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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
--------------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . . . . . to . . . . . . . . . .
Commission File Number 0-25970
CONSOLIDATED ECO-SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
IDAHO 82-0464589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4294 Lakeland Drive
Suite 200
Jackson, Mississippi 39208
(Address of principal executive offices)
Registrant's telephone number, including area code: (601) 936-4440
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
Par value $.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-K or any amendment to this
Form 10-K. [_]
As of March 31, 1997, 15,281,971 shares of the registrant's common stock were
outstanding. The aggregate market value of the common stock (based upon the
closing price on the Nasdaq SmallCap Market on March 31, 1996 of $1 1/4) of
Consolidated Eco-Systems, Inc. held by non-affiliates of the registrant at that
date was approximately $15,803,630.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement relating to 1997 Annual Meeting of the registrant
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TABLE OF CONTENTS
Item Page
PART I
1. Business .............................................................. 3
2. Properties............................................................. 10
3. Legal Proceedings...................................................... 11
4. Submission of Matters to a Vote of Security Holders.................... 13
Executive Officers and Key Employees................................... 14
PART II
5. Market for Registrant's Common Equity and Related Shareholder
Matters.............................................................. 15
6. Selected Consolidated Financial Data................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................. 17
8. Financial Statements and Supplementary Data............................ 21
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................. 21
PART III
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's definitive proxy statement
relating to its 1997 Annual Meeting of Shareholders (which involves, among other
things, the election of Directors of the Registrant) to be filed pursuant to
Regulation 14C not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 22
Signatures............................................................. 27
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PART I
Item 1. Business
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
General
Consolidated Eco-Systems, Inc. (the "Company") provides a broad range of
environmental, industrial and technical services which include environmental
remediation, industrial clean-up, emergency response, recycling and various
specialized environmental services. These services are provided through a
network of subsidiaries (the "Subsidiaries"), each of which tends to specialize
in providing specific types of environmental, industrial and technical services
to clients, individually or in combination with related services of the other
Subsidiaries.
The Company presently conducts substantially all of its business through
seven of its Subsidiaries whose operations are primarily based in the states of
Arkansas, Texas, Oklahoma, Kansas, Mississippi, Missouri, Alabama, Florida,
Louisiana, Ohio and Pennsylvania. These Subsidiaries are Consolidated
Environmental Services, Inc. ("CESI"), Cierra, Inc., Exsorbet Technical
Services, Inc. d/b/a SpilTech Services, Inc. ("SpilTech"), Eco-Acquisition, Inc.
d/b/a Eco-Systems, Inc. ("Eco-Systems"), Larco Environmental Services, Inc.
("Larco"), K.R. Industrial Service of Alabama, Inc. ("KRISA"), and 7-7, Inc.
("7-7"). CESI, Cierra, SpilTech and Eco-Systems were formed or acquired by the
Company in 1995. Larco, KRISA and 7-7 were acquired by the Company in 1996. The
Company's principal office is located at 4294 Lakeland Drive, Suite 200,
Jackson, Mississippi 39208 and its telephone number is (601) 936-4440.
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The Company, originally incorporated in Idaho in 1930 as Sentinel Mines
Corporation, commenced its environmental business operations in late November
1993 when it acquired, and assumed the name of, Exsorbet Industries, Inc. whose
principal business was the manufacture and sale of a product used in the clean
up of hydrocarbon spills. On January 23, 1997, the Company changed its name to
Consolidated Eco-Systems, Inc.
On April 20, 1995, the Company formed Exsorbet Technical Services, Inc.
which is in the business of providing emergency spill response and industrial
services. After the Company acquired CESI on September 27, 1995, Exsorbet
Technical Services, Inc. began conducting its operations under the name
SpilTech. Its offices are located in Euless, Texas and Little Rock, Arkansas.
On September 27, 1995, the Company acquired CESI, an environmental
services company, specializing in site remediation, dewatering and pond
solidification and hazardous waste clean-up, with offices in Dallas, Texas and
Little Rock, Arkansas. CESI was an 80% stockholder of Cierra, an environmental
consulting firm, at the time of the acquisition; it has since acquired the
remaining 20% and, accordingly, is now the sole stockholder of Cierra.
On December 28, 1995, the Company acquired Eco-Systems, an environmental
consulting/engineering firm, comprised of scientists and engineers specializing
in remedial investigations, remediation engineering, air quality, waste water,
regulatory compliance, solid waste engineering, litigation support/expert
testimony, environmental resources and industrial hygiene and safety.
Eco-Systems offices are located in Jackson, Mississippi; Mobile, Alabama; and
Houston, Texas.
On June 26, 1996, the Company acquired Larco, a company which provides
industrial services to petrochemical, manufacturing and transportation
industries along the Texas and Louisiana industrial belt and northward along the
Mississippi River and connected inland waterways. Larco had also been active in
the clean-up and mitigation of oil and other spills, but divested itself of that
portion of its business on February 27, 1997 due to reduced demand for emergency
response service. (See "Business - Recent Developments: Sale of Larco Emergency
Response Equipment"). Larco's offices are in Sulphur and Baton Rouge, Louisiana.
On June 27, 1996, the Company acquired KRISA, an industrial service
company which provides boiler clean-out and rehabilitation for utility companies
and other clients using specialized techniques. KRISA has offices in Mobile,
Birmingham, Decatur and Double Springs, Alabama and Panama City, Florida.
On September 30, 1996, the Company acquired 7-7, a company which offers a
wide range of environmental services, including environmental remediation, barge
cleaning, industrial maintenance and hazardous waste recycling. 7-7 licenses a
liquification process (the "Liquification Process") which recycles coal tar and
petroleum tar sludges into a commercially usable product and which has
applications for the steel industry, petroleum and chemical refineries, utility
power plants, wood treatment facilities and Superfund sites. 7-7 is based in
Wooster, Ohio.
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Products and Services
The Company offers substantially all of its products and services through
its Subsidiaries, each of which tends to specialize in serving different phases
of a client's environmental, industrial and technical needs. In addition, the
Company offers the product Exsorbet, through an exclusive manufacturer and
distributor (see "Manufacturing and Marketing of Exsorbet" below). The Company
also maintains ongoing contact with state and federal environmental regulators
in order to obtain insight into the interpretation of constantly evolving
regulations and regulatory developments. The Company's services and product and
the Subsidiaries or distributor, as the case may be, through which they are
offered are as follows:
Environmental Remediation and Management Services. The Company's
environmental services, which it offers through CESI, include hazardous waste
management, sludge management and dewatering, composting, tank cleaning and
dismantlement, underground storage tank closure, landfill and impoundment
capping, contaminated soil and water treatment, civil construction, groundwater
system installation, slurry walls, demolition and decontamination.
Environmental Consulting. The Company provides diversified environmental
consulting and engineering services, primarily through Eco-Systems, which
specializes in remedial investigations, remediation engineering, air quality,
waste water, regulatory compliance, solid waste engineering, litigation
support/expert testimony, environmental resources and industrial hygiene/safety.
Eco-Systems also performs preliminary project evaluation and environmental and
technical services prior to the performance by CESI of contracting and waste
management services on the same project. Because of the wide range of expertise
of its consultants, Eco-Systems is able to, and does, serve clients in a broad
base of industries, including: petrochemicals; agricultural chemicals; oil
exploration, refining and marketing; gas pipelines; pulp and paper/forest
products; manufacturing; waste disposal and management; state and local
government; and law firms. Its consultants and engineers have expertise in
environmental engineering, materials engineering, chemical engineering,
hydrogeology, computer-aided drafting and design, civil engineering, geology,
archaeology and physics.
Emergency Spill Response. The Company provides emergency spill response
and industrial services primarily through SpilTech. These services are intended
to minimize the adverse impacts of a toxic substance release to the surrounding
population, minimize the extent of surrounding property destruction and minimize
clean-up costs.
Environmental Consulting and Compliance Audits. Cierra is an environmental
consulting firm based in Little Rock, Arkansas which provides an integrated
system of environmental services, including: phase I audits for real estate
transactions; underground storage tank closure investigations; and compliance
audits. Cierra's employees have diverse backgrounds applicable to the
environmental field with expertise in the areas of agriculture, biology,
chemistry, geology, hydrology, toxicological evaluations and wetlands
evaluations.
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Manufacture and Marketing of Exsorbet. The Company's only product is
Exsorbet which is an organic, peat moss-based absorbent material used primarily
to clean up oil and other hydrocarbon based materials. It is distinguished from
other peat moss absorbents in that the proprietary drying process by which it is
manufactured results in its being capable of absorbing hydrocarbons at a greater
capacity than many competing sorbent products. In addition, the Company believes
that it is produced at a lesser cost than most other peat moss absorbents. Its
largest target markets consist of companies in need of environmental remediation
resulting from petroleum contaminated waste and companies in need of industrial
absorbents.
The Company itself manufactured and marketed Exsorbet until June 26, 1995.
On that date, it entered into an agreement with Waste Solutions Corporation
("WSC"), an Illinois corporation with its principal place of business located in
Brookfield, Illinois, pursuant to which WSC became the exclusive distributor of
Exsorbet in the continental United States. On July 11, 1996, the Company and WSC
entered into a new agreement which also provides for WSC to lease the Company's
manufacturing facility at Mulberry, Arkansas and to assume the exclusive
manufacturing, in addition to the distribution, responsibilities for this
product. The lease arrangement runs until June 30, 1999 and is subject to
earlier termination if certain events occur. (See "Recent Developments -
Agreement Relating to Manufacture and Distribution of Exsorbet").
Industrial Cleaning Services. The Company provides on-site industrial
environmental cleaning services through different techniques selected to best
meet the needs of its clients. Through Larco, the Company utilizes wet and dry
vacuum trucks to perform tank cleaning, sludge removal, industrial hydroblasting
and dewatering, as well as waste transportation and roll-off box transportation
services, mainly to clients in petroleum transportation, refining and
production; paper manufacturing; chemical manufacturing; and storage and
municipal utilities. In addition, through utilization of KRISA's specialized
hydroblasting techniques, the Company is able to provide on-site industrial
environmental cleaning services on an "on-line" basis which enables its clients,
principally electrical utility companies and other boiler dependent operations,
to continue their operations without a total shutdown of their boilers.
Waste Recycling. The Company offers a wide range of environmental services
through 7-7, including site remediation, barge cleaning, industrial maintenance
and waste recycling, utilizing, among other things, its Liquification Process
which it has developed to recycle (either on site or off site) tar sludges into
commercially usable products, namely viable feedstocks, such as high-BTU fuel
stock. Currently, 7-7 has three liquification units, one of which is a permanent
facility located in Cleveland, Ohio with a capacity of up to 300 tons per day
and two of which are mobile units, available for specific projects, with
capacities of 100 to 150 tons each per day. The Liquidation Process has
applications for the steel industry, petroleum and chemical refineries, utility
power plants, wood treatment facilities and Superfund sites.
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Patents
The Company has a license for the use of three patents utilized in
recycling coal tar into a commercially usable product. There can be no assurance
that similar processes will not be developed that would allow competitors to
better compete with the Company in this area. The Company does not believe that
any such events would have a material adverse effect on it.
Regulation
Substantially all of the Company's business operations are subject to
extensive laws and regulations promulgated by the Federal, state and local
governments and regulatory authorities dealing with the discharge of materials
into the environment or otherwise relating to the protection of the environment.
The Company believes that it is in compliance in all material respects with all
such laws and regulations.
Marketing and Distribution
The Company promotes its services and product through direct personal
contact, direct mailings and telephone solicitations. In 1996, the Company hired
a National Sales Manager whose principal current responsibilities involve the
active promotion of the liquification/recycling services of 7-7 and more
effective cross-selling among its various Subsidiaries. The Company also has
eight (8) additional persons whose primary responsibilities involve sales and
marketing.
The Company distributes Exsorbet through an exclusive
manufacturing/distribution agreement with WSC. (See "Business - Products and
Services: Manufacture and Marketing of Exsorbet" above).
Backlog
The Company, through its Subsidiaries, had approximately $12.6 million in
backlog projects at March 31, 1997, comprised of approximately: $1.1 million for
CESI; $2.8 million for Eco-Systems; $0.2 million for SpilTech; and $8.5 million
for 7-7.
The reduction of approximately $8 million in backlog from that reported in
the Company's fourth quarter of 1996 is primarily attributable to the Company's
decision to exclude from backlog any agreements primarily based on labor and
materials because of the inherent difficulty in estimating future revenues from
that type of agreement. Such agreements are the primary sources of revenues of
KRISA and Larco, neither of whose revenues have decreased.
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Competition
The environmental services industry is heavily regulated on the state and
federal levels and is characterized by intense competition. Many companies of
all sizes are engaged in activities similar to those of the Company (including
the Subsidiaries), and many of the Company's competitors have substantially
greater assets and capital resources than the Company. The Company operates
primarily in the eight state region of Alabama, Arkansas, Louisiana,
Mississippi, Ohio, Oklahoma, Pennsylvania and Texas. The Company seeks to
distinguish its services by (i) providing timely, high quality and
cost-effective solutions to the various environmental issues facing its clients,
(ii) maintaining long-term relationships with its clients, and (iii) utilizing
technology to provide state of the art services in accordance with applicable
regulatory standards. In addition, the Company believes that certain of its
services, such as the recycling Liquification Process and its specialized
hydroblasting technique, are unique enough to give it a competitive edge when
appropriately marketed. (See "Business - Marketing and Distribution" above).
There can be no assurance, however, that the Company will compete successfully
against its competitors, given the size, resources and marketing capabilities of
many of such companies.
Employees
As of March 1, 1997, the Company and the Subsidiaries had 392 full-time
employees, as follows: 14 at various locations maintained by the Company; 36 at
CESI; 7 at Cierra; 14 at SpilTech; 41 at Eco-Systems; 80 at Larco; 120 at KRISA;
and 80 at 7-7. The Company's employees are not part of any union nor a part of
any collective bargaining arrangement except for less than ten percent (10%) of
the employees of 7-7 who are members of Laborer's Union, Local 516 and Local
158. The Company believes that it currently maintains good relations with its
employees.
Recent Developments
Annual Meeting
At the Annual Meeting of Shareholders, held on December 10, 1996, the
shareholders of the Company approved the reincorporation of the Company in
Delaware through a merger of the Company with and into a Delaware corporation,
Consolidated Eco-Systems, Inc. The Company expects to effect such
reincorporation during 1997.
