
The following table reflects the 1993 and 1996 Plans' option activity for
the years ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1998 Price 1997 Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 877,083 $ 1.21 95,233 $ .41
Granted - - 791,250 1.34
Exercised 2,400 .29 - -
Expired 6,475 1.00 9,400 0.67
---------- ---------- ---------- ----------
Options outstanding at
end of year 868,208 1.25 877,083 1.21
---------- ---------- ---------- ----------
Options exercisable at
end of year 868,208 $ 1.25 877,083 $ 1.21
========== ========== ========== ==========
Price range of options
outstanding at end of year $1.38-$.29 - 9.75-$0.29 -
Weighted-average remaining
contractual life of options outstanding 2 Years - 3 Years -
Options available for future
grants at end of year 1,225,000 $ - 1,225,000 $ -
========== ========== ========== ==========
Weighted-average fair value
of options granted 868,208 $ .18 877,083 $ 1.00
========== ========== ========== ==========
</TABLE>
F-23
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Stock Option Plans (Continued)
The Company has elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation
expense has been recognized for the stock option.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the
methodology prescribed under Statement of Financial Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss would
have been (decreased) increased by approximately $(812,000) and $877,000 in
1998 and 1997, respectively. The weighted average fair value of the options
granted during 1998 and 1997 was estimated using the Black-Scholes option
pricing model using the following assumptions:
1998 1997
---- ----
Risk-free interest rate 5.5% 6.65%
Expected life (years) 2 3
Expected volatility 35% 147%
Expected dividends None None
15. Reserve for Restructuring
During the first quarter of fiscal year 1997, the Company recorded a
special charge of $350,000 for the restructuring of its operations and
integration with ART, which was acquired in 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, 1998, approximately $64,000 of the charge has
not yet been utilized.
16. Sale of Laboratory Assets
On June 6, 1997, the Company sold to an unrelated company, its secured
claim to all assets from a previously disposed wet chemistry laboratory
operation for total consideration of $110,000. The company subsequently
filed under Chapter 11 and defaulted on the note. The Company reclaimed the
equipment securing the note from the bankruptcy court. On March 5, 1998,
the equipment was resold to an unrelated company for a total consideration
of $93,878. The total sales price is payable by a promissory note in the
principal amount of $23,878, which note bears interest at 9% per annum
payable in equal 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.
F-24
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Discontinued Operations
Sale of Cable Products Division
On April 3, 1996, ABC Cable Products, Inc. ("ABC"), 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, had payment
dates of July 1, 1996 ($500,000), March 5, 1997 ($250,000) and September 5,
1997 ($250,000). As of March 31, 1998, the balance of the note was
collected in full. Operating income relating to its cable products division
included in the March 31, 1997 consolidated financial statements and
included in "Loss from discontinued operations," in the consolidated
statements of operations amounted to $53,802.
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.
Merger of a Certain Subsidiary's Operations with Parent Company
On October 29, 1993, pursuant to a share exchange, the Company acquired
100% of the capital stock ("ECI Shares") of Enviropact Consultants, Inc.
("ECI"). ECI was formed by Enviropact, Inc. (the "Debtor"), which had filed
a petition pursuant to Title 11, as amended, of the United States Code.
The transaction was treated as an acquisition, utilizing the purchase
method, with the investment in ECI of approximately $2,756,000, consisting
of the shares and other cash and non-cash consideration, allocated to
assets and liabilities of ECI based on their estimated fair value as of
October 29, 1993, the date of acquisition. The cost, in excess of net
assets acquired, was approximately $1,765,000 and was being amortized on a
straight-line basis over 14 years. See Note 2 - Significant Accounting
Policies, for a further discussion of goodwill.
In late 1997, the Company began winding down the operations of ECI and
reduced ECI's labor force to three employees. In addition, a decision was
made by the Company to merge the operations of ECI with that of the Parent.
Consequently, a $365,000 charge to income was recorded relating to the
write-off of goodwill in ECI.
