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, 2000
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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)
Florida 84-1061207
--------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
14505 Commerce Way, Suite 400, Miami Lakes, Florida 33016
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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
-----------------------------
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 [ ]
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.
[ ]
The issuer's revenues for its most recent fiscal year: $5,042,353
The aggregate market value of the voting stock held by non-affiliates of the
Company was approximately $5,863,474 on the average bid and asked price of
$.1875 on June 22, 2000
As of March 31, 2000, the Company had a total of 31,271,860 shares of Common
Stock outstanding.
Transitional Small Business Disclosure format (check one):
Yes [ ] No [x]
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
ECOS Group, Inc. (the "Company") is a Florida corporation, which has
been in the environmental business since 1993. In January 1993, CBLX Holdings,
Inc., a Colorado corporation, purchased Evans Environmental Corp., a Florida
corporation, in a reverse merger acquisition. Following the merger, the name of
CBLX Holdings, Inc. was changed to Evans Environmental Corp. ("Evans
Environmental").
In 1992, the Company purchased the stock of Evans Environmental and
Geosciences ("EE&G"), a company in operation since 1986. In July 1996, Evans
Environmental purchased the stock of American Remedial Technologies, Inc., a
Florida corporation, which was engaged in the remediation of contaminated soils
("ART"). In September 1996, the Company changed its name to ECOS Group, Inc. to
reflect the broader business interests of the Company with its new subsidiary.
In October 1997, the Company disposed of ART, which never achieved prepared
projections, to cure the defaults ART had incurred on loans that had supported
ART. On February 22, 2000, the Company held a special Meeting in which a
majority of stockholders voted, by proxy or in person to change the Company's
state of incorporation from Colorado to Florida by means of a merger of the
Company with and into a wholly owned subsidiary.
(b) Business of Issuer
The Company is a holding company, which currently has EE&G as its only
active subsidiary. EE&G is a regional supplier of environmental and engineering
consulting and testing services to both private clients and government clients.
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 during the 1980's, however, the Company believes that the
field is experiencing diminishing growth in this area due to a relatively mature
market.
1. Principal services:
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 ("IAQ"). Although the
Company 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), expanding EE&G's geographic
reach (enabling it to supply its current scope of services over a larger
geographic region) and adding selected services to augment revenues. In the
latter part of the fiscal year ended March 31, 2000, EE&G added
construction/demolition and electrical services to its array of services with
excellent results. The dramatic upswing in construction, demolition and
electrical work, coupled by a decrease in the asbestos revenues, moved the
Company to establish a new practice area for the construction, demolition and
electrical work and to consolidate the IAQ and Asbestos practices as of April 1,
2000.
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The Asbestos Practice
EE&G provides the following Asbestos consulting services:
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.
o Training.
o Expert witness testimony.
This practice area supplies approximately 39% of EE&G's total revenues.
In the early 1990's, Asbestos supplied nearly 90% of EE&G's revenues. This
dramatic decrease in the percentage of Asbestos revenues is attributable to a
decrease in revenues in the Asbestos practice compared with solid growth in the
Company's Hazardous Substance and IAQ practices. The Company expects continued
erosion of the percentage of Asbestos in its business mix due to the overall
maturity of this market in Florida.
The Company 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 resulting from the mild climate and
youth of many of the buildings, has had a negative impact on this market. The
Company 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 cooler. Accordingly, the Company currently intends to
evaluate expansion opportunities.
The Hazardous Substance Practice
EE&G's Hazardous Substance ("HS") practice area comprised 48% of EE&G's
gross revenues in fiscal year 2000. The HS practice consists of professional
employees with backgrounds predominantly in geology, engineering, environmental
science, biology, and other natural sciences. The staff includes a variety of
registered 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:
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o Soil and Groundwater Assessment and Remediation. The largest
source of revenue in the HS practice area in fiscal year 2000
was the assessment and remediation of soil and groundwater
contamination incidents at municipal, commercial, and
industrial facilities. Due to the sensitivity of the
groundwater aquifer system in Florida and increased regulatory
pressures, EE&G's 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, 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. Following
the enactment 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. Since the national
economy continued to be strong throughout fiscal year 2000,
our HS practice continued to see significant revenues from
environmental audits relative to real estate transactions.
o Petroleum Storage Tank Management. On December 31, 1998, the
Federal and State deadline for required upgrades to
underground storage tank ("UST") systems expired. EE&G
continued to obtain a fair amount of business during fiscal
year 1999 in the assessment, remediation, closure, design, and
installation of UST and aboveground storage tank systems. With
the passing of this deadline, the Company anticipates a
significant decline in the demand for this service in the 2000
calendar year.
o Compliance Audits. EE&G actively performed compliance audits
in fiscal year 2000, primarily for its
industrial/manufacturing clients. EE&G assisted clients with
compliance with environmental regulations and best management
practices, which typically resulted in waste minimization and
costs savings.
o Engineering/Design. EE&G continued to expand its engineering
capabilities in fiscal year 2000. EE&G engineers completed
projects involving soil and groundwater remediation systems,
storm water management systems, sanitary sewer systems, sewer
lift stations, pollution prevention equipment, HVAC design 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 IAQ practice area accounted for 13% of the
Company's gross revenue in fiscal year 2000.
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<PAGE>
The primary project types in which the IAQ practice earns revenues are
as follows:
o Indoor Air Quality Services. 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.
However, increased public awareness, combined with several
large legal cases involving "sick building syndrome" resulted
in a significant increase in the demand for our IAQ services.
EE&G's IAQ services expanded in fiscal year 1999 to
construction management and oversight of architectural and
mechanical modifications/renovations to building components
and heating, ventilation and air conditioning systems relative
to building IAQ problems. In July 1999, the Company signed a
new contract with Broward County School Board to provide
construction management services for mold and mildew
remediation projects. As a result, the Company believes that
its construction management services will increase as a
percentage of the IAQ practice. During the year ended March
31, 2000, IAQ projects accounted for approximately 95% of
revenues for the practice area.
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 10% of the revenues for the practice area, and are 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.
2. Distribution methods of the services
EE&G performs its services through a combination of field
investigations, regulatory agency liaison, technical evaluation, and report
preparation. EE&G's primary products include correspondence, cost proposals and
technical reports. EE&G's projects are typically located in close geographical
proximity to its offices; however, EE&G's national clients retain the Company's
services throughout the United States and Caribbean Islands.
3. Status of any publicly announced new service
In January 2000, EE&G began offering a new service line --
construction/demolition and electrical contracting. This new service line,
developed in response to need generated by EE&G's long term and national
clients, experienced rapid growth and success, becoming a new cost center in
April 2000. In addition, EE&G received its electrical contractor's license in
January 2000 and are currently applying for its General Contractor's license.
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<PAGE>
4. 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.
Despite this high level of competition, EE&G has successfully competed with both
large and small organizations and has maintained and expanded its practices.
EE&G also derives a significant competitive advantage from a large regional
presence in Florida and its fourteen years of successful work in this region.
5. 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.
6. Customers
EE&G maintains a diverse client base, consisting of both government and
private sector customers. 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, 2000, one of the Company's
customers represented nearly 18% of revenue but only 9% of the accounts
receivable. Also, the top ten customers of the Company combined comprised 49% of
the total revenues and 34% of the accounts receivable. For the fiscal year ended
March 31, 1999, one of the Company's customers represented nearly 11% of revenue
but only 4% of the accounts receivable. Also, the top ten customers of the
Company combined comprised 51% of the total revenues and 41% of the accounts
receivable.
7. Intellectual Property Rights
The Company has no present patent application pending nor does it
recognize intellectual property as an asset on its balance sheet.
8. Government approval of principal services
The Company's services are guided extensively by government approval
systems. All of EE&G's licenses and certifications are subject to government
approval on an annual basis. Employees who qualify the firm for its practices in
engineering, geology, asbestos and hazardous materials management, for example,
are required to take annual refreshers to maintain their licensure or
certifications.
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9. 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 legally responsible for their environmental problems, the Company must
comply with all legal requirements 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, professional 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.