Agreements Relating to 7-7 Acquisition
On September 30, 1996, the Company, in connection with obtaining the
financing necessary to enable it to complete its purchase of 7-7, entered into a
private placement agreement pursuant to which American Physicians Service Group,
Inc., a Texas corporation ("APS") purchased 1,200,000 shares of the Company's
Common Stock for $3,300,000 with an option for a period of sixty days to require
the Company to repurchase all such shares at the same price in the form of cash
or a promissory note bearing interest at a rate of 15.75% per annum, with the
principal and interest payable in full on October 1, 1997. The option was
exercised on November 20, 1996 and, in connection therewith, the
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Company issued to APS a promissory note in the stated principal amount of
$3,300,000 bearing interest at the rate of 15.75% per annum and due October 1,
1997.
The Company also entered into assignment and security agreements with APS
pursuant to which the Company granted a security interest in all the assets and
the issued and outstanding stock of 7-7 to APS (the "Collateral"). Pursuant to
such agreements, the Company also agreed not to create, incur, assume or become
liable in any manner for any indebtedness (for borrowed money, deferred payment
for the purchase of assets, lease payments, as surety or guarantor of the debt
of another, or otherwise) other than to APS without APS's prior written consent,
except for trade debts incurred in the ordinary course of business. APS has
consented to the issuance of the Convertible Debentures (See "Business -- Recent
Developments: Private Placement of Convertible Debentures" below). There can be
no assurance that APS will consent to any future incurrence of indebtedness.
Agreement Relating to Manufacture and Distribution of Exsorbet
On July 11, 1996, the Company entered into an agreement to lease to WSC
its plant for the manufacture of Exsorbet for a three-year period, subject to
earlier termination if certain events occur. Under the agreement, WSC, which had
been the exclusive distribution of Exsorbet in the United States, also became
the manufacturer of the product. The agreement requires that the Company
purchase a minimum of $50,000 per month of Exsorbet. The Company has not met
this minimum requirement in any month since the inception of the agreement.
Larco Credit Facility Default
Hibernia National Bank of New Orleans, LA ("Hibernia"), the primary
creditor of Larco, asserted on February 13, 1997, that Larco was in default of
its credit facility and threatened to accelerate the notes underlying the
facility. Although Larco disputed the alleged default, it satisfied Hibernia's
demand on or about March 3, 1997. The Company believes that there is no
outstanding default. The current balance due to Hibernia is approximately $1.5
million, which is secured by certain of Larco's assets.
Sale of Larco Emergency Response Equipment
On February 27, 1997 Larco sold its emergency response equipment to an
unaffiliated third party, for approximately $1,200,000. The proceeds of such
sale were used to retire a portion of Larco's debt to Hibernia. (see "Larco
Credit Facility" above). The sale was a result of a reduced demand for Larco's
emergency spill response, causing that portion of its business to become
unprofitable. Under the terms of the contract of sale, Larco agreed not to
compete with the purchaser in the emergency response business and the purchaser
agreed not to compete with Larco in the industrial services business, in each
case with limited exceptions, within approximately fifty miles of Lake Charles,
Louisiana.
Private Placement of Convertible Debentures.
Between December 20, 1996 and January 22, 1997, the Company sold 8%
Convertible Debentures in the aggregate principal amount of $5,000,000
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to certain accredited investors, as defined by Rule 501 of the Securities Act
(the "Holder"). Each Convertible Debenture is convertible into Common Stock at
the option of the Holder of such Convertible Debenture commencing on the
sixty-first day following the date of issuance of the Convertible Debenture
until the Convertible Debenture is paid in full, at a conversion price equal to
eighty percent of the average closing bid price of the Common Stock on the five
trading days immediately preceding the conversion date, subject to certain
limitations set forth in the Convertible Debentures. The Convertible Debentures
were issued pursuant to section 4(2) of the Securities Act, which provides that
a registration statement is not required in connection with transactions not
involving a public offering. All Convertible Debentures which remain unconverted
automatically convert pursuant to the above described formula two years from the
date of issuance.
The proceeds of sale of the Convertible Debentures have, and will be used
to pay past due accounts payable of the Company, for working capital and for
other financial needs of the Company and its subsidiaries. In connection with
the issuance of the Convertible Debentures, the Company paid $400,000 in sales
commissions to H. J. Meyers & Co., Inc. ("H. J. Meyers") the Company's placement
agent in connection with the offering. The Company also issued to H. J. Meyers
warrants to purchase 500,000 shares of Common Stock at $1.56 per share.
The Company agreed, in connection with the sale of the Convertible
Debentures, to file a registration statement covering the shares of Common Stock
issuable upon conversion, and to use its best efforts to cause such registration
statement to be declared effective by the Securities and Exchange Commission
within sixty days of the date the Convertible Debenture was issued. Such
registration statement was filed with the Securities and Exchange Commission on
March 11, 1997 and its effectiveness is pending. Pursuant to the terms of the
Convertible Debentures, the Company is obligated to pay to the debenture holders
as liquidated damages, the sum of $25 per $1,000 principal amount of debenture
for each thirty day period beyond sixty days from the debenture issuance date
that a registration statement covering the shares issuable upon conversion is
not effective. As of April 4, 1997, $115,833 of such liquidated damages had been
paid or was due.
Item 2. Properties.
The Company owns a 24.4 acre tract in Mulberry, Arkansas on which a light
manufacturing plant, attached office, warehouse, machine shed and parking
facilities are located. This Facility is leased to WSC for the manufacture of
Exsorbet. (See "Business - Recent Developments - Agreement Relating to
Manufacture and Distribution of Exsorbet" above). The principal amount
outstanding on the mortgage on this property at December 31, 1996 was
approximately $1 million, bearing interest at 9.25% per annum and due on August
9, 1998.
The Company also leases various properties for the operations of its
businesses, as follows:
CESI leases an office/warehouse at: 6807 West 12th Street, Little
Rock, Arkansas (which is also used by Cierra and SpilTech); and
17440 Dallas Parkway, Dallas, Texas; in addition, CESI has subleased
all its office space at 15851 Dallas Parkway, Dallas, Texas;
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Eco-Systems leases offices at: 4294 Lakeland Drive, Jackson,
Mississippi; 6475 Van Buren Street, Daphne, Alabama; and 11111 Katy
Freeway, Houston, Texas;
SpilTech leases offices, in addition to its Little Rock facility
which it shares with CESI and Cierra, at l2700 Calloway Cemetery
Road, Euless, Texas.
KRISA leases two buildings and a shop at 25354 Highway 24 West,
Trinity, Alabama; one building and a shop at 122 Park Drive,
Saraland, Alabama; one building and a shop at 308 Church Street
South, Panama City, Florida; and, as of April 1, 1997, two
buildings, an office and shop at 15 Industrial Park Drive,
Childersburg, Alabama.
7-7 owns a two-story office building and equipment maintenance shop
at 607 Freedlander Road, Wooster, Ohio and leases a site for its
coal tar liquifier at 3201 Independence Road, Cleveland, Ohio.
Larco owns a two-story building which also includes an equipment
storage/maintenance shop at 1890 Swisco Road, Sulphur, Louisiana.
Exsorbet Administration leases office space at 1401 South Waldron,
Fort Smith, Arkansas; the Company is not using such space and is
presently attempting to sublease it.
The Company believes that its properties are adequate for its business
operations in the foreseeable future.
Item 3. Legal Proceedings.
On October 28, 1994, certain former employees of the Company filed suit
against the Company in the Circuit Court of Crawford County, Arkansas seeking
$50,000 in actual damages and $2,500,000 in punitive damages for violations of
the Arkansas Civil Rights Act and for the common law tort of outrage. The case
is set for trial in May 1997. The plaintiffs claim that they were sexually
harassed by a supervisor formerly employed by the Company. Management believes
that the suit is without merit and that any adverse judgment will not have a
material adverse effect on the Company.
Effective December 10, 1996, the Company placed Charles E. Chunn, Jr., its
then chief financial officer, on paid administrative leave. Subsequent thereto,
on March 10, 1997, the Company commenced an action against Mr. Chunn in the
Chancery Court of Sebastian County, Arkansas seeking rescission of employment
and deferred compensation agreements, restitution of all amounts paid to Mr.
Chunn under such agreements, a declaratory judgment to the effect that the
Company has no further obligation to Mr. Chunn under any of such agreements and
an accounting. Mr. Chunn has filed counterclaims seeking an unspecified amount
of damages, additional shares of the Company's
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Common Stock and attorneys' fees. The Company believes that it has meritorious
defenses to Mr. Chunn's counterclaims. If, however, Mr. Chunn were to prevail in
the assertion of all of his counterclaims, the ultimate outcome of this action
would have a material adverse effect on the Company. The Company intends to
aggressively assert and prosecute its claims and defend against all of Mr.
Chunn's counterclaims.
On February 10, 1997, Alabama Insurance Exchange ("AIE"), filed an action
against the Company, Consolidated Environmental Services, Inc., Eco-Systems,
Larco, 7-7, and Robert Vick, a director and officer of the Company, in the
Circuit Court of Jefferson County, Alabama. AIE contends that it was engaged as
the exclusive insurance broker of record for the Company and its subsidiaries
and that the Company breached this agreement by rescinding the broker of record
engagement. AIE seeks actual and punitive damages for breach of contract,
quantum meruit, conversion, intentional interference with a business contract,
promissory misrepresentation, and conspiracy to defraud. Although this matter is
in its very early stages, the Company believes that it has valid defenses to the
claim and that its outcome will not have a material adverse effect on the
Company. The defendants, including the Company, have removed this action to the
United States District Court in Birmingham, Alabama. No trial date has been set.
On or about February 18, 1997, Perma Fix-Environmental Services, Inc. and
Perma-Fix, Inc., (collectively "Perma-Fix") filed an action against the Company
in the United States District Court for the Northern District of Texas, Wichita
Falls Division. Perma-Fix contends that the Company has misappropriated a secret
procedure that Perma-Fix contends is proprietary to it. Perma-Fix also contends
that employees of SpilTech who were formerly employed by Perma-Fix have
disparaged the services and business of Perma-Fix by the use of false or
misleading misrepresentations. Perma-Fix also contends that the Company breached
an agreement with Perma-Fix to refrain from soliciting or inducing any customer
of Perma-Fix to use the services of the Company. Perma-Fix further alleges that
the Company has received benefits by virtue of misappropriation of its
confidential information and that the Company should be required to provide
these benefits to Perma-Fix. The suit seeks actual damages in excess of $50,000,
injunctive relief, unspecified punitive damages, court costs, and attorney's
fees. The Company believes that it has valid defenses to the claim and that its
outcome will not have a material adverse effect on the Company.
A civil action was brought in the District Court of Harris County, Texas
in 1996 against Larco, as well as several other emergency response and/or other
environmental companies, by certain law enforcement officers who contend that
they were injured by fumes emitted from burning oil. The plaintiffs are seeking
unspecified damages for failure by such companies to warn the law enforcement
officers about dangers from the burning fumes after an explosion on or near the
San Jacinto River in southern Texas. The Company believes that it has valid
defenses to the claim and that its outcome will not have a material adverse
effect on the Company.
A patent infringement action was brought against Larco seeking damages and
injunctive relief. The Company's insurance carrier has assumed the defense of
this action. The Company believes that any recovery will be covered by
insurance.
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The Company is also party to certain litigation in the ordinary course of
its business. The Company does not believe that any such proceedings will have a
material adverse impact on its operations.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on December 10,
1996. The results of the matters submitted to a vote of shareholders at the
Annual Meeting were as follows:
(a) Election of Directors: The following nominees were each elected for a
term of one year:
Nominee For Withheld
------- --- --------
Charles E. Chunn, Jr.* 6,284,963 139,682
James J. Connors, Jr. 8,733,208 139,682
Dr. Edward L. Schrader 8,592,731 139,682
Sam Sexton III 8,592,731 139,682
Robert D. Vick 8,592,731 139,682
Larry Woodcock 6,579,894 139,682
- ----------
* Mr. Chunn resigned as a director on March 19, 1997. See also the second
paragraph under "Legal Proceedings".
In addition, Bernie J. Manard was nominated and seconded from the floor.
An aggregate of 850,548 shares voted in favor of his election as a director of
the Company. There were no votes against his election or abstentions. His
election failed for want of a majority.
In addition, the following matters were brought before the shareholders at
the aforesaid Annual Meeting, with the vote set forth in the parenthetical
following each described matter: (a) reincorporation of the Company under the
laws of the State of Delaware (7,549,584 for, 476,840 against, 39,750
abstentions); (b) elimination of cumulative voting rights with respect to the
election of the Board of Directors (5,913,079 for, 669,825 against, 1,658,420
abstentions); (c) creation of a series of "blank check" preferred stock
(6,240,196 for, 1,806,441 against, 19,537 abstentions); (d) change the Company
name to "Consolidated Eco-Systems, Inc." (7,956,835 for, 163,746 against, 42,342
abstentions); and (f) ratification of the selection of Cooper, Shuffield &
Company (which has since merged into Moore Stephens Frost) as the Company's
independent certified public accountants for the fiscal year ending December 31,
1996 (6,444,407 for, 1,677,623 against, 40,094 abstentions).
13
<PAGE>
The proposals relating to the elimination of cumulative voting rights and
the creation of "blank check" preferred stock did not obtain the votes required
by Idaho corporate law and, accordingly, were defeated.
Executive Officers and Key Employees
James J. Connors, Jr., 38, was named President and Chief Executive Officer
on February 7, 1997. He had served as Executive Vice President of the Company
since April 1, 1996 and had also assumed the additional role of Chief Operating
Officer on January 9, 1997. Prior thereto, Mr. Connors had been Chairman of the
Board and was also a founding principal of Eco-Systems, which was formed in
March 1993 and acquired by the Company in December 1995. Prior thereto, from
1989 to 1993, he had served as a Vice President and Senior Associate with
Woodward-Clyde Consultants, a consulting and engineering firm based in Denver,
Colorado.
Caleb H. Dana, Jr., 47, has served as an Executive Vice President of the
Company since April 1, 1996. Prior thereto he had, since March 1993, served as
Principal Regulatory Officer of Eco-Systems. From 1989 to 1993, Mr. Dana served
as an associate with Woodward-Clyde Consultants. Prior thereto, Mr. Dana worked
for the Mississippi Department of Environmental Quality, Board of Pollution
Control for eleven years and for the United States Environmental Protection
Agency for two years.
Kenneth R. McDonald, 46, became a Vice President of the Company in June
1996 in connection with the Company's acquisition of KRISA where he has served
as Chairman of the Board and President since 1991.