Disposal of Soil Remediation Division
On October 23, 1997, the Company disposed of American Remedial
Technologies, Inc. ("ART") by transferring all of the Common Stock of ART
to Messrs. Mark Patton, Fred Miller and Joe Torres Jr., the holders of a
$500,000 promissory note receivable from ART, in complete
F-25
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Discontinued Operations (Continued)
satisfaction of the debt. The Company originally purchased ART for
$7,500,000 on July 8, 1996, as discussed in Note 4 - Acquisition of
American Remedial Technologies, Inc.
In addition, the Company received 100,000 shares of Series C convertible
preferred stock in ART in exchange for complete satisfaction of a note
receivable by the Company from ART amounting to $1,322,224. Preferred stock
was issued relating to the related party debt.
In October, 1997, the Company recorded a loss of approximately $6,448,000
on the disposal of its Soil Remediation Division.
For all years presented, the Company has shown the results of the Soil
Remediation Division separately as discontinued operations in the
consolidated financial statements. Summarized results of the Division for
the six months and nine months ended March 31, 1998 and 1997, respectively,
were as follows:
1998 1997
(six months) (nine months)
------------ -------------
Revenues $ 1,661,380 $ 2,653,056
Expenses 2,327,620 4,142,120
----------- ------------
Net Loss $ (666,240) $ (1,489,064)
=========== ===========
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 recorded a benefit, net
of expenses, of approximately $286,000 related to completed vendor
settlements for the year ended March 31, 1997. As of March 31, 1998, the
Company continues to negotiate with the creditors who rejected the
Company's offer and carries a $117,652 provision for creditors who rejected
the Company's 1996 offer.
F-26
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Extraordinary Items (Continued)
Settlement of Delinquent Payroll Taxes
On June 28, 1996, the Company's 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 Service 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 loss tax carryforwards. The net operating loss carryforwards
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 has
no other outstanding disputes with the IRS or delinquent payroll taxes.
19. SEC Filings
For the quarters ended September 30, 1997 and December 31, 1997, the
Company filed Forms 10-QSB with the Securities and Exchange Commission
reflecting common shares issued and outstanding of 19,489,826 and
22,156,493, respectively. The actual number of common shares issued and
outstanding as of September 30, 1997 and December 31, 1997 were 17,600,026
and 20,266,693, respectively.
20. Joint Venture with a Foreign Entity
On March 5, 1998, the Company entered into a joint venture with a foreign
entity to engage in consulting and management services in France. As of
March 31, 1998, the venture is still in its early stages with no consulting
or management services having been performed by either party.
21. Subsequent Events
Stock Option Plans
On July 1, 1998, 674,500 options covered by the current plan were granted
to thirty-two employees at an exercise price of $0.10 per share with a
three year expiration date.
Settlement of Attorney's Fees
On November 12, 1998, the Company executed a Settlement Agreement for a
claim payable to one of its attorneys. As a result, the Company recorded a
gain, net of expenses, of approximately $230,000, during November, 1998.
F-27
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Subsequent Events (Continued)
Termination of Employment Agreement
On November 17, 1998, a mutual agreement was reached between the Company
and its Chief Executive Officer to terminate their four-year employment
contract dated July 8, 1996. In exchange for the termination, the Officer
agreed to release the Company from a $354,337 obligation payable to the
Officer in the form of a note payable as well as surrender 633,365 shares
of Series B Convertible Preferred Stock of the Company.
F-28
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the use of our report for ECOS
Group, Inc. and Subsidiary, dated December 4, 1998, and to all references to our
Firm included in or made part of this Registration Statement.
MORRISON, BROWN, ARGIZ & COMPANY
Miami, Florida
May 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 68902
<SECURITIES> 0
<RECEIVABLES> 1131456
<ALLOWANCES> 113000
<INVENTORY> 0
<CURRENT-ASSETS> 1165355
<PP&E> 180342
<DEPRECIATION> 110913
<TOTAL-ASSETS> 1772408
<CURRENT-LIABILITIES> 2632838
<BONDS> 0
0
1000
<COMMON> 243199
<OTHER-SE> (1592498)
<TOTAL-LIABILITY-AND-EQUITY> 1772408
<SALES> 4846819
<TOTAL-REVENUES> 4846819
<CGS> 2780068
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3218424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131243
<INCOME-PRETAX> (1676588)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1676588)
<DISCONTINUED> (7478781)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9155369)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