Until the spring of 1995, the Company provided numerous 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"). Occasionally, the
Company entered into contracts with third parties for the purpose of funding
such remediation work, subject to payment of a markup or handling fee to these
funding parties. If the State of Florida determined that certain costs were not
reimbursable, then such contracts generally provide that the Company is required
to bear all costs not reimbursed. No assurances exist 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
implemented, under the FIPT, a prioritized Petroleum Cleanup Program based upon
pre-approved scope of work and costs.
The Company submitted claims, as of March 31, 2000, totaling
approximately $116,000, net of reserves, under FIPT's prior program. As of March
31, 2000, the Company does not have any material claims remaining to be
submitted under the new program. The Company does not have plans for future
participation in this program.
10. Research and Development
For the fiscal year ended March 31, 2000, the Company did not expend
any significant funds on research and development activities.
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11. 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 substances 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 asbestos 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.
12. Employees
As of March 31, 2000, the Company employed 58 full time employees. No
employees are members of a collective bargaining unit under a union
representation contract.
(c) Reports to security holders
None.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property, but leases 8,400 square feet for its
Miami operating offices for approximately $135,000 annually. The Company reduced
its lease costs when the Miami lease expired in January 2000 by relocating to a
comparable size location in Miami Lakes for about half the cost of the previous
location. The Company maintains other offices throughout Florida on a
month-to-month basis. The Company believes that its facilities are more than
adequate for its current operations and its commitments sufficiently flexible
for future needs.
ITEM 3. LEGAL PROCEEDINGS.
On October 28, 1998, The Housing Authority of St. Petersburg (the
"Housing Authority") filed a claim against the Company in the Circuit Court of
the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. The
Housing Authority alleged that the Company breached its contract for failing to
disclose the location of lead based paint in parts of the housing project. The
Company believes that it has adequate legal defenses with respect to the claim.
The Company is insured for damages that may be recovered by the Housing
Authority against EE&G in the event of an adverse outcome, minus a
self-insurance of $100,000. The Company does not anticipate that the amount of
any potential loss will materially affect its financial position, but realizes
that an unfavorable adverse outcome could potentially adversely affect such
position or reported results of its operations. As such, the Company reserved
approximately $92,000 to protect itself against any adverse outcome.
In addition, the Company is exposed to various asserted and unasserted
potential claims encountered in the normal course of business. The Company
believes that the resolution of these matters will not have a material adverse
effect on the Company's financial position or the results of its operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On February 22, 2000, the Company held a Special Meeting to vote on a
proposal to change the Company's state of incorporation from Colorado to Florida
by means of a merger of the Company with and into a wholly owned subsidiary.
There were 16,739,820 shares present, represented by proxy and by stockholders
voting in person at the Special Meeting, which constituted approximately 54% of
the shares entitled to vote. All 16,739,820 shares were cast in favor of the
proposal. No abstentions or votes were cast against the proposal.
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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. On April 20, 1995, the Company's Common Stock also began
trading under the symbol EVE 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. As of March 31, 2000 the Company no longer
maintains an active listing on the Berlin Stock Exchange.
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------------- --------------------------------------
Quarter Ended High Bid Low Bid
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<S> <C> <C> <C> <C>
Fiscal Year 2000:
---------------------------------------- -------------------------------------- --------------------------------------
March 31, 2000 $0.3906 $0.0469
---------------------------------------- -------------------------------------- --------------------------------------
December 31, 1999 $0.0625 $0.0312
---------------------------------------- -------------------------------------- --------------------------------------
September 30, 1999 $0.1250 $0.0625
---------------------------------------- -------------------------------------- --------------------------------------
June 30, 1999 $0.2031 $0.0312
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
Fiscal Year 1999:
---------------------------------------- -------------------------------------- --------------------------------------
March 31, 1999 $0.0469 $0.0312
---------------------------------------- -------------------------------------- --------------------------------------
December 31, 1998 $0.0469 $0.0156
---------------------------------------- -------------------------------------- --------------------------------------
September 30, 1998 $0.1250 $0.0156
---------------------------------------- -------------------------------------- --------------------------------------
June 30, 1998 $0.1562 $0.0781
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
Holders
The Company had 347 stockholders of record as of March 31, 2000 and
believes there are approximately 1,100 additional beneficial holders of its
securities who hold such shares in "street" or nominee name.
Dividends
The Company has not paid any dividends during the past two fiscal years
and does not intend to pay any cash dividends on common stock of the foreseeable
future.
The Company's current policy is to reinvest earnings, if any, into the
growth and expansion of the Company. 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 OR PLAN OF OPERATION
Results of Operations
Introduction
During fiscal years 1999 and 2000, the Company continued to focus on
the growth and maintenance of EE&G, the Company's operating subsidiary, and on
further reducing the Company's liabilities, especially long-term debt. In fiscal
year 2000, the Company began to explore a variety of merger and acquisition
opportunities as a means of increasing the Company's growth rate.
Fiscal year 2000 was a transition year for EE&G. The asbestos market
in Florida, EE&G's main service area, steadily declined as this limited resource
market continues to be depleted with each completed project. This general
decline was aggravated by the loss of a few significant clients in this practice
in fiscal year 2000. While the revenues in the asbestos practice are generally
stable for the latter part of fiscal year 2000, the Company does not expect
significant growth in this area and has actively developed other service lines
to replace the lost asbestos revenues. The transition was officially marked at
the beginning of fiscal year 2001 when the asbestos practice was combined with
the indoor air quality practice into a single practice area and a new practice
area, the construction/demolition/electrical practice was established.
Based on experience to date, including the amount of
construction/demolition/electrical work backlogged to date, the Company has set
aggressive goals for this practice area. The Company anticipates that the growth
in this new practice area will significantly exceed the erosion of asbestos
revenues by the early part of fiscal year 2001, allowing the Company to
experience significant growth both in revenues and operational profit in fiscal
year 2001.
The development of the construction/demolition/electrical practice has,
over the last year, proven to be a cash intensive effort. This type of work
typically requires outlay of significant quantities of cash at the outset of
projects that may not be recouped until collection on the final invoice for that
project some time later. The rapid expansion of the
construction/demolition/electrical practice has significantly impacted the
overall cash flow of the Company's operations. To date, the Company has
successfully managed this cash flow difficulty without external sources of
additional cash such as a bank line of credit. Should the Company not obtain a
line of credit to augment the operational cash flow, then the Company foresees
the possibility of not realizing the full growth potential of the
construction/demolition/electrical practice area in fiscal year 2001.
During fiscal years 1999 and 2000, the Company benefited substantially
from one-time events such as discounts on loans (see discussion of these items
below). The Company believes that the opportunities for such dramatic one-time
gains have been largely exhausted and for the upcoming Fiscal year 2001 the
Company will, with limited exceptions, be dependent solely on operational
profits.
The Company has begun exploring a variety of merger and acquisition
opportunities in order to augment its existing revenue stream and increase
stockholder value. The Company will continue to explore these opportunities
during Fiscal year 2001, although no assurance can be given that a merger or
acquisition will be made during the foreseeable future.
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<PAGE>
Fiscal year ended March 31, 2000 compared to fiscal year ended March 31, 1999
During the fiscal year ended March 31, 2000, the Company ended with Net
Income of $766,206, as compared to income of $320,770 for the fiscal year ended
March 31, 1999.
During fiscal year 2000, the Company continued the cost saving actions,
which were started during fiscal year 1998, including negotiating a new lease
for the Miami office, reductions of corporate overhead and other measures. The
results of these cost saving actions contributed to the Company's return to
operational profitability during fiscal year 2000. The Company believes that it
can experience sustained and profitable revenue growth in the future, although
no assurances can be given.
The Company has broadened its service areas offered to clients by the
addition of construction, demolition and electrical lighting maintenance
services within EE&G. The Company anticipates rapid growth in these new service
areas both through attracting new clients and offering more services to existing
clients.
The Company's revenues increased from $4,814,116 for fiscal year 1999
to $5,042,353 for fiscal year 2000, an increase of $228,237 or approximately
4.7%. Direct costs were $2,838,607 for fiscal year 2000 versus $2,791,565 for
fiscal year 1999, representing an increase of $47,042 or approximately 1.7%. The
Company's gross profit margin increased from 42.0% in fiscal year 1999 to 43.7%
in fiscal year 2000.