Edward M. Penick, Jr., 53, a Vice-President of the Company, was also named
Chief Financial Officer on February 24, 1997. Mr. Penick was a founding
principal of CESI, which was acquired by the Company in September 1995. Prior
thereto, he served as Vice Chairman of Twin City Bank in Little Rock, Arkansas
from 1990 to 1991 and as its President from 1977 to 1990.
Edward L. Schrader, 45, joined the Company as a Director in February 1996.
On February 7, 1997, he became a full-time Chairman of the Board of Directors.
From 1988 to 1995 he was Chairman of the Department of Geology and a Founder and
Director of Millsaps Sorbet Laboratory and an international environmental
consultant at Millsaps College where he currently serves as an Associate Dean in
the Division of Sciences. Prior thereto, Dr. Schrader served as Vice President
of United Catalysts, Inc., President of Diversified Minerals Corp. and Chief
Geologist for the J.M. Huber Corp.
Sam Sexton III, 39, joined the Company on December 20, 1993 as a Director
and Vice President. He was named General Counsel of the Company on April 1,
1996. He served as Vice President until his election as Secretary of the Company
on February 26, 1996. From 1990 to 1996, Mr. Sexton has practiced law with
Sexton Law Firm, P.A. in Fort Smith, Arkansas.
Robert D. Vick, 40, has served as an Executive Vice President of the
Company since April 1, 1996 and as a director since August 22, 1996. Prior
thereto, since March 1993, he had been Principal Engineer for Eco-Systems, which
was acquired by the Company in December 1995. From 1991 to 1993, he served as an
associate and Senior Project Engineer for Woodward-Clyde Consultants, a
14
<PAGE>
Denver based consulting firm.
Larry J. Woodcock, 49, has been an Executive Vice President and Director
of the Company since June 26, 1996 when the Company acquired Larco. Prior
thereto, since 1979, he had served as President of Larco.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Since November 27, 1995, the Company's Common Stock has been traded under
the symbol "EXSO" on the Nasdaq SmallCap Market ("Nasdaq"). Prior to such date,
the Company's Common Stock was traded on the OTC-Bulletin Board by the National
Association of Securities Dealers broker-dealers pursuant to Rule 15c2-11 of the
Securities and Exchange Commission. As of March 31, 1997, there were 975 holders
of record of the Company's Common Stock, as reflected in the records of the
Company. The following table sets forth, for the periods indicated, the range of
high and low bid prices for the Company's Common Stock as reported by Nasdaq
through December 31, 1996:
Since inception, no dividends have been paid on the Company' Common Stock.
The Company currently intends to retain earnings to finance the expansion of the
Company's business and, therefore, does not expect to pay dividends on its
Common Stock in the foreseeable future.
Period Prices
---------------- -----------------------
Fiscal Year 1995 High Low
---- ---
First Quarter $10-1/2 $5-5/8
Second Quarter 9-1/2 7-1/8
Third Quarter 13 6
Fourth Quarter 12-1/4 7-3/4
Fiscal Year 1996
First Quarter 8-1/8 5-3/4
Second Quarter 6-1/4 3-5/8
Third Quarter 4 2-1/16
Fourth Quarter 2-3/16 1-1/16
15
<PAGE>
Item 6. Selected Consolidated Financial Data.
The selected consolidated financial data set forth below for the three
years ended December 31, 1996 have been derived from the Company's audited
consolidated financial statements (in thousands, except per share amounts). The
Company had no operations during 1992. The financial data for 1993 is obtained
by restating the audited 1993 financial statements to reflect the acquisition of
KRISA. The acquisition of Larco has not been reflected in the 1993 data because
such information was not available at Larco. All of the information set forth
below should be read in conjunction with the audited consolidated financial
statements and notes thereto included in "Item 8 - Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Sales .................................. $ 29,998 $ 21,826 $ 16,658 $ 5,206
Cost of Sales .......................... 20,739 12,052 9.460 3,339
Gross Profit ........................... 9,259 9,774 7,198 1,867
Operating Expenses and Costs:
Marketing .............................. 1,442 1,135 356 276
General and Administrative ............. 12,568 7,658 5,768 1,099
Total Operating Expenses ......... 14,010 8,793 6,124 1,375
Operating Income (Loss) ................... (4,751) 981 1,074 492
Other Income (Expense), Net ............... (994) (335) (260) (40)
Income (Loss) before Income Taxes ......... (5,745) 646 814 452
Provision (Benefit) for Income Taxes ...... (1,551) (89) 196 100
Income (Loss) before Minority Interest .... (4,194) 735 618 352
Minority Interest ......................... -- 26 22 --
-------- -------- -------- -------
Net Income (Loss) ......................... (4,194) 709 596 352
Per Share:
Net Income (Loss) ...................... $ (0.32) $ 0.07 $ 0.06 $ 0.04
Weighted Average Shares Outstanding ....... 13,122 10,436 9,867 8,467
Balance Sheet Data:
Current Assets ............................ $ 12,020 $ 7,246 $ 4,786 $ 2,120
Current Liabilities ....................... 22,571 5,744 4,952 1,640
Total Assets .............................. 45,877 20,520 14,470 9,634
Long-Term Debt (including current portion) 10,421 5,158 2,634 1,110
Total Shareholder Equity .................. 17,102 10,483 7,010 7,343
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
The following analysis and discussion highlights the significant factors
affecting the Company's financial condition and results of operations. For a
more complete understanding of the following discussion, reference should be
made to the Company's Consolidated Financial Statements and the related notes
thereto presented elsewhere in this report.
Overview
During 1995 and 1996 the Company consummated five acquisition transactions
which significantly expanded the range of environmental, industrial and
technical services which the Company offers, as well as broadening the
geographic region which it services. Fiscal 1996 was a period during which the
Company sought to integrate the businesses acquired and their facilities and
personnel to provide a cohesive menu of services to its customer base. During
that period, the Company experienced reduced profit margins resulting from
increased competition in certain service areas and certain operating
inefficiencies. Accordingly, during 1996 and to date in 1997 the Company has
discontinued certain services and disposed of, terminated or redeployed certain
assets and personnel. Since January 1, 1997, the Company has reduced its work
force by approximately 15% and, in March 1997, it disposed of Larco's emergency
response equipment. Further, during 1996 and to date, the Company has
implemented a significant restructuring of its managment personnel, including
the appointment of a new President and a new Chief Financial Officer.
As a result of the debt incurred in connection with the consummated
acquisitions, as well as higher than expected operating expense, which yielded
lower profit margins, the Company experienced during 1996, and continues to
experience, a working capital short-fall. The Company addressed its cash needs
during 1996 and January 1997 through the issuance of $10 million of 7.5% and 8%
Convertible Debentures. The Company's financial recovery program will require
the Company to raise additional debt or equity capital as well as restructure
its outstanding debt.
17
<PAGE>
Results of Operations
1996 Compared to 1995
The primary components of total income and expenses which affect net
income are sales, cost of sales, operating expenses, other income and provisions
for income taxes. These figures have been restated to reflect the poolings of
interest with Larco and KRISA, which directly resulted in significant changes in
these amounts between 1996 and 1995. The 1996 figures also reflect the
acquisition of 7-7.
Sales. For the years ended December 31, 1996 and 1995, sales were
$29,998,228 and $21,825,894, respectively. The increase in sales was due
primarily to the increased cross-selling coordination among various Company
Subsidiaries, other improved marketing efforts and an enhancement of the
Company's ability to serve more customers at the same time. Both industrial
service sales, which the Company actively sought to increase during 1996, and
industrial service equipment contributed to the increase in sales. The increase
also reflects fourth quarter sales of $2,201,734 attributable to the acquisition
of 7-7.
Cost of Sales. For the years ended December 31, 1996 and 1995, the cost of
sales were $20,739,198 and $12,052,473, respectively, or 69.1% and 55.2% of
sales, respectively. The cost of sales as a percentage of sales increased due to
unanticipated expenses incurred in the construction/remediation sector and due
to increased competition in the emergency response business which resulted in a
lowering of prices for services provided. The Company is implementing new
programs to control the cost of sales through more aggressive cost monitoring
and through elimination of unprofitable operations. Cost of sales also increased
due to difficulties experienced by 7-7 in the early stages of developing its
liquification process which created a by-product requiring shipment and disposal
at an outside location. Management has attempted to control the costs related to
7-7's operations by identifying remedies, such as more economical disposal of
the by-product or elimination of the by-product through different technology.
Total Operating Expenses. For the years ended December 31, 1996 and 1995,
total operating expenses were $14,009,887 and $8,792,759, respectively. The
increase resulted from a significant increase in general and administrative
expenses. For the years ended December 31, 1996 and 1995, general and
administrative expenses were $12,567,723 and $7,658,185, respectively. The
increase in general and administrative expenses was due primarily to: expenses
incurred in connection with stock option issuances (approximately $960,000);
increased expenses related to salaries and additional staffing (approximately
$1,500,000); increased consulting expenses (approximately $150,000); increased
expenses for professional services (approximately $150,000); expenses related to
acquisitions (approximately $115,000); increased rental costs (approximately
$50,000); and unusual bad debt expenses (approximately $475,000). The Company
has currently implemented a plan to attempt to control general and
administrative expenses through consolidation of corporate accounting, legal and
general administrative staffs, as well as through the elimination of duplicative
and unnecessary services.
18
<PAGE>
Provisions for Income Taxes. Income taxes (benefit) for the years ended
December 31, 1996 and 1995 were ($1,551,765) and ($88,457), respectively.
Other income (expense). Other income (expense) increased from ($334,487)
to ($994,572) primarily due to increased interest expenses.
Net Income (Loss). For the years ended December 31, 1996 and 1995, net
income (loss) was ($4,193,664) and $709,059, respectively, and net income (loss)
per share was approximately ($0.32) and $0.07, respectively. The figures for
1995 have been restated to reflect the additional shares of stock issued in
connection with the pooling of Larco and KRISA. Net income decreased for the
reasons described above.
1995 Compared to 1994
Sales. For the years ended December 31, 1995 and 1994, sales were
$21,825,894 and $16,658,704, respectively. The increase in sales was due to
enhanced marketing effort on the part of the Company.
Cost of Sales. For the years ended December 31, 1995 and 1994, the cost of
sales were $12,052,473 and $9,460,369, respectively, or 55.2% as a percentage of
sales as compared to 56.8%, respectively.
Total Operating Expenses. For the years ended December 31, 1995 and 1994,
total operating expenses were $8,792,759 and $6,123,746, respectively. The
increase resulted from an increase in the cost of sales, marketing expenses and
general and administrative expenses.
Provisions for Income Taxes. Income tax expense (benefit) for the years
ended December 31, 1995 and 1994 were ($88,457) and $196,623, respectively.
Other Income (Expenses). Other income (expense) for the years ended
December 31, 1995 and 1994 were ($334,487) and ($260,294), respectively.
Net Income. For the years ended December 31, 1995 and 1994, net income was
$709,059 and $595,668, respectively, and net income per share was approximately
$0.07 and $0.06, respectively.
Financial Condition and Liquidity
The figures relating to financial condition and liquidity reflect
restated financial information following the various poolings of interest
acquisitions, identified above, which the Company entered in 1995 and 1996. At
December 31, 1996, total current assets were $12,019,585, reflecting an increase
over the December 31, 1995 level of $7,246,426. Total current liabilities at
December 31, 1996 were $22,571,328 compared with $5,744,459 at December 31,
1995. This resulted in a current ratio of 0.53 and 1.26 at December 31, 1996 and
1995, respectively. The increase in total current liabilities is primarily
related to: an increase in notes payable which increased to $11,631,582 at
December 31,
19
<PAGE>
1996 from $1,706,137 at December 31, 1995; an increase in accounts payable to
$5,342,375 at December 31, 1996 from $2,002,241 at December 31, 1995; and an
increase in current maturities on long term debt to $4,271,427 at December 31,
1996 from $1,250,606 at December 31, 1995. The increase in these liabilities is
significantly attributable to liabilities incurred in connection with the
acquisitions of Larco and 7-7. The Company's current level of liquidity has
affected its ability to meet its short-term obligations.
Working capital needs have generally been met from cash generated from
operations, short term borrowing and the issuance of convertible debentures.
During 1996, the Company issued a total of $7,000,000 in convertible debentures,
the proceeds of which were used to meet short term needs, finance acquisitions,
repay a portion of long term debt and for working capital purposes (including
payment of salaries and other obligations to officers and directors). From early
1996 to date, the Company has been experiencing working capital deficiencies
which have affected its ability to meet its obligations. The Company is
presently exploring methods for raising additional working capital either
through a senior credit facility or the sale of debt or equity securities or
other assets. There can, however, be no assurance that such funds will be
obtained. Failure to raise such funds could have a material adverse effect on
the Company.
In connection with the acquisition of 7-7, the Company issued promissory
notes in the aggregate amount of $900,000, bearing interest at the rate of 8.0%
per annum, payable in quarterly installments over a five year period. Although
the first installment of approximately $45,000 principal amount on these notes
was due on December 1, 1996, the Company did not make such payment. The
noteholders have agreed to defer payment until June 1997 or to temporarily
withhold collection efforts. There can be no assurance that such forbearance
from collection efforts will continue. The Company is addressing the repayment
of these notes as part of its overall financial recovery program. However, the
Company's inability to raise adequate working capital or the noteholders'
cessation of forbearance from collection efforts would have a material adverse
effect on the Company's financial condition.
As a result of the exercise of a stock put agreement, the Company executed
a secured promissory note in the amount of $3,300,000 in favor of APS on October
1, 1997. (See "Business - Recent Developments - Agreements Relating to 7-7
Acquisition"). The note, which bears interest at the rate of 15.75% per annum,
is due on October 1, 1997. The note is secured by a general security interest in
all the outstanding stock and assets of 7-7. The security agreements with APS
also requires the Company to obtain APS's the right to consent to the incurring
of debts by the Company and its Subsidiaries outside the ordinary course of
business. Failure of APS to consent to the incurring of indebtedness for the
refinancing of certain indebtedness would have a material adverse effect upon
the Company.
In March 1997, the Company filed suit against Mr. Charles E. Chunn, Jr.,
its former chief financial officer. (See "Legal Proceedings"). Mr. Chunn has
filed a counterclaim seeking an unspecified amount of damages, additional shares
of the Company's Common Stock and attorneys' fees. While the Company is of the
view that there is no merit to any of Mr. Chunn's claims, his prevailing on all
such claims could have a material adverse effect upon the Company.