Other costs and expenses decreased $223,601, or 10%, to $1,967,808 for
fiscal year 2000 compared to $2,191,409 for fiscal year 1999. Included in the
fiscal year 1999 expenses is an expense for estimated stock compensation for
Directors, Management and employees amounting to $351,065. Excluding the effect
of this one-time item in fiscal 1999, fiscal year 2000 expenses of $1,967,808
reflected an increase of 6.9%, or $127,464 over fiscal year 1999 when expenses
were $1,840,344.
The operating income for fiscal year 2000 was $235,938, an increase of
$404,796 from the fiscal year 1999 operating loss of $168,858. Excluding the
expense for stock compensation previously described, an operating income of
$235,938 would have resulted in fiscal year 2000 versus an operating income of
$182,207 for fiscal year 1999, representing a 29% increase from fiscal year 1999
to fiscal year 2000.
The $351,065 liability expensed in fiscal year 1999, described above,
was subsequently settled by issuance of 9,407,039 shares of common stock valued
at $44,211. A $306,854 gain was recognized in fiscal year 2000 on the settlement
of this accrual and is reflected in Other Income under the caption "Settlement
of accounts payable and accrued liabilities".
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 $230,000, during fiscal year 1999. Additionally, on November
17, 1998, a mutual agreement was reached between the Company and its then Chief
Executive Officer to terminate their four-year employment contract dated July 8,
1996. In exchange for the termination, the Chief Executive Officer agreed to
release the Company from a $354,337 obligation payable to the Chief Executive
Officer in the form of a note payable as well as surrender 633,365 shares of
Series B Convertible Preferred Stock of the Company. As a result, the Company
recorded a gain of $354,337 during fiscal year 1999.
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<PAGE>
On January 17, 2000, the Company settled a promissory note whose
balance was $460,851 plus interest of $10,745 for $250,000 with funds from a
private lender. A $221,596 gain was recognized on the early extinguishment of
this debt. On the same day, the Company also settled a promissory note with a
balance of $72,000 plus interest of $22,819 for $40,000 with the Company's
internal funds. A $54,819 gain was recognized on the early extinguishment of
this debt.
The aforementioned one-time items contributed to the income before
income taxes of $777,192 for fiscal year 2000. This was $456,422 better than the
$320,770 income for fiscal year 1999 and can be summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year1999
---------------- ---------------
<S> <C> <C>
Income from consulting offices $ 2,203,746 $ 2,022,551
Corporate overhead (1,967,808) (2,191,409)
Other Income (expense) 541,254 489,628
---------------- ---------------
Income before income taxes $ 777,192 $ 320,770
---------------- ---------------
</TABLE>
Net Income for fiscal year 2000 was $766,206 compared to a $320,770
income for fiscal year 1999. The net income for fiscal year 2000 includes a
provision for income taxes of $10,986.
Liquidity and Capital Resources
The Company had a working capital deficit of $359,872 at March 31,
2000, compared with a working capital deficit of $1,175,356 at March 31, 1999.
This decrease in deficit of $815,484 reflects a working capital ratio of .75 at
March 31, 2000 from .50 at March 31, 1999.
Net cash increased during fiscal year 2000 by $77,973 compared to an
increase during fiscal year 1999 of $21,775. Cash provided by continuing
operations was $200,519 compared to cash provided of $190,332 in fiscal year
1999. Cash of $46,753 and $16,928 in fiscal year 2000 and fiscal year 1999,
respectively, was used to purchase equipment. The cash used for financing
activities of $75,793 was significantly reduced from the $151,629 in fiscal year
1999, due to a reduction of related party debt in the last two years.
The Company entered into subcontractor finance agreements totaling
$518,716 during fiscal years 1998 and 1997 and was 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 the financing companies for any
reimbursement denials. The Company must pay any denied reimbursements within 10
days of notification. As of March 31, 2000, the Company had outstanding balances
of $251,077.
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, 2000, the Company had claims
submitted to the FIPT approximating $116,000, net of reserves.
13
<PAGE>
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, 2001. The Company believes that it can experience
sustained and profitable revenue growth in the future, although no assurances
can be given. However, if the Company does not continue its 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.
None.
14
<PAGE>
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 June 29, 2000
are as follows:
<TABLE>
<CAPTION>
In Office
Name Age Position(s) Since
---------------------------------------- ---------- -------------------------------------------- -------------------
<S> <C> <C> <C>
Wendell R. Anderson 67 Director 1994
Luis De la Cruz 47 Director 1996
Leon S. Eplan 71 Director 1993
Dr. Charles C. Evans 43 Chairman of the Board of Directors 1993
Chief Executive Officer 1998
Timothy Gipe 36 Director, Secretary 1999
President of EE&G 1998
Joseph F. Startari 52 Director 1996
Ana Caminas 46 Chief Financial Officer 1999
</TABLE>
Business Experience:
Wendell R. Anderson, former Governor of the State of Minnesota, was
appointed to the Board of Directors in 1994. Mr. Anderson currently practices
law in Minnesota. The Minneapolis Star Tribune named him one of Minnesota's 100
most influential people of the 20th century. He has served as a director of the
following public companies: Fingerhut Corp. (since 1991), National City Bank
Corporation (since 1981) and Turbodyne Technologies, Inc. (since 1996). He also
served as member of the University of Minnesota's Board of Regents and currently
is a member of its Foundation Board.
Ana Caminas has 25 years experience in management and accounting. Ms.
Caminas was hired in March 1999 as Chief Financial Officer to fill the vacancy
left by Mr. Michael G. Baker in July 1998. From 1991 to 1998, Ms. Caminas served
as Vice President of J.I. Kislak Mortgage Corporation. Ms. Caminas graduated
from Florida International University with Bachelor of Science degree in
Business Administration. She has a Master's Degree in Accounting from the
University of Miami and maintains professional registration as a Certified
Public Accountant in the State of Florida.
Luis De La Cruz has served president and stockholder of De La Cruz &
Cutler, P.A., a law firm in Coral Gables, Florida since 1990. Mr. De La Cruz
legal expertise is in the areas of real estate and commercial transactions. He
earned a Bachelor of Science degree in civil engineering and a Juris Doctorate
from the University of Florida.
15
<PAGE>
Leon S. Eplan, a Director since April 1993, heads Eplan Consulting, an
Atlanta based international consulting firm that provides 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. 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 improvements in
their preparation for the 1996 Summer Olympic Games. Mr. Eplan 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 and has served in that capacity to the present day.
Until March 1995, Dr. Evans also served as the President and Chief Executive
Officer of the Company. From 1986 until March 1995, Dr. Evans had been
continuously employed as President of one or more of Evans Environmental's
subsidiaries. In February 1998, Dr. Evans was appointed interim Chief Executive
Officer of the Company, and in June 1998, was appointed to Chief Executive
Officer. He currently serves in this capacity and his contract is renewed
annually.
Timothy R. Gipe joined the Company as General Manager of EE&G in 1996.
Since 1996, Mr. Gipe has been responsible for directing and managing EE&G, with
an aggressive focus on growth and profitability. In 1998, Mr. Gipe was appointed
President of EE&G. He was appointed Secretary of the Company and voted into the
Board of Directors in 1999, where he has become active in the corporate business
strategies. Prior to joining the Company, Mr. Gipe was employed by a national
environmental engineering firm, SCS Engineers, where he served as their Miami
Branch Office Director from 1990 to 1995.
Joseph F. Startari, a director since 1996, is president, Chief
Executive Officer and Chairman of Biotechna Environmental (2000) Corporation, an
environmental/biotechnology company, and president and Chief Executive Officer
of Biotechna USA, Inc. a majority owned subsidiary (referred to collectively as
"Biotechna"). Mr. Startari joined Biotechna in December 1995. Prior to joining
Biotechna, Mr. Startari held various senior positions in operations, marketing,
research and development and materials management during his 18-year tenure at
Olin Corporation (Ordinance Division) and also served as Executive Vice
President of Olin Services, Inc.