20
<PAGE>
Between December 20, 1996 and January 22, 1997, the Company issued
$5,000,000 in convertible debentures and, in connection therewith, agreed to
file a registration statement with the Securities and Exchange Commission within
five days of the date of each debenture issuance and to pay liquidated damages
equivalent to $25 per $1,000 of principal amount of debentures if the
registration statement were not declared effective within sixty days of the date
of the applicable closing. As of the date of this filing, the registration
statement had not been declared effective. The Company incurs liquidated damages
of $125,000 per month until the registration statement is declared effective.
The Company believes that it can satisfy this indebtedness through its present
cash availability or through other means provided for in the agreements between
the Company and the various debenture holders. If, however, the effectiveness of
the registration statement is delayed for a significant period of time, such
delay could have a material adverse effect upon the Company.
Item 8. Financial Statements and Supplementary Data.
The Company's financial statements and supplementary data are attached to
this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement relating
to its 1997 Annual Meeting of Shareholders (which involves, among other things,
the election of Directors of the Company) to be filed pursuant to Regulation 14C
not later than 120 days after the end of the fiscal year covered by this Form
10-K.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following is a list of the consolidated financial statements and the
financial statement schedule which are included in this Form 10-K.
o Report of Independent Public Accountants
o Consolidated Balance Sheets - December 31, 1996 and 1995
o Consolidated Statements of Operations - Years ended December 31,
1996, 1995 and 1994
o Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1996, 1995 and 1994
o Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994
o Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
Form 8-KA-1 with respect to Acquisition of Larco Environmental Services,
Inc. filed on or about September 9, 1996.
Form 8-KA-1 with respect to Acquisition of KR Industrial Service of
Alabama, Inc. filed on or about September 9, 1996.
Form 8-K with respect to Acquisition of 7-7, Inc. filed on or about
October 9, 1996.
22
<PAGE>
(c) The following documents are filed as a part of this report or are
incorporated herein by reference as an exhibit, in addition to the
Financial Statements and Schedules which are filed with this report:
Exhibit No. Description
* 3.1 Articles of Incorporation of Exsorbet Industries, Inc.,
dated March 14, 1930, as amended November 2, 1981, February
19, 1988, March 9, 1988, August 5, 1988, and December 20, 1993
(filed as Exhibit 3.1 to Form 10-QSB filed June 30, 1995).
* 3.2 By-Laws of Exsorbet Industries, Inc. (incorporated by
reference to Exhibit 3.2 to Form 10-QSB filed June 30, 1995)
* 3.3 Form of Common Stock Certificate of the Company, $.001 par
value (incorporated by reference to Exhibit 3 to Form 10-SB
filed May 1, 1995)
* 10.1 Distributorship Agreement by and between the Company and Waste
Solutions Corp., dated June 26, 1995 (incorporated by
reference to Exhibit 10.1 on Form 10-QSB filed June 30, 1995).
* 10.2 Real Estate Mortgage by and between Danville State Bank,
Danville, Arkansas and Exsorbet Industries, Inc., dated March
28, 1995 (incorporated by reference to Exhibit 10.3 on Form
10-QSB filed June 30, 1995).
* 10.3 Note by and between Danville State Bank, Danville, Arkansas
and Exsorbet Industries, Inc., dated August 9, 1995
(incorporated by reference to Exhibit 10.4 on Form 10-QSB
filed June 30, 1995).
* 10.4 Real Estate Mortgage by and between Danville State Bank,
Danville, Arkansas and the Company, dated August 9, 1995
(incorporated by reference to Exhibit 10.5 on Form 10-QSB
filed June 30, 1995).
* 10.5 Agreement and Plan of Merger dated June 26, 1996 by and
between the Company, Exsorbet Acquisition, Inc., Larco
Environmental Services, Inc., and Larry and Marilyn Woodcock
(incorporated by reference to Exhibit 2.1 of Form 8-K/A-1,
dated June 26, 1996).
* 10.6 Agreement dated June 27, 1996 by and between the Company, KR
Acquisition, Inc., KR Industrial Service of Alabama, Inc.,
Kenneth R. McDonald, Carolyn McDonald and Kenneth A. Flatt,
Jr. (incorporated by reference to Exhibit 2.1 of Form 8-K/A-1,
dated June 27, 1996)
23
<PAGE>
* 10.7 Agreement and Plan of Merger dated August 5, 1996 by and among
the Company, 7-7 Merger, Inc., 7-7, Inc., Calvin F. Lowe II,
Gary Platek, G. Howard Collingwood, James Hodgson and Edward
Kurzenberger (incorporated by reference to Exhibit 2.1 of Form
8-K/A-2, dated September 30, 1996 .
* 10.8 Form of Promissory Note Payable to Individual 7-7, Inc.
Shareholders (incorporated by reference to Exhibit 10.7 to
Form 8-K/A-2 dated September 30, 1996).
* 10.9 Stock Purchase Agreement dated September 30, 1996 by and
between the Company and American Physicians Service Group,
Inc. (incorporated by reference to Exhibit 10.8 to Form
8-K/A-2 dated September 30, 1996).
* 10.10 Stock Put Agreement dated September 30, 1996 by and between
the Company and American Physicians Group, Inc. (incorporated
by reference to Exhibit 10.9 to Form 8-K/A-2 dated September
30, 1996).
* 10.11 Shareholders Rights Agreement dated September 30, 1996 by and
between the Company and American Physicians Service Group,
Inc. (incorporated by reference to Exhibit 10.10 to Form
8-K/A-2 dated September 30, 1996).
* 10.12 Stock Warrant dated September 30, 1996 from the Company to
American Physicians Service Group, Inc. (incorporated by
reference to Exhibit 10.11 to Form 8-K/A-2 dated September 30,
1996).
* 10.13 Contingent Warrant dated September 30, 1996 from the Company
to American Physicians Group, Inc. (incorporated by reference
to Exhibit 10.12 to Form 8-K/A-2 dated September 30, 1996).
* 10.14 No Contest Agreement dated September 30, 1996 by and between
the Company and American Physicians Group, Inc. (incorporated
by reference to Exhibit 10.13 to Form 8-K/A-2 dated September
30, 1996).
* 10.15 Form of Option Agreement dated September 30, 1996 by and
between individual shareholders of the Company and American
Physicians Group, Inc. (incorporated by reference to Exhibit
10.14 to Form 8-K/A-2 dated September 30, 1996).
* 10.16 Assignment and Security Agreement dated September 30, 1996 by
and between the Company and Ameritech Physician Service Group,
Inc. (incorporated by reference to Exhibit 10.15 to Form
8-K/A-2 dated September 30, 1996)
* 10.17 Agreement dated July 11, 1996 between the Company, Waste
Solutions Corporation and John Giura and Chander Jadwani
relating to lease of Exsorbet manufacturing plant.
24
<PAGE>
* 10.18 Employment Agreement, dated May 15, 1996, by and between the
Company and Chares E. Chunn, Jr. (incorporated by reference to
Exhibit 10.1 to Form 10-Q for quarterly period ended June 30,
1996).
* 10.19 Employment Agreement, dated May 15, 1996, by and between Dr.
Edward L. Schrader and the Company (incorporated by reference
to Exhibit 10.2 to Form 10-Q for quarterly period ended June
30, 1996).
* 10.20 Agreement, dated May 15, 1996, between the Company and Dr.
Edward L. Schrader (incorporated by reference to Exhibit 10.3
to Form 10-Q for quarterly period ended June 30, 1996).
* 10.21 Employment Agreement of Sam Sexton III, dated May 15, 1996
(incorporated by reference to Exhibit 10.4 to Form 10-Q for
quarterly period ended June 30, 1996).
* 10.22 Employment Agreement of Larry Woodcock, dated June 26, 1996
(incorporated by reference to Exhibit 10.5 to Form 10-Q for
quarterly period ended June 30, 1996).
* 10.23 Employment Agreement of Marilyn Woodcock, dated June 26, 1996
(incorporated by reference to Exhibit 10.6 to Form 10-Q for
quarterly period ended June 30, 1996).
* 10.24 Registration Rights Agreement, dated June 26, 1996, by and
between the Company and Larry and Marilyn Woodcock
(incorporated by reference to Exhibit 10.7 to Form 10-Q for
quarterly period ended June 30, 1996).
* 10.25 Employment Agreement of Kenneth R. McDonald, dated June 27,
1996 (incorporated by reference to Exhibit 10.8 to Form 10-Q
for quarterly period ended June 30, 1996).
* 10.26 Employment Agreement of Carolyn. McDonald, dated June 27, 1996
(incorporated by reference to Exhibit 10.8 to Form 10-Q for
quarterly period ended June 30, 1996).
* 10.27 Consulting Agreement of Calvin F. Lowe, Sr. (incorporated by
reference to Exhibit 10.1 to Form 8-K dated September 30,
1996).
* 10.28 Consulting Agreement of Calvin F. Lowe, II. (incorporated by
reference to Exhibit 10.2 to Form 8-K dated September 30,
1996).
* 10.29 Company Incentive Award Plan, dated June 22, 1995
(incorporated by reference to Exhibit 10.7 to Form 10-QSB
filed on June 30, 1995).
* 10.30 Promissory Note of the Company in the amount of $3,300,000 in
favor of APS (incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-3, filed on March 11, 1997,
File No. 333-23087).
25
<PAGE>
10.31 Agreement with Waste Solutions Corporation dated July 11,
1996.
* 10.32 Form of Convertible Equity Debenture (incorporated by
reference to Exhibit 10.2 to the Registration Statement on
Form S-3, filed on March 11, 1997, File No. 333-23087).
* 10.33 Form of Securities Purchase Agreement (incorporated by
reference to Exhibit 10.3 to the Registration Statement on
Form S-3, filed on March 11, 1997, File No. 333-23087).
* 10.34 Form of Registration Rights Agreement (incorporated by
reference to Exhibit 10.4 to the Registration Statement on
Form S-3, filed on March 11, 1997, File No. 333-23087).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Cooper, Shuffield & Company.
23.2 Consent of Moore Stephens Frost.
* Incorporated herein by reference.
26
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report F-2
Consolidated Balance Sheet as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
[LETTERHEAD OF MOORE STEPHENS FROST]
Independent Auditor's Report
Board of Directors and Shareholders
Consolidated Eco-Systems, Inc.
We have audited the accompanying consolidated balance sheet of Consolidated
Eco-Systems, Inc. and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Consolidated Eco-Systems, Inc. as of
December 31, 1995 and for each of the two years in the period ended December 31,
1995, were audited by other auditors whose opinion, dated March 22, 1996, on
those statements included an explanatory paragraph referring to the restatement
of these statements to reflect two poolings of interest that occurred during the
year ended December 31, 1995 and included reference to reliance on another
auditor in connection with the 1994 financial statements of one of these
companies. As discussed in note 16 to the consolidated financial statements, the
Company has restated its 1995 and 1994 consolidated financial statements during
the current year to correct the accounting for these poolings of interest in
order to be in conformity with generally accepted accounting principles. The
prior auditors reported on these consolidated financial statements before the
restatement.
The consolidated financial statements as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996 have been
restated to reflect the poolings of interest of Larco Environmental Services,
Inc. ("Larco") and K.R. Industrial Services of Alabama, Inc. ("KRISA") during
1996 as described in note 2 to the consolidated financial statements. We did not
audit the 1995 or 1994 financial statements of Larco or KRISA, which statements
reflected total assets of $7,954,665 and $6,201,514 as of December 31, 1995 and
1994, respectively, and total revenues of $9,256,001 and $7,681,795 for the
years then ended. Those statements were audited by other auditors whose report
was furnished to us, and our opinion as it relates to the amounts included for
Larco and KRISA as of December 31, 1995 and for the two years in the period then
ended, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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
financial statement presentation. We believe that our audit and the reports of
the other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of Consolidated
Eco-Systems,Inc. and Subsidiaries as of December 31,1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
<PAGE>
We also reviewed the adjustments described in note 16 that were applied to
restate the 1995 and 1994 financial statements. In our opinion, such adjustments
are appropriate and have been properly applied.