Directors are elected annually at the Company's annual stockholders'
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. Luis de la Cruz is Chairman and Mr. Wendell Anderson and Dr. Charles
C. Evans are members. The Compensation Committee reviews and approves annual
salaries and bonuses for all executive officers and reviews, approves and
recommends to the Board of Directors the terms and conditions of all employee
benefit plans or changes, including the granting of stock options pursuant to
the Company's stock option plans.
16
<PAGE>
The Board of Directors also established an Audit Committee of which
Mr. Joseph F. Startari is Chairman and Mr. Leon Eplan and Dr. Charles Evans are
voting members and Ana Caminas is a non-voting member. The Audit Committee
oversees the Company's Chief Financial Officer, meets periodically with the
Company's outside auditors, and is generally 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, 2000, it complied with all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
Awards
---------------------------------
Securities
Name Under-
And Other Annual Restricted Lying
Principal Position Year Salary Bonus Compensation Stock Award $ Options
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles Evans 2000 $ 102,500 $10,000 * -- --
Chairman and Chief
Executive Officer
1999 $ 92,708 (1) * $104,200(3) 2,671,795
1998 $ 51,702 -- * -- --
----------------------------------------------------------------------------------------------------------------
Timothy Gipe 2000 $ 100,000 $10,000 * -- --
President
1999 $ 95,042 (1) * $102,939(4) 2,639,462
1998 $ 71,354 $36,654(2) * -- --
----------------------------------------------------------------------------------------------------------------
</TABLE>
* The value of perquisites and other personal benefits paid does not exceed the
lesser of $50,000 or 10% of the total annual salary & bonuses reported for
executive officers.
(1) Executive officer elected to receive restricted stock in lieu of cash
bonus.
(2) Represents bonus paid in fiscal year 1999 for services performed in fiscal
year 1998.
(3) Dr. Evans was awarded 2,671,795 shares of restricted stock in lieu of
compensation owed. Value represents such shares at $0.039 per share, the
closing market price of the Company's common stock on the date of the
grant. The restricted stock was fully vested upon grant. Dr. Evans has the
right to receive all dividends paid upon such stock. As of March 31, 2000,
Dr. Evans held 3,619,923 shares of restricted stock valued at
$622,265 (based upon a closing price of the Company's common stock of
$0.1719 per share as of March 31, 2000).
17
<PAGE>
(4) Mr. Gipe was awarded 2,639,462 shares of restricted stock in lieu of
compensation owed. Value represents such shares at $0.039 per share, the
closing market price of the Company's common stock on the date of the
grant. The restricted stock was fully vested upon grant. Mr. Gipe has the
right to receive all dividends paid upon such stock. As of March 31, 2000,
Mr. Timothy Gipe held 3,139,462 shares of restricted stock valued at
$539,674 as of March 31, 2000. (based upon a closing price of the Company's
common stock of $0.1719 per share as of March 31, 2000).
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
------------------------- ------------------ ------------------ ---------------------- ----------------------
Number of Securities
Underlying
Unexercised Value of Unexercised
Options/SAR's at In-the-Money
fiscal year end (#) Options/SAR's at
Shares Acquired Exercisable/ fiscal year end ($)
on Exercise (#) Value Realized Unexercisable Exercisable/
($) Unexercisable
------------------------- ------------------ ------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C>
Charles Evans
Chairman and Chief -- -- 2,869,923 $493,340
Executive Officer
------------------------- ------------------ ------------------ ---------------------- ----------------------
Timothy Gipe
President -- -- 2,639,462 $453,723
------------------------- ------------------ ------------------ ---------------------- ----------------------
</TABLE>
Repricing of Options
On July 1, 1998, Dr. Evans and Mr. Gipe were granted 300,000 and
500,000 stock options, respectively; each of which was, (i) for 3 years, (ii)
immediately exercisable and (iii) at an exercise price of $0.10 per share (the
market price on the date of the grant). On June 4, 1999, the stock options were
cancelled and an equivalent number of shares of common stock were issued to the
employees holding the options.
Employment Agreements
In June 1999, Charles C. Evans executed a one-year agreement to serve
as Chief Executive Officer of the Company. Pursuant to the terms of the
agreement, Dr. Evans received a salary of $104,000, a car allowance of $600 per
month, a performance based bonus of up to $15,000 per year, a stock option bonus
incentive of up to 250,000 shares, reimbursement for business travel and
expenses and eight weeks paid vacation per year. The agreement also provides
that he will not compete with the Company's business for a period of one-year
following his voluntary resignation or the termination of his employment for
cause. In June 2000, the Company renewed Dr. Evans' contract for another
one-year term, including a 2.5% base salary increase.
In June 1999, Timothy Gipe executed a one-year agreement to serve as
President of EE&G. Pursuant to this agreement, Mr. Gipe received a salary of
$100,000 per year, a performance based bonus of up to $15,000 per year, a stock
option bonus incentive of up to 250,000 shares, reimbursement for business
travel and expenses and four weeks paid vacation per year. The agreement also
provides that Mr. Gipe will not compete with the Company's business for a period
of one-year following his voluntary resignation or the termination of his
employment for cause. The Company renewed Mr. Gipe's contract in June 2000 for
another one-year term, including a 2.5% base salary increase and paid vacation
of five weeks per year.
18
<PAGE>
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 attended. Further, for serving
on the Board of Directors, non-employee 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. In March, 1999, the
Board of Directors voted to award common stock and warrants for past due unpaid
compensation. Specifically, Wendell R. Anderson received 376,923 shares valued
at $14,700; Luis De La Cruz received 230,769 shares valued at $9,000; Leon S.
Eplan received 446,154 shares valued at $17,400 and Joseph F. Startari received
223,077 shares valued at $8,700. An equal number of warrants to purchase common
stock of the Corporation at $0.06875 per option share with a one-year vesting
period were issued to the same directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Of the 75,000,000 shares of Company common stock authorized, there were
approximately 31,271,860 shares of the Company common stock outstanding and
approximately 347 holders of record as of March 31, 2000. There were also
3,210,193 warrants and 8,217,667 options outstanding as of March 31, 2000. The
1,000,000 shares of ECOS Group Series B Convertible Preferred Stock previously
outstanding expire with the filing of this 10-KSB.
The following table sets forth certain information, as of June 16,
2000, regarding the Company's shares 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 or Series B Convertible Preferred 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.
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number
of % of
Name and Address Shares Class(2)
---------------- -------- --------
<S> <C> <C>
Strategica Capital Corporation (3)
1221 Brickell Avenue, Suite 2600 2,460,193 7.35%
Miami, Florida 33131
Wendell R. Anderson (1), (4) 803,846 2.56%
Director
Luis De La Cruz (1), (5) 511,538 1.64%
Director
Leon S. Eplan (1), (6) 942,308 2.99%
Director
Joseph F. Startari (1), (7) 496,154 1.59%
Director
19
<PAGE>
Common Stock
-----------------------
Number
of % of
Name and Address Shares Class(2)
---------------- -------- --------
Charles C. Evans (1), (8) 6,489,846 19.15%
Chairman of the Board of Directors and
Chief Executive Officer
Timothy Gipe (1)(9) 5,928,924 17.54%
Director and Secretary
All Directors, Executive Officers and 15,385,436 40.42%
nominees as a Group
(7 persons) (10)
</TABLE>
(1) The address for Directors and Executive Officers is 14505 Commerce Way,
Suite 400, Miami Lakes, Florida 33016.
(2) Pursuant to rules of the Security and Exchange Commission, shares of
the common stock subject to options, options, rights or conversion
privileges held by directors and executive officers that are
exercisable within 60 days of March 30, 2000 are deemed outstanding for
purposes of beneficial ownership and the beneficial ownership of all
executive officers and directors as a group.
(3) Includes (i) 175,000 shares of common stock issuable under options
granted to a predecessor corporation and (ii) 761,731 shares of Series
A Convertible Preferred Stock issuable under options. The shares of
Series A Convertible Preferred Stock are convertible into 2,285,193
shares of Common Stock.
(4) Includes 376,923 shares of common stock issuable under options.
(5) Includes 230,769 shares of common stock issuable under options.
(6) Includes 446,154 shares of common stock issuable under options.
(7) Includes 223,077 shares of common stock issuable under options.
(8) Includes 2,869,923 shares of common stock issuable under options.