/s/ Moore Stephens Frost
Moore Stephens Frost
Certified Public Accountants
Little Rock, Arkansas
March 24, 1997
F-2
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
Assets 1996 1995
---- ----
Current assets
Cash and cash equivalents $ 2,730,966 $ 877,182
Accounts receivable, trade - less allowance
for doubtful accounts of $716,977 in 1996
and $249,668 in 1995 6,661,832 4,132,911
Accounts receivable - other 120,954 236,025
Notes receivable 1,097,576 147,934
Costs and estimated earnings in excess of
billings on uncompleted contracts 495,796 271,092
Inventories 537,637 835,550
Deferred income taxes -- 371,447
Other current assets 374,824 374,285
----------- -----------
Total current assets 12,019,585 7,246,426
----------- -----------
Net property, plant and equipment 25,594,669 12,103,989
----------- -----------
Other assets
Intangible assets, net 5,865,310 968,879
Due from shareholders 1,679,043 36,321
Deferred income taxes 309,481 --
Other assets 408,787 164,354
----------- -----------
Total other assets 8,262,621 1,169,554
----------- -----------
Total assets $45,876,875 $20,519,969
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
Liabilities and Shareholders' Equity 1996 1995
---- ----
Current liabilities
Notes payable $ 11,631,582 $ 1,706,137
Accounts payable 5,342,375 2,002,241
Accrued liabilities 1,067,611 579,717
Billings in excess of costs and estimated
earnings on uncompleted contracts 74,482 205,758
Current deferred income taxes 237,851 --
Current maturities of long-term debt 4,217,427 1,250,606
------------ -----------
Total current liabilities 22,571,328 5,744,459
------------ -----------
Long-term debt 6,203,999 3,907,004
------------ -----------
Deferred income taxes -- 348,493
------------ -----------
Minority interest in subsidiaries -- 36,574
------------ -----------
Shareholders' equity
Common stock, $.001 par value
Authorized 50,000,000 shares;
Issued 15,113,899 in 1996 and
10,582,548 shares in 1995 15,114 10,583
Additional paid-in capital 21,831,153 7,683,907
Retained earnings (deficit) (1,444,719) 2,788,949
------------ -----------
20,401,548 10,483,439
Treasury stock, 1,200,000 shares at cost (3,300,000) --
------------ -----------
Total shareholders' equity 17,101,548 10,483,439
------------ -----------
Total liabilities and shareholders' equity $ 45,876,875 $20,519,969
============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $ 29,998,228 $ 21,825,894 $ 16,658,704
Cost of sales 20,739,198 12,052,473 9,460,369
------------ ------------ ------------
Gross profit 9,259,030 9,773,421 7,198,335
------------ ------------ ------------
Operating expenses
Marketing 1,442,164 1,134,574 355,421
General and administrative 12,567,723 7,658,185 5,768,325
------------ ------------ ------------
Total operating expenses 14,009,887 8,792,759 6,123,746
------------ ------------ ------------
Operating income (loss) (4,750,857) 980,662 1,074,589
Other income (expense), net (994,572) (334,487) (260,294)
------------ ------------ ------------
Income (loss) before income taxes (5,745,429) 646,175 814,295
Income taxes (benefit) (1,551,765) (88,457) 196,623
------------ ------------ ------------
Income (loss) before minority interest (4,193,664) 734,632 617,672
Minority interest in income -- 25,573 22,004
------------ ------------ ------------
Net income (loss) $ (4,193,664) $ 709,059 $ 595,668
============ ============ ============
Earnings per common share and
common share equivalent $ (0.32) $ 0.07 $ 0.06
============ ============ ============
Weighted average shares outstanding 13,122,063 10,436,153 9,867,105
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Retained Total
Number of Common Paid-In Earnings Treasury Shareholders'
Shares Stock Capital (Deficit) Stock Equity
------ ----- ------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1994 9,675,339 $ 9,676 $ 4,094,085 $ 2,129,905 -- $ 6,233,666
Issuance of common stock 403,409 404 123,750 -- -- 124,154
Contribution of capital (KRISA) -- -- 204,712 -- -- 204,712
Distributions to
shareholders' (ECO) -- -- -- (152,331) -- (152,331)
Distributions to
shareholders (KRISA) -- -- -- (8,202) -- (8,202)
Net income -- -- -- 595,668 -- 595,668
---------- ------- ----------- ----------- ----------- ------------
Balance - December 31, 1994 10,078,748 10,080 4,422,547 2,565,040 -- 6,997,667
Issuance of common stock 503,800 503 2,437,705 -- -- 2,438,208
Contribution of capital (LARCO) -- -- 823,655 -- -- 823,655
Distributions to
shareholders (ECO) -- -- -- (465,000) -- (465,000)
Distributions to
shareholders (KRISA) -- -- -- (20,150) -- (20,150)
Net income -- -- -- 709,059 -- 709,059
---------- ------- ----------- ----------- ----------- ------------
Balance - December 31, 1995 10,582,548 10,583 7,683,907 2,788,949 -- 10,483,439
Issuance of common stock for
purchase of 7-7, Inc. 874,550 875 3,249,125 -- -- 3,250,000
Distributions to
shareholders (KRISA) -- -- -- (40,004) -- (40,004)
Stock options awarded -- -- 1,195,927 -- -- 1,195,927
Issuance of common stock 1,202,857 1,203 3,309,511 -- -- 3,310,714
Exercise of stock options 39,667 40 2,490 -- -- 2,530
Conversion of debentures to
common stock, net of issue
cost of $350,000 2,414,277 2,413 4,558,243 -- -- 4,560,656
Purchase of treasury stock -- -- -- -- $(3,300,000) (3,300,000)
Issuance of debentures, net
of issue cost of $168,050 -- -- 1,831,950 -- -- 1,831,950
Net loss -- -- -- (4,193,664) -- (4,193,664)
---------- ------- ----------- ----------- ----------- ------------
Balance - December 31, 1996 15,113,899 $15,114 $21,831,153 $(1,444,719) $(3,300,000) $ 17,101,548
========== ======= =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (4,193,664) $ 709,059 $ 595,668
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Expense on issuance of stock options 1,195,927 -- --
Depreciation 1,496,820 689,328 411,343
Amortization 387,091 202,864 85,650
(Gain) loss on sale of assets 169,873 2,945 (2,333)
Minority interest in income -- 25,573 22,004
Changes in assets and liabilities
Accounts receivable (223,045) (1,789,712) (598,729)
Costs and estimated earnings in excess of
billings on uncompleted contracts (224,704) (226,386) 44,706
Inventories 321,654 472,752 (866,524)
Other current assets 103,727 (178,444) (123,804)
Other assets (70,454) (9,011) (168,801)
Accounts payable 342,362 589,094 765,611
Accrued liabilities 308,755 206,017 (198,847)
Income tax liability -- 102,265 (31,282)
Billings in excess of costs and estimated
earnings on uncompleted contracts (131,276) 148,046 (57,712)
Deferred income taxes (1,511,566) (310,003) 24,417
------------ ----------- -----------
Net cash provided by operating activities (2,028,500) 634,387 (98,633)
------------ ----------- -----------
Cash flows from investing activities
Purchases of property, plant and equipment (5,295,215) (3,511,708) (4,874,129)
Proceeds from sale of assets 388,100 242,687 408,766
Payments for intangibles (213,901) (417,982) (25,718)
Purchase of minority interest (36,574) -- --
Issuance of notes receivable (1,069,125) (61,000) (35,196)
Collections on notes receivable 119,483 31,000 4,322
Issuance of notes to stockholders (1,642,722) -- --
Purchase of 7-7, Inc., net of cash acquired (2,948,177) -- --
------------ ----------- -----------
Net cash used for investing activities (10,698,131) (3,717,003) (4,521,955)
------------ ----------- -----------
Cash flows from financing activities
Proceeds from issuance of long-term debt 2,389,527 5,199,023 1,409,419
Repayment of long-term debt (3,089,712) (2,874,194) (984,163)
Issuance of common stock 10,714 1,800,000 499,999
Issuance of convertible debentures 6,592,606 -- --
Net borrowings (repayments) - notes payable 8,714,754 (16,468) 3,533,506
Distributions to shareholders (40,004) (485,150) (160,533)
Exercise of stock options 2,530 -- --
------------ ----------- -----------
Net cash provided by financing activities 14,580,415 3,623,211 4,298,228
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,853,784 540,595 (322,360)
Cash and cash equivalents - beginning of year 877,182 336,587 658,947
------------ ----------- -----------
Cash and cash equivalents - end of year $ 2,730,966 $ 877,182 $ 336,587
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. Summary of Significant Accounting Policies
a. Business activity - Consolidated Eco-Systems, Inc. ("CONECO")
(formerly Exsorbet Industries, Inc.) and Subsidiaries ("the Company")
is in the business of providing a broad range of environmental,
industrial and technical services which include environmental
remediation, industrial clean-up, emergency response, recycling and
various specialized environmental services. The Company serves clients
and markets its products throughout the United States and certain
foreign countries.
b. Principles of consolidation - The consolidated financial statements
include the accounts of Consolidated Eco-Systems, Inc. and its
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
c. Cash and cash equivalents - For purposes of the consolidated statement
of cash flows, the Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash
equivalents.
d. Inventories - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
e. Property, plant and equipment - Property, plant and equipment are
stated at cost. Depreciation is provided primarily by the
straight-line method over the estimated useful lives of the various
assets. For income tax purposes, accelerated methods are used with
recognition of deferred income tax for the resulting temporary
differences.
The estimated useful lives of property, plant and equipment for
purposes of computing depreciation are as follows:
Buildings 20 to 40 years
Manufacturing equipment 15 to 40 years
Office equipment 15 years
Vehicles 5 to 15 years
f. Intangibles - Intangible assets are being amortized on a straight-line
basis over lives of two to forty years.
g. Income taxes - The Company utilizes the liability method of accounting
for deferred income taxes. The liability method provides deferred
taxes on the balance sheet for the temporary differences between
financial statement and income tax return basis of assets and
liabilities as of the fiscal year end date at the presently enacted
tax rates.
Prior to the combinations, two of the subsidiaries (Eco-Systems,
Inc. and K.R. Industrial Service of Alabama, Inc.) were operating
under the provisions of Subchapter S of the Federal Internal Revenue
Code. Under this provision, the income of these companies was taxed at
the individual shareholder level. Aggregate distributions of
individually taxed corporate income were made during 1996, 1995 and
1994 of $40,004, $485,150 and $160,533, respectively, by these
subsidiaries.
h. Revenue and cost recognition - For financial reporting purposes,
profits on contracts are recorded using the percentage-of-completion
method of accounting, determined by the ratio of costs incurred to
date to management's estimates of total anticipated costs. Such
amounts necessarily are based on estimates, and the uncertainty
inherent in the estimates initially is reduced progressively as work
on the contract nears completion. Because of inherent uncertainties in
estimating costs, it is at least reasonably possible that the
estimates used will change within the near term. If estimated total
costs for a contract indicate a loss, the Company provides currently
for the total anticipated loss on the contract.
F-8
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. Summary of Significant Accounting Policies (cont.)
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation. Marketing, general
and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and income, which are recognized in the period in
which the revisions are determined. Changes in estimated job
profitability resulting from job performance, job conditions, contract
penalty provisions, claim, change orders and settlements are accounted
for as changes in estimates in the current period.
The asset, "costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
i. Research and development expense - The Company expenses research and
development costs as incurred. During the year ended December 31,
1996, expenses related to development of a liquidation process for
hydro-carbons at 7-7, Inc. totalled approximately $389,000 during the
period since the acquisition of that subsidiary as of September 30,
1996.
j. Earnings per share - Earnings per share is based on the weighted
average number of shares and share equivalents outstanding during each
year.
k. 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 at December 31, 1996 and 1995 and revenues and
expenses for each of the three years in the period ended December 31,
1996. The actual outcome of the estimates could differ from those
estimates made in the preparation of the financial statements.
2. Business Combinations
On June 26, 1996, the Company acquired all the issued and outstanding
stock of Larco Environmental Services, Inc. ("Larco"). The shareholders of
Larco received a total of 1,152,020 shares of the Company's common stock in
exchange for their holdings. Larco is an environmental emergency response
and industrial services company headquartered in Sulphur, Louisiana. During
1996, prior to the combination, Larco had operating revenues of
approximately $3,444,000 and net loss of approximately $62,800.
On June 27, 1996, the Company acquired all the issued and outstanding
stock of K.R. Industrial Service of Alabama, Inc. ("KRISA"). The
shareholders of KRISA received a total of 545,338 shares of the Company's
common stock in exchange for their holdings. KRISA, which is headquartered
in Double Springs, Alabama, is an environmental industrial services company
which provides boiler clean-out and rehabilitation for utility companies
and other clients using specialized techniques. During 1996, prior to the
combination, KRISA had operating revenues of approximately $2,688,000 and
net income of approximately $439,000.
F-9
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. Business Combinations (cont.)
These transactions have been accounted for as poolings of interest,
and the accompanying consolidated financial statements reflect the above
combinations for each year presented. Following is a reconciliation of
amounts of revenue and earnings previously reported by the Company with the
combined amounts currently presented in the financial statements:
1995 1994
---- ----
Revenues
CONECO (as previously reported) $ 12,569,893 $ 8,976,909
Larco 5,677,617 5,593,312
KRISA 3,578,384 2,088,483
------------ -----------
$ 21,825,894 $16,658,704
============ ===========
Earnings (loss)
CONECO (as restated - see note 16) $ 699,671 $ 196,370
Larco (533,680) 212,199
KRISA 543,068 187,099
------------ -----------
$ 709,059 $ 595,668
============ ===========
On September 30, 1996, the Company acquired all of the issued and
outstanding stock of 7-7, Inc. The shareholders of 7-7, Inc. received cash
of $3,000,000, subordinated notes of $900,000 and 874,546 shares of the
Company's common stock in exchange for their holdings, as well as
employment contracts that include provisions for future payments based upon
earnings. 7-7, Inc. is located in Wooster, Ohio and offers a wide range of
environmental services including remediation, barge cleaning, industrial
maintenance and hazardous waste recycling.
The 7-7 acquisition has been accounted for as a purchase and,
accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair values of the
net assets acquired of $5,069,621 has been recorded as goodwill and is
being amortized on a straight-line basis over 40 years.
The operating results of 7-7, Inc. have been included in the
consolidated statement of operations from the date of acquisition. The
following table reflects operating results on a pro forma basis as if this
acquisition had taken place on January 1, 1994:
1996 1995 1994
---- ---- ----
Sales $ 39,662,557 $39,998,304 $28,235,520
Net income (5,685,821) 1,133,364 316,057
Earnings per share (0.43) .11 .03
On September 27, 1995, the Company acquired all of the issued and
outstanding stock of Central Environmental Services, Inc. ("CESI") and its
subsidiaries, all Arkansas corporations. The shareholders of CESI received
a total of 388,000 shares of the Company's common stock in exchange for
their holdings.
F-10
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. Business Combinations (cont.)
On December 28, 1995, the Company acquired Eco-Systems, Inc. ("ECO"),
a Mississippi corporation, in exchange for 333,333 shares of the Company's
stock.
These transactions were accounted for as poolings of interest, and the
accompanying financial statements presented in prior years have reflected
the combinations for each year presented.
3. Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash held in financial institutions in
excess of balances insured by the Federal Deposit Insurance Corporation and
trade receivables. Concentrations of credit risk with respect to
receivables are limited due to the dispersion of the Company's customer
base over geographic areas and the fact that significant receivables are
bid based contracts for site remediation and related services. The Company
performs periodic credit evaluations of its customers' financial condition
and generally does not require collateral or advance payments.
The Company maintains its cash in bank deposit accounts at high credit
quality financial institutions. The balances, at times, may exceed
federally insured limits.
During the year ended December 31, 1996, approximately $3,913,000
(13%) of the Company's sales arose from a government contract. For the
years ended December 31, 1995 and 1994, none of the Company's revenue with
individual customers exceeded 10% of total revenue. At December 31, 1996,
accounts receivable included approximately $785,000 (12%) from the
government contract. At December 31, 1995, accounts receivable included
approximately $924,000 (22%) from two of the Company's major customers.
4. Costs, Billings and Estimated Earnings of Uncompleted Contracts
The status of jobs in progress at December 31, 1996 and 1995 was:
1996 1995
---- ----
Costs incurred on uncompleted contracts $5,837,301 $1,991,337
Estimated earnings 1,412,795 957,190
---------- ----------
7,250,096 2,948,527
Less billings to date 6,828,782 2,883,193
---------- ----------
$ 421,314 $ 65,334
========== ==========
Included in the accompanying balance sheets under the following captions:
1996 1995
---- ----
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 495,796 $ 271,092
Billings in excess of costs and estimated
earnings on uncompleted contracts (74,482) (205,758)
---------- ----------
$ 421,314 $ 65,334
========== ==========
F-11
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
5. Inventories
Inventories consist of:
1996 1995
---- ----
Raw materials $ 30,000 $ 249,214
Work in process -- 42,724
Finished goods -- 155,234
Supplies 507,637 388,378
------------ ------------
$ 537,637 $ 835,550
============ ============
6. Property, Plant and Equipment
Property, plant and equipment consist of:
1996 1995
---- ----
Land $ 500,611 $ 73,068
Buildings 3,522,080 2,068,448
Machinery and equipment 22,225,065 9,572,537
Office equipment 406,597 305,795
Office furniture and fixtures 286,861 96,765
Vehicles 1,941,268 1,848,571
------------ ------------
28,882,482 13,965,184
Accumulated depreciation (3,287,813) (1,861,195)
------------ ------------
$ 25,594,669 $ 12,103,989
============ ============
7. Intangible Assets
Intangible assets subject to amortization include organizational
costs, trademarks and patents, acquisition costs, contract rights,
marketing intangibles, and goodwill. All are being amortized on a
straight-line basis over periods of two to forty years. Accumulated
amortization on these intangibles was $793,763 and $374,767 at December 31,
1996 and 1995, respectively.
8. Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1995 consists of:
1996 1995
---- ----
Accrued interest $ 216,719 $ 128,753
Accrued payroll 329,882 173,972
Payroll taxes payable 217,797 206,484
Other 303,213 70,508
------------ ------------
$ 1,067,611 $ 579,717
============ ============
F-12
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
9. Notes Payable
Notes payable consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to a corporation, interest at
15.75%, principal due on October 1, 1997,
secured by the stock of 7-7, Inc. and all assets
of that subsidiary. $ 3,300,000 $ -
Note payable to a bank, interest at 6.25%, due December 10,
1996, secured by a certificate of deposit which was used to
repay the note during January 1997. 1,500,000 -
$2,500,000 line of credit with a bank, interest
at prime plus 1.5% (currently 9.75%), secured
by certain accounts receivable and equipment. 1,360,000 -
Note payable to a bank, interest at 10.5%,
maturing on December 15, 1997, secured by
certain vehicles and equipment. 1,009,310 -
Note payable to a bank, due on demand, if no demand, payable in
three installments, including interest of 9.25%, maturing on
August 9, 1998, secured by certain real estate. 1,018,719 -
Various notes at 10%, payable to various
vendors, due at March 1, 1997, unsecured. 1,017,973 -
Note payable to a bank, interest at 5.75%, principal due March
23, 1997, secured by a certificate of deposit which was used
to repay the note during January 1997. 500,000 -
Note payable to a bank, interest at 9%,
principal due January 22, 1997, secured
by certain accounts receivable. 489,897 -
Line of credit with a bank, interest at 10.25%,
secured by certain tangible assets. 290,570 190,570
Note payable to a shareholder, interest at 8%,
maturing on or before December 30, 1996,
unsecured. 300,000 -
Note payable to a bank, interest at 9%,
principal maturing on January 5, 1997,
secured by certain accounts receivable. 200,000 -
</TABLE>
F-13
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
9. Notes Payable (cont.)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Unsecured note payable to a shareholder,
interest at 10%, principal due January 9,
1997, unsecured. $ 200,000 -
Note payable to a corporation, interest at
15%, principal due December 18, 1996,
secured by certain accounts receivable. 125,000 -
Note payable to a shareholder, interest at
10%, due on demand, unsecured. 121,776 -
Note payable to a shareholder, interest at 10%,
due on demand, unsecured. 100,000 -
Note payable to a bank, interest at 9.85%, payable in monthly
installments of $3,690, including interest, through April
1997, with the balance due May 1997, secured by
certain equipment. 98,337 -
$750,000 line of credit with a bank, interest
at the bank's prime lending rate plus 1%,
secured by certain accounts receivable. - $ 501,928
Note payable to a bank, interest at the bank's prime base
lending rate plus 1%, secured by certain equipment. - 365,100
Note payable to a leasing company, due in
June 1996. Balance at December 31,
1995 represents the lease purchase price
at maturity. - 72,236
Note payable to a bank, interest at 9.0%,
due on demand, secured by certain
accounts receivable. - 489,897
Various notes at 6%, payable to various
lenders, due on demand, unsecured. - 38,006
Notes payable to a shareholder, interest
at 6%, due on demand, unsecured. - 48,400
----------- -----------
$11,631,582 $ 1,706,137
=========== ===========
</TABLE>
F-14
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
10. Long-Term Debt
Long-term debt consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
$2,000,000 line of credit with a bank, payable in monthly
installments of $30,477, including interest at 9%, through
November 1997, secured by various tangible assets. $ 1,337,785 $ 636,662
Notes payable to various shareholders, payable in quarterly
installments of $55,040, including interest at 8%, through
September 2001, unsecured. 900,000 -
Notes payable to a bank, payable in monthly installments of
$20,484, including interest at 8.75%, through May and June
2001, secured by certain equipment. 908,081 -
Note payable to a bank, payable in monthly installments of
$10,000, including interest at 9.45%, through June 2001,
secured by certain accounts receivable and equipment. 540,000 -
Note payable to a bank, payable in monthly installments of
$13,657, including interest at the bank's prime lending rate
plus 0.6% (currently 10.1%) through October 1997 when the
balance is due, secured by certain machinery and equipment. 521,654 625,999
Note payable to a bank, payable in monthly installments of
$11,318, including interest at 11.38%, through March 2001,
secured by certain property. 456,032 -
Note payable to a bank, payable in monthly installments of
$14,084, including interest at 9.5%, through December 1999,
secured by certain equipment. 439,311 -
Notes payable to a bank, payable in monthly installments of
$7,690, including interest at 9%, through August 2001, secured
by certain vehicles and equipment. 352,836 -
Note payable to a finance company, payable in monthly
installments of $4,283, including interest at 8.5%, through
October 2001, secured by certain equipment. 203,149 -
7.5% convertible debentures, payable or
convertible to common stock by May 1998
Balance converted to common stock in March
1997. 200,000 -
</TABLE>
F-15
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
10. Long-Term Debt (cont.)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to a bank, payable in monthly installments of
$15,208, including interest at 9.75%, through October 1997,
secured by certain equipment. $ 182,500 -
Note payable to a finance company, payable in monthly
installments of $3,341, including interest at 8.75%, through
February 2000, secured by certain equipment. 110,538 -
Note payable to a bank, payable in monthly installments of
$3,030, including interest at 11.26%, through April 2001,
secured by certain vehicles. 115,224 -
Note payable to a bank, payable in monthly installments of
$2,079, including interest at 10.5%, through August 2003,
secured by certain real estate. 109,759 -
Note payable to a bank, payable in monthly installments of
$3,613, including interest at 13.5%, through February 2001,
secured by certain equipment. 108,857 $ 137,549
Various notes payable, currently payable in monthly installments
totalling $36,987, including interest at 8% to 13.525%, with
maturities generally from April 1998 through April 2001,
secured by various real estate, equipment, and vehicles. 826,740 214,943
Various capital lease agreements, interest generally at 8.75% to
13.78%, currently payable $99,232 per month, maturing from
July 1997 to October 2001. 3,108,960 1,538,288
Note payable to a bank, payable in annual installments of
$162,758, including interest at 9.25%, with the balance due
August 1998, secured by certain real estate. Balance repaid
during 1996. - 1,000,000
Note payable to a company, payable in annual installments of
$100,000, plus interest at 6%, through March 2000, unsecured
Balance repaid during 1996. - 500,000
Note payable to a financing company, payable in monthly
installments of $9,948, including interest at 10.65%, through
December 1999, secured by certain machinery and equipment
Assets sold during 1996 and balance was repaid. - 374,370
</TABLE>
F-16
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
10. Long-Term Debt (cont.)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Various notes repaid during 1996. - $ 129,799
----------- -----------
$10,421,426 5,157,610
Less current maturities 4,217,427 1,250,606
----------- -----------
Long-term debt, less current maturities $ 6,203,999 $ 3,907,004
=========== ===========
</TABLE>
Interest expense included in other income (expense) on the
consolidated statement of operations was $1,192,062, $615,605 and $320,771
for the years ended December 31, 1996, 1995 and 1994, respectively.
Following are aggregate maturities of long-term debt as of December
31, 1996:
1997 $ 4,217,427
1998 2,203,507
1999 1,920,217
2000 1,399,328
2001 658,970
Thereafter 21,977
-----------
$10,421,426
===========
The fair value of the Company's long-term debt based on rates
currently available to the Company for similar terms and maturities was
approximately $10,200,000 at December 31, 1996.
11. Income Taxes
The consolidated provision (credit) for income taxes included in the
consolidated statement of operations for the years ended December 31, are
as follows:
1996 1995 1994
---- ---- ----
Current provision (benefit)
Federal $ (40,199) $ 175,461 $ 119,277
State -- 46,085 52,929
----------- ----------- -----------
(40,199) 221,546 172,206
Deferred provision (benefit) (1,511,566) (310,003) 24,417
----------- ----------- -----------
Income taxes (benefit) $(1,551,765) $ (88,457) $ 196,623
=========== =========== ===========
F-17
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
11. Income Taxes (cont.)
Following is a reconciliation of the applicable U.S. federal income
tax rates to the effective tax rates reflected in the statement of income:
1996 1995 1994
---- ---- ----
U.S. federal income tax rate (35.0)% 35.0% 35.0%
State income taxes, net (2.3) 2.3 2.3
S corporation income tax to the shareholders 8.5 (84.0) (58.0)
Other differences, net 1.8 33.0 44.8
----- ----- -----
Effective income tax rate (27.0)% (13.7) % 24.1%
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Items that gave rise to significant portions of the deferred tax accounts
at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Amortization of intangible assets $ 8,479 $ 71,334
Allowance for doubtful accounts 293,675 86,170
Stock options 457,920 --
Net operating loss and contribution carryforwards 2,722,300 402,530
Other 22,575 622,844
----------- -----------
3,504,949 1,182,878
----------- -----------
Deferred tax liabilities:
Conversion from percentage of completion to
completed contract method of accounting 516,921 318,757
Differences on property, plant and equipment 2,916,398 841,167
----------- -----------
3,433,319 1,159,924
----------- -----------
Net deferred tax asset $ 71,630 $ 22,954
=========== ===========
Classification in the balance sheet
Current deferred tax assets $ 279,070 $ 690,204
Current deferred tax liabilities (516,921) (318,757)
----------- -----------
Net current deferred tax asset (liability) $ (237,851) $ 371,447
=========== ===========
Non-current deferred tax assets $ 3,225,879 $ 492,675
Non-current deferred tax liabilities (2,916,398) (841,168)
----------- -----------
Net non-current deferred tax asset (liability) $ 309,481 $ (348,493)
=========== ===========
</TABLE>
For federal tax purposes, the Company has approximately $6,980,000 of
net operating loss carryforwards as of December 31, 1996 which expire in
the years 2008 through 2011.
F-18
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
12. Convertible Debentures and Stock Transactions
a. During May 1996, the Company issued $5,000,000 of 7 1/2% Convertible
Debentures due two years from issuance. These debentures, plus accrued
interest, could be converted into shares of the Company's common stock
at 20% less than the stock's five day average closing bid immediately
prior to the date of the conversion, subject to a computed floor.
During 1996, $4,800,000 these debentures, plus $110,665 of accrued
interest, were converted into 2,394,227 shares of common stock. The
remaining $200,000 of these debentures, plus $12,370 of accrued
interest, were converted into 129,572 shares of common stock during
March 1997. Since substantially all the debentures were converted as
of December 31,1996, issuance costs of $350,000 related to these
debentures has been charged to additional paid-in-capital in the
accompanying financial statements.
b. In connection with the purchase of 7-7, Inc. in September 1996, the
Company issued 1,200,000 shares of its common stock to American
Physicians Service Group, Inc. ("APS") for a total of $3,300,000.
Under the terms of this agreement, the Company gave APS a Stock Put
Agreement whereby APS could require the Company to repurchase these
shares for a note payable due October 1, 1997 at 15.75%. APS exercised
this option to sell these shares back to the Company, and these shares
have been reflected as treasury stock in the accompanying financial
statements.
c. During December 1996, the Company began issuing 8% Convertible Equity
Debentures. A total of $2,000,000 was issued during 1996 with an
additional $3,000,000 issued in January 1997. Under the terms of these
debentures, the face value, plus a deferred amount at 8% of the face
value, may be converted into the Company's common stock at any time by
the debenture holder. If not previously converted, all outstanding
debentures must be converted to common stock two years from the date
of issue. All such conversions will be made at 20% less than the
stock's five day average closing bid immediately prior to the date of
the conversion. Since the debentures can only be repaid by issuance of
stock, the issue price of $2,000,000 as of December 31, 1996, less
issue costs of $168,050, has been reflected as additional paid-in
capital in the accompanying financial statements. Under the terms of
these debentures, the Company is subject to liquidating damages of
approximately $125,000 per month if this stock is not registered
within 60 days of the date of the debentures. Registration is not
expected to be completed until April 1997.
13. Stock Options
During 1995, the Company adopted The 1995 Incentive Award Plan of
Exsorbet Industries, Inc. ("the Plan") for the benefit of its eligible
employees. The Plan was adopted to provide additional incentive for key
employees and to enable the Company to obtain and retain the services of
key employees. An aggregate of 1,800,000 shares of the Company's common
stock are available for awards under the Plan.
The Company has issued various options to acquire its common stock
during 1996, 1995 and 1994, including options under the Plan as well as
other awards issued to its employees and consultants. During 1996, the
Company determined that a significant portion of the options issued during
1995 and 1994 were not legally issued because they did not have prior
shareholder approval before they were issued.
F-19
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
13. Stock Options (cont.)
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation" during the year
ended December 31, 1995 for all the stock options issued. SFAS No. 123
provides for fair value accounting for all stock options based on various
factors at the date the grants were made. Any expense recorded for these
options is recognized as additional paid in capital until the options are
exercised and shares are issued. Expense related to these options has been
recognized during the year ended December 31, 1996 or will be recognized in
future years as the vesting period for the awards is achieved.