(9) Includes 2,639,462 shares of common stock issuable under options and
150,000 shares of common stock issuable under options by Mr. Gipe's
wife as to which shares Mr. Gipe disclaims beneficial ownership.
(10) Includes 6,892,718 shares of common stock issuable under options and
150,000 shares of common stock issuable under options by Mr. Gipe's
wife as to which shares Mr. Gipe disclaims beneficial ownership.
20
<PAGE>
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, Charles C. Evans. The note was due upon
demand and bearing interest at 12% per annum. The note was settled during fiscal
year 2000 with a cash payment of $7,500, issuance of 198,128 shares of the
Company's common stock and options to purchase 198,128 shares of the Company's
common stock at a price of $0.06875 per share.
On October 29, 1997, the Company borrowed $608,000 from stockholder
Michael Klein's father, Sam Klein, pursuant to a five year promissory note,
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 balance of $460,851 plus interest of $10,745 was settled for $250,000
on January 17, 2000 with funds provided by a private lender. A $221,596 gain was
recognized on the early extinguishment of this debt.
In May 1997, the Company borrowed $72,000 from the mother of Enrique A.
Tomeu, a former director and stockholder of the Company. The loan was due upon
demand, bearing interest at 12% per annum. The balance of $72,000 plus interest
of $22,817 was settled for $40,000 on January 17, 2000 from the Company's
internal funds. A $54,519 gain was recognized on the early extinguishment of
this debt.
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. On November 17, 1998, a mutual
agreement was reached between the Company and Mr. Tomeu to terminate their
four-year employment contract dated July 8, 1996. In exchange for termination of
the employment contract, the Officer agreed to release the Company from $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.
These shares which are held by EE&G, expire with the filing of this 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
3.1 Restated Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3(i) of Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995, dated August 21, 1995.
3.2 Bylaws. incorporated by reference from Exhibit 3(ii) of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995,
dated August 21, 1995.
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.
21
<PAGE>
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. incorporated by reference from Exhibit 4.7 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
4.8 Warrant Agreement dated July 8, 1996 between the Company and Karl
Spoddig. incorporated by reference from Exhibit 4.8 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
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 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 1993 Stock Option Plan incorporated by reference
from Exhibit 10.3 of Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1995 dated August 18, 1995.
10.8 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.
22
<PAGE>
10.13 Stock Sale Agreement between the Company and Enrique A. Tomeu dated
March 15, 1996, as amended, incorporated by reference from Exhibit
10.13 of Registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996, dated July 15, 1996.
10.14 Agency Agreement between the Company and Clubb Capital Ltd dated July
8, 1996, incorporated by reference from Exhibit 10.14 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
10.15 Asset Purchase Agreement between the Company, ABC Cable Products, Inc.
and ICX International, Inc. dated April 3, 1996, incorporated by
reference from Exhibit 10.15 of Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1996, dated July 15, 1996.
10.16 Promissory Note between the Company and Lisa L. Robbins dated May 1,
1995, incorporated by reference from Exhibit 10.16 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
10.17 Corporate Relations Agreement, dated August 13, 1996, between the
Company and Corporate Relations Group, Inc, incorporated by reference
from Exhibit 10.2 of the Registrant's Registration Statement on Form
S-3, dated October 11, 1996.
10.18 The Company's 1996 Stock Option Plan, incorporated by reference from
the Company's Proxy Statement for the Annual Meeting of Stockholders
held on October 18, 1996.
21 List of Subsidiaries of the Corporation.
23.1 Independent Auditor's Consent -- Morrison, Brown, Argiz & Company.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
23
<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/ Ana Caminas
---------------------------
Ana Caminas
Chief Financial Officer
Date: June 29, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
__________________________ Director June 29, 2000
Dr. Charles C. Evans
__________________________ Director June 29, 2000
Timothy R. Gipe
__________________________ Director June 29, 2000
Wendell Anderson
__________________________ Director June 29, 2000
Leon S. Eplan
__________________________ Director June 29, 2000
Luis De la Cruz
__________________________ Director June 29, 2000
Joseph F. Startari
</TABLE>
24
<PAGE>
ECOS GROUP, INC.
-------------------
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
as of March 31, 2000
and for the years ended March 31, 2000 and 1999
ECOS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Independent Auditor's Report F-1
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-23
</TABLE>
<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, 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
March 31, 2000 and 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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 audits
provide 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, 2000, and the results of their operations and their
cash flows for the years ended March 31, 2000 and 1999 in conformity with
generally accepted accounting principles.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
Miami, Florida
May 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2000
<S> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents (Note 2) $ 168,650
Accounts receivable, net of $ 70,137 allowance 816,234
Notes receivable (Note 15) --
Prepaid expenses & other assets 67,423
------------
TOTAL CURRENT ASSETS 1,052,307
Amounts due under state reimbursement program (Note 3) 116,287
Property and equipment, net (Notes 2, 4) 53,981
Goodwill, net of $326,555 accumulated amortization (Note 2) 263,398
------------
TOTAL ASSETS $ 1,485,973
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 814,380
Accrued expenses (Note 5) 346,722
Notes payable (Note 6) 251,077
------------
TOTAL CURRENT LIABILITIES 1,412,179
------------
Long-term debt , less current portion (Note 6) 250,000
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT (Note 10)
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, None issued and outstanding --
Common stock, $.012 par value; 75,000,000 authorized,
31,271,860 issued and outstanding 375,262
Additional paid in capital 16,546,952
Accumulated deficit (17,098,420)
------------
TOTAL STOCKHOLDERS' DEFICIT (176,206)
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 1,485,973
============
</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,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
REVENUE
Consulting services $ 5,042,353 $ 4,814,116
----------- -----------
COSTS OF CONSULTING SERVICES
Subcontractor expenses 1,288,862 1,127,624
Other direct costs and expenses 1,549,745 1,726,365
----------- -----------
TOTAL DIRECT COSTS AND EXPENSES 2,838,607 2,853,989
----------- -----------
GROSS PROFIT 2,203,746 1,960,127
----------- -----------
OTHER COSTS AND EXPENSES
General, administrative and other operating costs 1,967,808 1,777,920
Stock compensation for services -- 351,065
----------- -----------
TOTAL OTHER COSTS AND EXPENSES 1,967,808 2,128,985
----------- -----------
OPERATING INCOME (LOSS) 235,938 (168,858)
----------- -----------
OTHER INCOME (EXPENSE)
Interest, net (49,021) (45,691)
Settlement of accounts payable and accrued liabilities 313,360 240,607
Forgiveness of debt 276,415 354,337
Other income (expense), net 500 (59,625)
----------- -----------
TOTAL OTHER INCOME 541,254 489,628
----------- -----------
INCOME FROM CONTINUING OPERATIONS 777,192 320,770
INCOME TAXES 10,986 --
----------- -----------
NET INCOME $ 766,206 $ 320,770
=========== ===========
BASIC INCOME PER COMMON SHARE: $ .027 $ .016
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ .015 $ .009
=========== ===========
</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>
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 766,206 $ 320,770
--------- ---------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 76,321 87,087
Settlements of accounts payable and accrued expenses (313,360) (240,607)
Services paid with common stock 22,400 --
Forgiveness of debt (276,415) (354,337)
Increase (decrease) in provision for bad debts and potential loss on
state reimbursement program -- 73,038
Changes in operating assets & liabilities:
Accounts receivable 245,684 (18,962)
Prepaid expenses & other (501) (12,803)
Accounts payable and accrued expenses (319,816) 336,146
--------- ---------
Total adjustments (565,687) (130,438)
--------- ---------
Net cash provided by operating activities 200,519 190,332
--------- ---------
Investing activities:
Purchases of equipment (46,753) (16,928)
Proceeds from sale of equipment -- --
--------- ---------
Net cash used in investing activities (46,753) (16,928)
--------- ---------
Financing activities:
Proceeds from exercise of warrants/options 11,725
Proceeds from notes payable 250,000 22,000
Payments on notes payable (13,000) (41,125)
Payments on related party notes payable (324,518) (132,504)
--------- ---------
Net cash used in financing activities (75,793) (151,629)
--------- ---------
Net increase in cash 77,973 21,775
Cash, beginning of period 90,677 68,902
--------- ---------
Cash, end of period $ 168,650 $ 90,677
========= =========
</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>
2000 1999
--------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 81,180 $ 70,253
=============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On June 4, 1999, the Company issued 198,128 shares of common stock for $7,500
principal and $217 interest payment on a related party debt.