Information regarding stock options for the fiscal years ending
December 31, 1996 and 1995 are as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- -----
Option awarded during 1995 and
outstanding at December 31, 1995 164,667 $1.580
Option awarded during 1996 1,702,469 0.965
Forfeitures during 1996 (50,000) 2.501
Awards exercised during 1996 (39,667) 0.064
----------
Options outstanding at December 31, 1996 1,777,469 $0.999
========== ======
Options exercisable
- December 31, 1995 164,667 $1.580
- December 31, 1996 798,000 1.790
The weighted average grant date fair value of options granted was
$1.00 and $2.49 per share for the years ended December 31, 1996 and 1995,
respectively. All the awards issued were at prices below the market price
of the stock on the date of the grant. The fair value of the grants was
determined using the Black-Scholes model with an additional discount
provided for the options being issued for restricted shares issued pursuant
to Rule 144. The significant assumptions used in this valuation were as
follows:
Risk-free interest rate 5%
Expected life 10 years
Expected volatility 106%
Expected dividend rate 0
Liquidity and risk discount 65% to 70%
Expected forfeitures 5%
Expense recorded for the year ended December 31, 1996 relating to
these options was $1,195,926.
F-20
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
13. Stock Options (cont.)
As of December 31, 1996, outstanding options are summarized as follows
within ranges of the exercise price:
Exercise Price
--------------------------------
$0.001 to $1.00 $2.00 to $5.00
Per Share Per Share Total
--------- --------- -----
Option shares outstanding 1,282,469 495,000 1,777,469
Weighted average
exercise price $0.252 $2.934 $0.999
Weighted average
remaining contractual life 75 months 57 months 70 months
Option shares exercisable 323,000 475,000 798,000
Weighted average
exercise price $0.235 $2.847 $1.790
The information above includes options for 430,000 shares at $2.50 to
$3.25 per share which were not issued under the Plan.
14. Cash Flow Information
Supplemental cash flows information and noncash investing and
financing activities are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information
Cash paid during the year for:
Interest $1,030,503 $ 74,001 $ 52,122
Income taxes -- -- 97,978
Supplemental noncash investing
and financing activities
Stock issued for:
Debt satisfaction $4,910,656 $ 404,207 $ 750,000
Fair value of assets acquired -- 734,000 687,500
Fair value of operations acquired through:
Stock issued 3,250,000 -- --
Long-term debt 900,000 -- --
Treasury stock acquired by
issuance of note payable 3,300,000 -- --
Property acquired for capital lease 1,391,321 -- --
Transfer of depreciable assets:
Debt retired -- -- 432,110
Book value of assets transferred -- -- 412,210
Gain on transfer -- -- 19,900
</TABLE>
F-21
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
15. Commitments
a. Operating leases - Future minimum rental commitments under
non-cancellable operating lease agreements with initial or remaining
term in excess of one year are as follows:
1997 $ 771,476
1998 676,050
1999 554,834
2000 284,017
2001 134,450
----------
$2,420,827
==========
Lease expense from operating leases for the years ended December 31,
1996, 1995 and 1994 was $1,744,047, $1,137,533 and $734,456, respectively.
b. Capital leases - The Company leases certain equipment and vehicles under
capital lease agreements expiring in 1997 to 2001. The following amounts
related to these capital lease obligations are included in property, plant
and equipment in the consolidated balance sheet:
1996 1995
---- ----
Machinery and equipment $ 4,772,471 $ 1,749,846
Vehicles 299,054 156,949
----------- -----------
5,071,525 1,906,795
Accumulated depreciation (402,613) (141,248)
----------- -----------
$ 4,668,912 $ 1,765,547
=========== ===========
Amortization of these assets under capital lease is included in
depreciation expense in the accompanying financial statements.
Following is a schedule by years of future minimum lease payments
under capital leases and the present value of future minimum rentals as of
December 31, 1996:
1997 $1,223,933
1998 985,806
1999 839,785
2000 485,476
2001 146,212
----------
Total minimum lease payments 3,681,212
Less amount representing interest 572,252
----------
Present value of net minimum lease payments $3,108,960
==========
The present value of net minimum lease payments are included in
long-term debt. (See note 10).
F-22
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
15. Commitments (cont.)
c. Employment agreements - The Company has entered into various
employment agreements with officers and other key employees. These
agreements provide for various base salary levels, adjusted annually
for cost-of-living, as well as other benefits. The aggregate
commitment for future salaries at December 31, 1996, excluding bonus
provisions, are summarized as follows:
Forgiveness
Cash of Notes
Payments Receivable Total
-------- ---------- -----
1997 $2,080,959 $ 299,737 $ 2,380,696
1998 2,142,370 205,000 2,347,370
1999 2,165,872 205,000 2,370,872
2000 2,116,889 170,000 2,286,889
2001 849,942 160,000 1,009,942
2002 -- 9,900 9,900
---------- ---------- -----------
Total $9,356,032 $1,049,637 $10,405,669
========== ========== ===========
d. Benefit plans - The Company and its subsidiaries maintain various
profit sharing and 401(k) plans for their employees. There have been
no significant contributions to these plans during the three years in
the period ended December 31,1996.
16. Restatements
During fiscal 1996, the Company discovered errors in its accounting
for poolings of interest acquisitions in 1995. The financial statements for
1995 and 1994 have been restated to correct this error. The following shows
the affect of the correction of these errors, prior to the affect of
poolings of interest in fiscal 1996:
As
Restated
As Previously (Before Poolings
Presented Correction Reflected in 1996)
--------- ---------- ------------------
Intangible assets $ 5,220,702 $(4,251,823) $ 968,879
Additional paid in capital 11,465,188 (4,813,950) 6,651,238
Retained earnings 184,385 562,127 746,512
Net income
1995 $ 584,756 $ 114,915 $ 699,671
1994 81,456 114,914 196,370
Earnings per share
1995 $0.07 $0.01 $0.08
1994 0.01 0.01 0.02
F-23
<PAGE>
CONSOLIDATED ECO-SYSTEMS, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
17. Contingencies
The Company is involved in various lawsuits which occur in the normal
course of business. Management intends to vigorously defend these actions
and believes no material losses will occur.
18. Subsequent Events
In February 1997, Hibernia National Bank asserted that Larco was in
default on approximately $1,475,000 of notes payable and approximately
$1,435,000 of long-term debt. During March 1997, the Company sold the
equipment related to the Larco emergency response operation and repaid
notes totalling approximately $1,274,000. The Company is attempting to
refinance the balance of the notes owed to Hibernia with another lender.
19. Management Plans
Subsequent to December 31,1996, the Company has restructured its
management and implemented various steps to help return to profitable
operations. The person who had previously been President and Chairman
became solely Chairman and another member of management became President. A
new Chief Financial Officer was also elected. The new management group is
attempting to reduce cost and implement a more centralized management and
accounting structure to better control the Company's operations. They are
also working with an investment banking firm to attempt to restructure a
substantial portion of the Company's debt to provide better working capital
and repayment terms. Management believes that these plans will be
instrumental in improving operating efficiencies and reducing costs thereby
allowing the Company to return to profitable operations and to strengthen
the Company's financial condition.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on April 8,
1997 on its behalf by the undersigned, thereunto duly authorized.
Consolidated Eco-Systems, Inc.
By: /s/ James J. Connors, Jr.
--------------------------------
James J. Connors, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated.
/s/ James J. Connors, Jr. President and Chief Executive Officer April 8, 1997
- ------------------------- Director
James J. Connors
/s/ Edward M. Penick, Jr. Vice President and Chief Financial April 8, 1997
- ------------------------- Officer (principal accounting officer)
Edward M. Penick
/s/ Edward L. Schrader Director April 8, 1997
- -------------------------
Edward L. Schrader
/s/ Sam Sexton, III Director April 8, 1997
- -------------------------
Sam Sexton, III
/s/ Robert D. Vick Director April 8, 1997
- -------------------------
Robert D. Vick
/s/ Larry J. Woodcock Director April 8, 1997
- -------------------------
Larry J. Woodcock
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Page
------ ----
10.31 Agreement with Waste Solutions Corporation dated
July 11, 1966 ..................................................
21.1 List of Subsidiaries of the Company ............................
23.1 Consent of Cooper, Shuffield & Company .........................
23.2 Consent of Moore Stephens Frost ................................
Exhibit 10.31
A G R E E M E N T
THIS AGREEMENT is made and entered into at Fort Smith, Arkansas on this
11th day of July, 1996, by and between Exsorbet Industries, Inc., an Idaho
corporation (hereinafter referred to solely as "Exsorbet"), Waste Solutions
Corporation, an Illinois corporation (hereinafter referred to solely as "WSC"),
and John Giura and Chander Jadhwani (hereinafter sometimes referred to as
"Guarantors").
WHEREAS, Exsorbet has been a manufacturer of a peat-based product used for
absorption of oil and other hydrocarbon products marketed under the trade name
"Exsorbet"; and
WHEREAS, a distributorship agreement was previously entered for WSC to be
the exclusive distributor of Exsorbet products in the United States and
elsewhere, with certain exceptions; and
WHEREAS, the parties desire to modify the existing relationship between
the parties;
THEREFORE, in consideration of the mutual covenants, obligations, rights,
and duties expressed herein,
IT IS AGREED AS FOLLOWS:
1. Lease. Exsorbet hereby leases to WSC, and WSC hereby leases from
Exsorbet, the following described real property and improvements located in
Crawford County, Arkansas, to-wit:
A part of the Southeast Quarter of the Southwest Quarter of Section 29,
Township 10 North, Range 29 West, Mulberry, Crawford County, Arkansas,
more particularly described as follows: Beginning at the Southeast corner
of Lot 5 - Mulberry Industrial Park (as filed for record May 8, 1990),
said point being on the east line of said SE/4 SW/4; thence south 00
degrees 35 minutes 00 seconds west, 1043.09 feet along said east line to
the southeast corner of said SE/4 of the SW/4; thence north 89 degrees 40
minutes 39 seconds west, 825.00 feet along the south line of said SE/4 of
the SW/4; thence north 00 degrees 35 minutes 05 seconds east, 1039.41 feet
to the southwest corner of said lot 5; thence south 89 degrees 56 minutes
00 seconds east, 825.00 feet along the south line of said lot 5 to the
point of beginning, containing 19.72 acres more or less;
AND
A part of the Southeast Quarter of the Southwest Quarter of Section 29,
Township 10 North, Range 29 West, Crawford County, Arkansas, more
particularly
<PAGE>
described as follows: Commencing at the Northeast Corner of the East Half
of the Southwest Quarter of Section 29, Township 10 North, Range 29 West;
thence South 00 degrees 06 minutes East, 1320.0 Feet to the Northeast
Corner of said SE/4 of the SW/4; thence South 00 degrees 35 minutes West,
30.0 feet along the East line of said SE/4 of the SW/4 to the point of
beginning; thence South 00 degrees 35 minutes West, 250.0 feet along the
East line; thence North 89 degrees 56 minutes West 825.0 feet parallel to
the North line of said SE/4 of the SW/4; thence North 00 degres 35 minutes
East, 250.0 feet; thence South 89 degrees 56 minutes East, 825.0 feet
parallel to the North line of said SE/4 of the SW/4 to the point of
beginning, containing 4.73 acres, more or less.
The municipal address of the above-described real property is One Exsorbet Lane,
Mulberry, Arkansas. Such location has been utilized by Exsorbet as the
manufacturing plant for Exsorbet products. At such location, a manufacturing
plant is located were Exsorbet products are manufactured. As used herein, the
term "plant" refers to the real property and improvements described in this
paragraph.
2. Lease Rental Payments. WSC shall pay a total rental obligation of One
Million Two Hundred Sixty Thousand Dollars ($1,260,000.00), representing a total
rental obligation of $35,000.00 per month. Such rental obligation shall be paid
as follows:
July 1, 1996 to June 30, 1997 - no monthly installments shall be due;
July 1, 1997 to June 30, 1998 - twelve (12) monthly installments of
Forty-Five Thousand Dollars ($45,000.00) each shall be paid, each
installment being due on the first day of each calendar month beginning on
July 1, 1997 and continuing through and including June 1, 1998; and
July 1, 1998 to June 30, 1999 - twelve (12) monthly installments of Sixth
Thousand Dollars ($60,000.00) each shall be paid, each installment being
due on the first day of each calendar month beginning on July 1, 1998 and
continuing through and including June 1, 1999.
3. Royalties. Notwithstanding any other provision herein, WSC shall pay a
royalty equal to one percent (1%) of gross sales of Exsorbet products which
exceed the amount of One Hundred Sixty-Six Thousand Dollars ($166,000.00) per
month and two percent (2%) of gross sales of Exsorbet products which exceed the
amount of Four Hundred Thousand Dollars ($400,000.00) per month. In computing
the amount of gross sales, sales to Exsorbet shall be excluded. All royalties
due under the provisions of this paragraph shall be paid to Exsorbet no later
than the twentieth day of the month following the accrual of such royalty
obligation.
4. Option to Purchase. At the expiration of the lease term, WSC shall be
given the option to purchase the real property described in paragraph 1 of this
Agreement , and referred to as the "plant," at a price negotiated in good faith
between the parties at the expiration of the lease term. If such option is
elected, at such time twenty-five percent (25%) of all lease payments
<PAGE>
made under this lease agreement shall be applied toward the purchase price. In
the event that WSC desires to purchase the real property, it shall provide
written notice of the election of such option no later than thirty (30) days
prior to the expiration of the lease term. In such event, the parties shall
begin negotiations for the purchase price within seven (7) days of the notice of
exercising such option. In the event that the parties are unable to determine a
purchase price in good faith, the matter shall be submitted to a panel of three
arbitrators who shall determine the fair market value of the real property,
which shall be the purchase price. One arbitrator shall be selected by each
party. The third arbitrator shall be selected by the two arbitrators selected by
the parties. The matter shall be submitted to the arbitrators in accordance with
the rules and principles of the American Arbitration Association. As used
herein, the term "fair market value," shall mean the price that an able
purchaser of the real property is willing to pay to Exsorbet for purchase of the
real property.
5. Insurance. During the term of this Agreement, WSC shall provide
insurance covering loss against fire, vandalism, wind storm, and other damage
which could be caused to the improvements upon the real property described in
paragraph 1 of this Agreement, and referred to as the "plant." Exsorbet shall be
designated as a loss payee on such insurance policy to the full extent of its
interest and in the event of loss shall be compensated to the amount of its
interest. The insurance policy mandated by this paragraph shall provide
insurance coverage with minimum limits for total destruction of real property in
the amount of at least $1,800,000. The insurance policy, or attachments, shall
indicate that ten days written notice will be provided to Exsorbet of any intent
to cancel the insurance coverage by the insurance carrier issuing the policy,
without regard to the cause of cancellation.