(See Note 8 - Related Party Transactions)
The stock was valued at: $ 931 $ -
=============== =============
On June 4, 1999, the Company issued 1,637,500 shares of common stock to
employees holding options and which option price in the aggregate of $63,862 was
waived.
The stock and related cost of issuance was valued at: $ 7,696 $ -
=============== =============
On June 4, 1999, the Company issued 7,166,013 shares of common stock to its
directors and officers in payment of past due unpaid compensation.
The stock was valued at: $ 33,680 $ -
=============== =============
On June 4, 1999, the Company issued 150,000 shares of common stock to an
employee in exchange for assets acquired.
The stock was valued at: $ 5,850 $ -
=============== =============
On January 31, 2000, the Company issued 603,526 shares of common stock to its
officers in payment of past due unpaid compensation.
The stock was valued at: $ 2,835 $ -
=============== =============
On January 17, 2000, the Company issued 1,000,000 shares of common stock to an
unrelated party in consideration of the issuance of a promissory note.
The stock was valued at: $ 22,400 $ -
=============== =============
</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, 2000 and 1999
<TABLE>
<CAPTION>
Shares of Shares of Series B Additional
Common Series B Preferred Common Paid-in Accumulated
Stock Preferred Stock Stock capital Deficit Total
----- --------- ----- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances 3/31/98 20,266,693 1,000,000 $ 1,000 $ 243,199 $ 16,592,898 $(18,185,396) $ (1,348,299)
-------------------------------------------------------------------------------------------------
Net Income 320,770 320,770
-------------------------------------------------------------------------------------------------
Balances 3/31/99 20,266,693 1,000,000 $ 1,000 $ 243,199 $ 16,592,898 $(17,864,626) $ (1,027,529)
-------------------------------------------------------------------------------------------------
Issuance of Stock for
conversion of debt 198,128 2,378 (1,447) 931
Issuance of Stock for
past compensation 9,407,039 112,885 (68,674) 44,211
Purchase of Fixed Assets 150,000 1,800 4,050 5,850
Issuance of Stock for
services 1,000,000 12,000 10,400 22,400
Warrants exercised 250,000 3,000 8,725 11,725
Expiration of preferred stock (1,000,000) (1,000) 1,000
Net Income 766,206 766,206
-------------------------------------------------------------------------------------------------
Balances 3/31/2000 31,271,860 -- -- $ 375,262 $ 16,546,952 $(17,098,420) $ (176,206)
-------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
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.
The Company is a Florida corporation with its principal office in Miami
Lakes, Florida.
On February 22, 2000 the Company held a Special Meeting in which a majority
of stockholders voted, by proxy or in person to change the Company's state
of incorporation from Colorado to Florida by means of a merger of the
Company with and into a wholly owned subsidiary.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All inter-company balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Equivalents
The Company classifies as cash and equivalents all highly liquid
investments that 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 that, at times, may exceed
federally insured limits. The Company has not experienced any losses in
such accounts.
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. The following estimated useful lives are used
for financial statement purposes:
<TABLE>
<CAPTION>
<S> <C> <C>
Computers and equipment 3 years
Automobiles 5 years
Furniture and fixtures 3 years
Leasehold improvements Lesser of 15 years or the term of the lease
</TABLE>
F-7
<PAGE>
2. Significant Accounting Policies (continued)
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 business that benefit
therefrom in order to assess whether there has been a permanent impairment
of goodwill.
Revenue Recognition
Consulting revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on temporary differences between the financial statement
and tax bases of assets and liabilities and net operating loss and credit
carry-forwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. A provision for income tax expense is recognized for income taxes
payable for the current period, plus the net changes in deferred tax
amounts.
Earnings per Share
The Company computes earnings per share in accordance with the provisions
of SFAS No. 128, "Earnings per Share." In SFAS No. 128, basic earnings per
share (EPS) is based upon the weighted average number of common shares
outstanding and excludes the dilutive effects of potential common stock
from the exercise of stock options. Similarly, diluted EPS reflects the
potential dilution that could occur if dilutive securities and other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. EPS computations were based on weighted average
common shares outstanding of 28,103,730 and 20,266,693 for the years ended
March 31, 2000 and 1999, respectively. Diluted EPS computations for March
31, 2000 was based on weighted average common shares of 51,132,643,
assuming the conversion of 8,217,667 common stock option shares, 3,210,193
common stock warrants. Diluted EPS computations for March 31, 1999 was
based on weighted average common shares of 34,877,196, assuming the
conversion of 9,705,167 common stock shares, 2,660,193 common stock
warrants, 10,000,000 common stock equivalents for preferred B stock and
8,117,667 of shares issued to employees in June, 1999 for past
compensation.
F-8
<PAGE>
2. Significant Accounting Policies (continued)
Stock Based Compensation
Compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Customers and Client Base
The majority of the Company's customers are located in Florida. A
significant amount of the Company's revenues are derived from governmental
agencies.
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. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific clients, historical trends and other information.
For the fiscal year ended March 31, 2000, one of the Company's customers
represented nearly 18% of revenue but only 9% of the accounts receivable.
Also the top ten customers of the Company combined comprised 49% of the
total revenues and 34% of the accounts receivable. For the fiscal year
ended March 31, 1999, one of the Company's customers represented nearly 11%
of the Company's revenues but only 4% of the accounts receivable. Also, the
top ten customers of the Company combined comprised 51% of the total
revenues and 41% of the accounts receivable.
Reclassifications
Certain amounts previously reported have been reclassified in the 1999
financial statements to conform to the 2000 financial statement
presentation.
3. State Reimbursement Program Receivables
The Company continues to monitor governmental activities in Florida with
respect to changes in the Florida Inland Protection Trust (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.
F-9
<PAGE>
3. State Reimbursement Program Receivables (continued)
As of March 31, 2000, the Company had claims submitted to the FIPT, under
the prior program, totaling $116,287, net of reserves of approximately
$175,000. During the year ended March 31, 2000, the Company provided
reserves for potential unallowed claims, present value discounts on
long-term receivables, and actual denials approximating $62,721.
Certain submitted claims have been financed under certain master funding
and subcontractor finance agreements. (See Note 6 - Notes Payable).
4. Property and Equipment
Property and equipment at March 31, 2000 consisted of the following:
Computer equipment $ 51,897
Furniture and Fixtures 6,026
Field Equipment 10,779
Automobiles and other vehicles 23,643
------------
92,345
Less accumulated depreciation and amortization 38,364
------------
$ 53,981
============
Depreciation and amortization of property and equipment approximated
$34,000 and $45,000 for the years ended March 31, 2000 and 1999,
respectively.
5. Accrued Expenses
Accrued expenses at March 31, 2000 consist of the following:
Compensation and employee benefits $ 174,788
Self insurance reserve 91,836
Interest 699
Professional fees 27,500
Local and payroll taxes 28,744
Federal Income Taxes 10,000
Other 13,155
------------
$ 346,722
============
F-10
<PAGE>
6. Notes Payable
<TABLE>
<CAPTION>
<S> <C>
Notes payable at March 31, 2000 consisted of the following:
Subcontractor finance agreements with recourse, Tier, Inc., collateralized
by specific receivables in connection with the FIPT, with interest at prime
(9.00% as of March 31, 2000) 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 (9.00% as of March 31, 2000) 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
Convertible Promissory Note payable dated January 17, 2000 from a private
lender bearing 10% interest rate payable in monthly installments of interest
only for two years, with the unpaid principal balance due on January 17,
2002. 250,000
----------
Total $501,077
==========
Current $ 251,077
==========
Long Term $ 250,000
==========
</TABLE>
The Company sold receivables, which for financial reporting purposes have
been reported as a borrowing transaction, aggregating $251,077 at March 31,
2000, eligible for reimbursement under the FIPT. The Company also entered
into subcontractor finance agreements. Under these agreements, the finance
companies have funded these receivables which are 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 the finance companies for any reimbursement denials. The
Company must pay any denied reimbursements within 10 days of notification.
(See Note 3- State Reimbursement Program Receivables).
F-11
<PAGE>
7. Commitments and Contingencies
Operating Leases
The Company leases certain office equipment, transportation equipment and
office space under operating leases that expire on various dates through
the fiscal year 2005.
Future minimum annual rental payments are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C> <C>
2001 $ 179,169
2002 147,159
2003 139,732
2004 139,732
2005 81,510
---------
Total $ 687,302
=========
</TABLE>
Total rental expense incurred approximated $259,000 and $245,000 for the
years ended March 31, 2000 and 1999, respectively.
Employment Agreements
The Company has employment agreements and arrangements with its executive
officers and certain management personnel. The agreements generally
continue until terminated by the executive or the Company, and some provide
severance payments under certain circumstances. Some agreements and
arrangements provide the employees with certain additional rights after a
Change in Control of the Company occurs. As of March 31, 2000 if all of the
employees under contract were to be terminated by the Company without good
cause under these contracts, the Company's liability would approximate
$94,000.
In June 1999, Charles C. Evans executed a one-year agreement to serve as
Chief Executive Officer of the Company. Pursuant to the terms of the
agreement, Dr. Evans received a salary of $104,000, a car allowance of $600
per month, a performance based bonus of up to $15,000 per year, a stock
option bonus incentive of up to 250,000 shares, reimbursement for business
travel and expenses and eight weeks paid vacation per year. The agreement
also provides that he will not compete with the Company's business for a
period of one-year following his voluntary resignation or the termination
of his employment for cause. In June 2000, the Company renewed Dr. Evans'
contract for another one-year term, including a 2.5% base salary increase.
F-12
<PAGE>
7. Commitments and Contingencies (continued)
Employment Agreements (continued)
In June 1999, Timothy Gipe executed a one-year agreement to serve as
President of EE&G. Pursuant to this agreement, Mr. Gipe received a salary
of $100,000 per year, a performance based bonus of up to $15,000 per year,
a stock option bonus incentive of up to 250,000 shares, reimbursement for
business travel and expenses and four weeks paid vacation per year. The
agreement also provides that Mr. Gipe will not compete with the Company's
business for a period of one-year following his voluntary resignation or
the termination of his employment for cause. The Company renewed Mr. Gipe's
contract in June 2000 for another one-year term, including a 2.5% base
salary increase and paid vacation of five weeks per year.
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 settled in July, 1996, the former lender made demands on
the Company, as well as asserting enforceability of claimed agreements.
Although the Company has rejected the validity of all such claims, it has
agreed to reach an accommodation with the former lender on some of these
claims solely for the purpose of reaching a definitive settlement of all
outstanding differences. To date, the former lender has not agreed to any
settlement. The Company is unable to foresee the ultimate outcome of this
matter.
NASDAQ Delisting
The Company's 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.
F-13
<PAGE>
7. Commitments and Contingencies (continued)
Litigation
The Company is the subject of a lawsuit alleging breach of contract on
behalf of the Company. The Company believes it has adequate legal defenses
with respect to the action and has and will continue to vigorously defend
against the action. However, it is reasonably possible that this action
could result in an outcome unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of this action
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations. Management
has provided a reserve of $91,836 for this uncertainty.
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 adverse effect on
the Company's financial position or the results of its operations.
8. Related Party Transactions
Debt
On October 29, 1997, the Company borrowed $608,000 from a stockholder's
father pursuant to a five-year promissory note, 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
balance of $460,851 plus interest of $10,745 was settled for $250,000 on
January 17, 2000 with funds provided by a private lender. A $221,596 gain
was recognized on the early extinguishment of this debt.
In May, 1997, the Company borrowed $72,000 from the mother of a former
director and stockholder of the Company. The loan was due upon demand,
bearing interest at 12% per annum. The balance of $72,000 plus interest of
$22,819 was settled for $40,000 on January 17, 2000 from the Company's
internal funds. A $54,819 gain was recognized on the early extinguishment
of this debt.
Settlements of Debt in Exchange for Stock
In July, 1995, the Company borrowed $85,000 from the spouse of the Chairman
of the Board of Directors. The note was due upon demand, bearing interest
at 12% per annum. The note was settled during fiscal year 2000 with a cash
payment of $7,500 and issuance of 198,128 shares of the Company's common
stock.
F-14
<PAGE>
9. Income Taxes
At March 31, 2000 and 1999, the Company had approximately $18,709,000 and
$19,486,000 of net operating loss carry-forwards, respectively. The net
operating losses begin to expire in the fiscal year ending March 31, 2007.
$14,992,000 of the net operating losses has been suspended until after the
Company has paid all payroll taxes previously compromised. The remaining
net operating losses of $3,717,000 that arose after the IRS settlement date
are available to offset future taxable income.
A reconciliation of the provision for income taxes to the federal statutory
rate of 34% is as follows:
2000 1999
---- ----
Tax at statutory rate 34% 34%
Alternative Minimum Tax 2 --
Valuation Allowance (34%) (34%)
2% -
The estimated tax effect of significant different and carry-forwards that
give rise to deferred tax assets are as follows:
2000 1999
---- ----
Reserves and other accruals $ 117,000 $ 117,000
Federal net operating and
capital loss carry-forward 1,309,000 1,573,000
Valuation allowance (1,426,000) (1,690,000)
$ -- $ --
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.
The Company has recorded a valuation allowance against gross deferred tax
assets due to uncertainty surrounding their realizations.
F-15
<PAGE>
10. Stockholders' Equity
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, 2000 and 1999, respectively,
there were no Series A preferred shares issued or outstanding.
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.
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 expires with the filing of this 10-KSB. At March 31, 2000,
there were no Series B preferred shares issued and outstanding. At March
31, 1999, there were 1,000,000 Series B preferred shares issued and
outstanding.
Common Stock
During the fiscal year 2000, the Company issued stock related to past due
compensation (see Note 16 - Extraordinary Items, Stock Issued for Past Due
Compensation). The shares issued were included in the calculations for
diluted earnings per share in the year ended March 31, 2000 and 1999:
On June 4, 1999:
o The stock option price of 1,637,500 options covered by the current
plan was waived and stocks were issued to the employees holding
the options.
o The Company issued 7,166,013 shares of stock to its Directors and
Officers in payment of past due unpaid compensation.
On January 31, 2000 the Company issued 603,526 shares of stock to its
Officers in payment of past due unpaid compensation.
F-16
<PAGE>
10. Stockholders' Equity (continued)
Common Stock (continued)
Also on June 4, 1999:
o The Company issued 198,128 shares of common stock in exchange for
$7,500 payment on an outstanding related party debt plus accrued
interest of $227. The value of the stock was $931.
o The Company issued 150,000 shares of common stock valued at $5,850
to an employee in exchange for assets acquired.
On January 17, 2000 the Company signed a two-year $250,000 promissory note
with a non-related party. Based on the terms of the agreement, the Company
issued the note holder 1,000,000 shares of Common Stock valued at
approximately $22,400.
During the year ended March 31, 1999, options were exercised for 2,400
shares of Common Stock for total proceeds of $697. No options were
exercised in the year ended March 31, 2000.
Earnings per Share
<TABLE>
<CAPTION>
For the Year Ended March 31, 2000 For the Year Ended March 31, 1999
----------------------------------------------------------------------------
Income Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ------------------------- ------
<S> <C> <C>
Income $ 766,206 $ 320,770
Less: Preferred stock dividends - -
----------- -----------
Basic EPS
Income allocable to
Common stockholders $ 766,206 28,103,730 $ .027 $ 320,770 20,266,693 $ .016
=========== ========== ========= =========== =========== =========
Diluted EPS
Income allocable to
Common stockholders $ 766,206 51,132,643 $ .015 $ 320,770 34,877,196 $ .009
=========== ========== ========= =========== =========== =========
</TABLE>
Common stock option shares and common stock warrants which could
potentially dilute basic EPS in the future were included in the computation
of diluted EPS for March 31, 2000 and March 31, 1999. The securities
consist of the following:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
----------------------------------- -----------------------------------
Price Per-Share Shares Price Per-Share Shares
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Potentially issuable common
shares from the exercise of:
Employee stock options $.039 - $.06875 8,217,667 $.039 - $.10 9,705,167
Warrants and options $.0469 - $2.70 3,210,193 $1.00 - $2.70 2,660,193
Series B Convertible Preferred Stock (1) 10,000,000
Stock issued for past compensation (2) 8,117,667
</TABLE>
(1) Series B Convertible Preferred Stock price per-share is subject to an
earn-out formula and expiration on March 31, 2000.
(2) In June, 1999 and January, 2000, Common stock was issued for past
compensation due to directors and officers.
F-17
<PAGE>
11. Warrants and Options
Warrants and options outstanding to purchase common stock of the Company
at March 31, 2000, consist of the following:
<TABLE>
<CAPTION>
Common
Issue Expiration Exercise Stock
Date Date Price Issuable
------- ---------- -------- --------
<S> <C> <C> <C> <C>
Issued in connection with:
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 (2) Jan 00 Jan 01 $.0469 750,000
----------
3,210,193
</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) On January 20, 2000, a one year consulting agreement was signed
which provided 1,000,000 common stock warrants at a price of
$.0469 per common share, of which 250,000 shares immediately
vested and were exercised on March 17, 2000. The remainder of the
common stock warrants vest based on the sustained prices of ECOS
stock. Once vested, the shares are subject to a one-year lock-up.
ECOS has the option to extend the agreement for an additional
year.
12. Stock Option Plans
The Company has two stock option plans that provide for the granting of
stock options to directors, officers and key employees of the Company or
its subsidiaries. The objectives of these plans include furthering the
growth of the Company and its subsidiaries by offering incentives to
directors, executive officers and other key employees of the Company, to
continue to attract and retain the best personnel and to increase the
interest of these employees in the Company through additional ownership of
its common stock. Under both of these plans, the Board of Directors
determines the option price (not to be less than fair market value for
incentive options) at date of grant, whether the options will be
non-qualified or incentive options and the timing of how the options will
become exercisable.
Under the January 29, 1993 plan, ("1993 Stock Option Plan") the Company is
authorized to grant non-qualified and incentive options for up to 400,000
common shares. The options shall expire no more than 10 years from date of
grant. There are no options currently outstanding for this plan which has
almost 365,000 shares available.
F-18
<PAGE>
12. Stock Option Plans (continued)
On August 15, 1996, the Company established the second stock option plan
(the "1996 Stock Option Plan") that provides for the granting of options of
up to 2,000,000 shares of the Company's common stock. The options shall
expire not more than 20 years from date of grant. In November, 1996,
225,000 options covered by this Plan were granted to three key employees at
an exercise price of $1.31. These options expired in November, 1998. During
fiscal year 1999, an additional 1,737,500 shares were granted under this
plan to directors, executive officers and key employees. During June, 1999,
the Company waived the option price and issued 1,637,500 of these shares
(See Note 10 - Stockholder's Equity).
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
expired unused in June, 1998.
Outside of any stock option plan, in March 1999, the Company issued an
aggregate of 9,705,167 common stock options to its Directors and Officers
in payment of past due unpaid compensation.
The following table reflects all option activity for the years ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
2000 Exercise Price 1999 Exercise Price
---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 9,705,167 $ 1.25 225,000 $ 1.21
Granted 150,000 .10 9,705,167 -
Cancelled 1,637,500 - - .29
Exercised - - - -
Expired - 1.25 225,000 1.00
------------- ------------- ------------- -------------
Options outstanding at
end of year 8,217,667 .06829 9,705,167 .07364
------------- ------------- ------------- -------------
Options exercisable at
end of year 8,217,667 $ .06829 1,228,125 $ .10
============= ============= ============= =============
Price range of options
outstanding at end of year $.039-$.06875 $.039-$0.10
Weighted-average remaining
contractual life of options outstanding 4 Years 5 Years
Options available for future
grants at end of year - -
============= =============
Weighted-average fair value
of options granted 195,909 $ .02384 190,221 $ .01960
============= ============= ============= =============
</TABLE>
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 options.
F-19
<PAGE>
12. Stock Option Plans (continued)
Other Stock Options (continued)
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 income would
have been decreased by approximately $43,000 and increased by approximately
$54,000 in 2000 and 1999, respectively. The weighted average fair value of
the options granted during 2000 and 1999 was estimated using the
Black-Scholes option pricing model using the following assumptions:
2000 1999
--------- ---------
Risk-free interest rate 6.3% 5.1%
Expected life (years) 4 2
Expected volatility 33% 33%
Expected dividends None None
13. 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. During the year ended March 31, 2000, the remaining $30,000
balance was utilized for the corporate office relocation.
14. Segment and Related Information
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued effective for fiscal years ending
after December 15, 1998. The Company's reportable segments are strategic
business units that offer different products and services. They are managed
separately because each business requires different technology and
marketing strategies.
The Company has three reportable segments: Asbestos Practice, Hazardous
Substance Practice and Indoor Air Quality Practice. The Asbestos Practice
provides a comprehensive suite of asbestos consulting services, including,
building inspections, laboratory analysis of building materials, abatement
design specifications, training and expert witness testimony. The Hazardous
Substance Practice staff of Geologists, Engineers and other Hazardous
Materials staff provide soil and groundwater assessment and remediation,
petroleum storage tank management and compliance audits. The Indoor Air
Quality Practice's projects include industrial hygiene evaluations, lead
based paint services and other indoor air quality related services.
F-20
<PAGE>
14. Segment and Related Information (continued)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on gross profit (gross revenues net of subcontractor and
other direct expenses) of the respective business units. Segment
information for the fiscal years 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
---------------- --------------
<S> <C> <C>
REVENUES:
Asbestos $ 1,973,589 $ 2,048,554
Hazardous Substances 2,433,042 2,217,922
Indoor Air Quality 635,722 547,640
------------- -------------
Total $ 5,042,353 $ 4,814,116
GROSS PROFIT:
Asbestos $ 992,889 $ 878,180
Hazardous Substances 931,715 833,012
Indoor Air Quality 279,142 248,935
------------- -------------
Total $ 2,203,746 $ 1,960,127
</TABLE>
The Company has no significant identifiable assets for the reportable
segments.
15. 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 was payable by a promissory note in the
principal amount of $23,878, which note bore 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 agreements were secured by the assets acquired. As of
March 5, 1999, the note was in default. Because the collectability was
uncertain, the Company recorded a $23,878 bad debt provision in the year
ended March 31, 1999. The note was removed from the Company's ledgers in
the year ended March 31, 2000.
F-21
<PAGE>
16. 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, 2000, the
Company continues to negotiate with the creditors who rejected the
Company's offer and carries a $92,650 provision for creditors who rejected
the Company's 1996 offer.
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 $230,000, during the year ended March 31, 1999.
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. As a result, the
Company recorded a gain of $354,337 during the year ended March 31, 1999.
These shares which are held by EE&G, expire with the filing of this 10-KSB.
Early Extinguishment of Debts
On January 17, 2000 the Company settled a promissory note whose balance was
$460,851 plus interest of $10,745 for $250,000 with funds from a private
lender. A $221,596 gain was recognized on the early extinguishment of this
debt. On the same day, the Company also settled a promissory note whose
balance was $72,000 plus interest of $22,817 for $40,000 with the Company's
internal funds. A $54,519 gain was recognized on the early extinguishment
of this debt.
F-22
<PAGE>
16. Extraordinary Items (continued)
Stock Issued for Past Due Compensation
A liability for stock compensation expense of $351,065 was recorded in the
year ended March 31, 1999. The liability was subsequently settled by
issuance of 9,407,039 shares of common stock valued at $ 44,211. A $306,854
gain was recognized in fiscal year 2000 on the settlement of this accrual
and is reflected in the Consolidated Statement of Operations under the
caption "Settlement of accounts payable and accrued liabilities". The
shares issued were included in the calculations for diluted earnings per
share in the year ended March 31, 2000 and 1999.
17. 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, 1999, the foreign entity was delinquent in its obligations to the
Company. In March of 2000, the foreign entity paid $26,500 to the Company
as a settlement to terminate all relations and obligations between the two
companies.
F-23