6. Real Property Taxes. During the term of this Agreement, WSC shall be
responsible for all real property taxes on the real property described in
paragraph 1 of this Agreement, and referred to as the "plant." The real property
taxes for the calendar years 1996 and 1999 shall be equally divided between the
parties.
7. Personal Property Taxes. In the event that there are any personal
property taxes incurred by the use of any personal property at the real property
described in paragraph 1 of this Agreement, and referred to as the "plant," WSC
shall be responsible for all such taxes incurred during the term of this
Agreement.
8. Prior Agreements. All prior agreements between the parties shall be
superseded by this Agreement. It is agreed that all future obligations pursuant
to the distributorship agreement attached hereto as Exhibit "A," are rescinded
and dissolved. Such obligations no longer exist.
9. Relationship Between the Parties. The relationship between the parties
shall not be construed as creating a master-servant, employer-employee, or
agency relationship. WSC shall not act as an agent, servant, or representative
of Exsorbet. Exsorbet shall not act as an agent, servant, or representative of
WSC.
<PAGE>
10. Inventory at the "Plant." All of the inventory (meaning products
manufactured for re-sale by Exsorbet) on hand and physically present at the
"plant" at the inception of this Agreement shall become the exclusive property
of WSC, subject only to WSC's compliance with this conditions of this Agreement.
11. Employees. WSC shall be the sole and exclusive employer of all persons
utilized to perform or provide services at the "plant" or elsewhere during the
term of this Agreement. WSC may, at its option, utilize the services of those
persons presently working at the "plaint" and employed by Exsorbet, or it may
elect to utilize persons it selects as its own employees, who have no prior
affiliation with Exsorbet. In the event that WSC utilizes the services of any
persons who were employees of Exsorbet prior to the inception of this Agreement,
it is specifically understood that the employer-employee relationship existing
between Exsorbet and such persons shall be terminated immediately prior to the
inception of this Agreement. WSC shall retain full and complete control over all
employees, independent contractors, and agents utilized by it. Exsorbet shall
have no right to control such persons and will not recruit any without written
WSC approval.
12. Worker's Compensation Insurance. WSC agrees to provide, at its own
expense, workers compensation insurance covering the employees who work at the
"plant" or elsewhere in the manufacturing of Exsorbet products. Such insurance
shall comply with the laws and statutes of the State of Arkansas.
13. Payroll, Withholdings, and Taxes. WSC shall be responsible for the
"payroll obligations" of all employees, agents, or other persons working at the
"plant," excluding only those persons who are specifically supplied by Exsorbet
in order to provide technical support to WSC as required under the terms of this
Agreement. Exsorbet shall not supply any technical support to WSC through the
use of any person working at the "plant," unless it notifies WSC in a writing
signed by a member of the board of directors of Exsorbet designating, by name,
all persons who will provide technical support to WSC (and who are, therefore,
employees of Exsorbet). For purposes of this paragraph, the term "payroll
obligations," shall include all salary, wages, withholding taxes, additional
taxes, insurance costs, unemployment compensation taxes, FICA taxes, employer
FICA contribution, and any other expense in connection with the employment of
individuals working at the "plant" or elsewhere in the manufacturing of Exsorbet
products.
14. COBRA Benefits. Exsorbet shall assure, to the extent lawfully
permissible, that all persons employed at the "plant" by Exsorbet immediately
prior to the inception of this Agreement, and who thereafter continue in the
employment of WSC, shall be entitled to continuation of their health insurance
or health plan benefits to the full extent required by the Consolidated Omnibus
Reconciliation Act of 1974. Such continuation of coverage shall be at the
expense of WSC. WSC shall be billed for such coverage on a monthly basis and
shall pay Exsorbet the cost of such continued coverage within ten days of
receipt of the statement for such coverage.
<PAGE>
15. Agreements with Other Entities/Exsorbet Technology. (A) Except to the
extent specifically stated herein, neither party shall be entitled to the
benefit of any other agreements existing between the other party and any third
party, such as rights or benefits which would accrue to the other party. It is
specifically understood and agreed that Exsorbet shall retain and possess all
rights, duties, and obligations that it may have in connection with certain
agreements executed between Exsorbet and: (i) Mississippi State University;
and/or (ii) Millsaps College; and/or (iii) any other person or entity regarding
the use of certain scientific information, including the use of a microbe
intended for use in the Exsorbet product. However, it is further agreed as
follows:
(i) Exsorbet shall not allow such scientific information (including the
aforesaid microbe) to be used in competition with WSC, unless WSC is first
offered the right to use such scientific information on the same terms
that Exsorbet would make available to someone other than WSC; and
(ii) in the event that Exsorbet intends to market, sell, or make
commercial use of any such scientific information (including the aforesaid
microbe) for a fee or profit, WSC shall be given the first right to
purchase or acquire such scientific information on the same terms as
Exsorbet would make available to someone other than WSC.
In the event that WSC is offered a right to purchase, acquire, or use such
scientific information (including the aforesaid microbe), WSC shall be provided
with thirty (30) days written notice of such right. If within such thirty (30)
day period, WSC fails to notify Exsorbet in writing of the exercising of its
right to purchase, acquire, or use such scientific information, it shall be
conclusively presumed that WSC has elected not to exercise such right.
(B) Exsorbet does recognize that it will be mutually beneficial to both
parties for WSC to be kept apprised of any newly discovered technological
information concerning the Exsorbet products to be manufactured by WSC.
Therefore, Exsorbet agrees that during the term of this Agreement and for so
long as WSC continues to manufacture the Exsorbet products that all newly
discovered technological information, which would benefit WSC in the
manufacturing of any products under the Exsorbet name, will be provided to WSC
within a reasonable time after discovery, accuracy verification, and adequate
testing.
16. Representations. Neither party is relying upon any representations of
the other party whatsoever (including representations regarding the use and
effectiveness of any Exsorbet product) unless such representations are either:
(i) contained on packaging currently utilized by Exsorbet; (ii) contained in
this Agreement; or (iii) contained in an exhibit, which has been signed by a
representative for both parties, and which exhibit is attached to this
Agreement.
17. Indemnification. WSC shall indemnify and hold harmless Exsorbet, its
officers, agents, directors, and employees for any and all damages that each
might incur as a result of any claim being made against any of such persons or
entities resulting from any sale of any Exsorbet product by WSC which occurs
during the term of this Agreement.
<PAGE>
18. Product Packaging and Literature. WSC will not alter, modify, or in
any way change the current packaging used on Exsorbet products, or sales
literature used in connection with the sale of Exsorbet products, without the
written consent of the board of directors of Exsorbet. WSC further agrees not to
alter, modify, delete, or in any way change the written representations and
statements contained on packaging or sales literature of Exsorbet products
without the written consent of the board of directors of Exsorbet. This excludes
products sold to any company under a private label package. Such consents
required above by Exsorbet's board of directors shall be returned within 15 days
of receipt.
19. Mortgage. Exsorbet has disclosed to WSC the existence of a mortgage
upon the real property described in paragraph 1 of this Agreement, and referred
to as the "plant." Such mortgage is currently held by Danville State Bank,
Danville, AR in the principal amount of One Million Dollars ($1,000,000.00).
Such mortgage is, and will be, superior to the rights of WSC under this
Agreement. Exsorbet has also disclosed to WSC the existence of a line of credit
with Danville State Bank in the amount of Two Million Dollars ($2,000,000.00)
[current balance of One Million Three Hundred Seven Thousand Dollars] which is
secured by a security interest in the equipment at the "plant" and which will be
superior to the rights of WSC under this Agreement.
20. Personal Guaranties. For the same consideration as is recited herein
and further in consideration of the forbearance of certain rights, the
obligations of WSC are personally guaranteed by the guarantors, John Giura and
Chander Jadhwani, who agree to assure that the obligations of WSC are satisfied
without notice or demand being made upon them.
21. Waste. WSC will not commit or cause waste (as is defined in the most
current version of Black's Law Dictionary) to be committed at the "plant."
22. Use of the "Plant." WSC shall not use the real property described
above (the "plant") for any purpose other than as a manufacturing facility for
Exsorbet products without the written consent of Exsorbet. WSC shall not use the
"plant" for any unlawful purpose. WSC shall not cease or stop the manufacturing
and distribution of any Exsorbet product without the written consent of
Exsorbet.
23. No Contractual Interference. Both parties agree, covenant, and warrant
that by entering this Agreement, they will not be in breach of any other
agreement in existence with such parties. Both parties further agree, covenant,
and warrant that they have no brokers fees, finders fees, or other fees which
would become due and payable by virtue of entering this Agreement.
24. Subletting. WSC shall not sublet the "plant" without the written
consent of Exsorbet, which consent shall not be unreasonably withheld.
Notwithstanding any other provision herein, in determining whether to give or
withhold consent, Exsorbet may consider the technical skill and expertise of any
proposed sub-lessee, the ability of the sub-lessee to maintain operations at the
"plant," and the effect that consenting to the sublease may have upon the name
and goodwill of Exsorbet.
<PAGE>
25. Delegation of Duties. Neither party may delegate its duties or
obligations under this Agreement.
26. Assignment of Rights. Neither party may assign or alter any of its
rights under this Agreement without the consent of the other party.
27. Equipment Condition. WSC shall keep the "plant," the fixtures in the
"plant," all improvements at the "plant," and the equipment at the "plant," in
the same condition that it is in on the date of execution of this Agreement,
normal wear and tear excepted.
28. Utilities and Operating Costs. WSC shall be responsible for, and shall
timely pay, the costs of all utilities in operating the "plant" (including
electricity, natural costs, heating costs, telephone expenses, long distance
expenses, and all other utility costs) as well as all other expenses incurred in
operating the "plant" during the term of this Agreement.
29. Sales Demands. WSC shall manufacture enough Exsorbet products to meet
demands for sales orders during the term of this Agreement.
30. Product Quality. WSC shall manufacture Exsorbet products maintaining
the same quality standards as have been maintained by Exsorbet and as are
necessary: (i) to maintain the good and quality name of Exsorbet; (ii) to
compete effectively in the industry; (iii) to make the products sold by WSC
competitive; and (iv) for the Exsorbet products to work as represented on
packaging and in literature. In the event that Exsorbet determines the quality
of Exsorbet products manufactured by WSC do not meet the quality standards
specified herein, Exsorbet shall provide WSC with written notice of all defects
in the quality of products. WSC shall have thirty (30) days to remedy any such
quality defects unless Exsorbet's president certifies in writing that the
defects pose an immediate risk to the health or safety of any person. In the
event of such certification, WSC shall immediately cease production, shipment,
and sale of all defective products for a period of five days. During such five
day period, Exsorbet and WSC shall evaluate the quality of the products
involved. At the end of the specified time indicated above (five or thirty
days), WSC may continue to manufacture, produce, and ship the previously
defective product or products if such defects have been remedied. Failure to
correct such defect or defects within the specified time shall, at the option of
Exsorbet, constitute a default by WSC.
31. Indemnification for Certain Obligations. WSC shall indemnify and hold
harmless Exsorbet, its officers, directors, employees and agents for all damages
and losses that Exsorbet may sustain during the term of this Agreement as a
result of any losses, damages, or monetary losses which are sustained by virtue
of any claims, demands, fines, penalties, or other obligations imposed upon
Exsorbet caused by any product manufactured, produced, or shipped by WSC during
the term of this Agreement.
32. Accounts Receivables. Exsorbet shall be entitled to all proceeds from
all accounts receivable of Exsorbet which have resulted from: (i) prior
operation of the "plant;" (ii) prior sales of Exsorbet products; (iii) prior
shipments of Exsorbet products; (iv) prior commitments or
<PAGE>
obligations to Exsorbet; or (v) prior debts or obligations due from any person
or entity (including WSC) to Exsorbet WSC shall be entitled to all future
proceeds from income generated by virtue of operation of the "plant" or the
sales of Exsorbet products manufactured or sold by WSC.
33. Operations of Exsorbet. It is understood that Exsorbet is a public
company trading on the Nasdaq Stock Exchange, Inc. small cap market under the
symbol "EXSO." The execution of this Agreement shall not imply that WSC has the
right or option to control any of Exsorbet's operations except to the extent
specifically stated herein. WSC shall have no right or option to receive any
proceeds or income of Exsorbet, except that income derived by virtue of future
sales of Exsorbet products which are manufactured, sold, and shipped during the
term of this lease Agreement at the "plant" shall become the property of WSC.
34. New Products. WSC shall not sell, manufacture, ship, or promote any
new or additional product, bearing the Exsorbet name or logo, without the
written consent of Exsorbet's board of directors. Such consent required by
Exsorbet's board of directors shall be returned within 15 days of receipt.
35. Name Change. In the event that the corporate name of Exsorbet should
change, any or all provisions of this Agreement concerning use and protection of
the Exsorbet name shall be construed as providing the same protection to the new
corporate name of Exsorbet.
36. Technical Support. Exsorbet shall provide such technical support
concerning the manufacturing and use of Exsorbet products to WSC as is
reasonably requested by WSC during the term of this Agreement. The manner in
which such support is provided shall be determined by Exsorbet.
37. Purchasing of Products. Exsorbet agrees to purchase from WSC, or to
otherwise cause the sale of, the Exsorbet peat-based product sold under the name
of "Exsorbet" in a gross amount equal to sales of Fifty Thousand Dollars
($50,000.00) per month. WSC agrees to provide such product to Exsorbet at the
rates currently charged by Exsorbet, as shown on Exhbit "B" , and in effect one
day prior to the date of this Agreement, less a twenty percent (20%) discount.
The terms for all sales shall be net amount due in thirty (30) days.
38. Acceleration. In the event of the termination of this Agreement by WSC
at any time prior to the expiration of three years, all rental obligations due
under this Agreement shall accelerate and become immediately due and payable.
This provision shall not be construed as a penalty or liquidated damages, or as
a limitation of liability.
39. Failure to Comply. In the event that either party fails to comply with
any condition or obligation imposed by this Agreement, such party shall be
provided with thirty (30) days written notice of the condition or obligation
which has not been satisfied, unless some other time period is stated otherwise
herein (in which case the provisions of this paragraph shall have no effect).
Such party shall then be given thirty (30) days to cure and rectify such
condition or obligation prior to declaring that party in default. In the event
that such condition or obligation is
<PAGE>
not satisfied within such time period, the party failing to comply with such
condition or obligation may then be declared in default.
40. Breach of Agreement. In the event of any disputes concerning or
arising under the terms of this Agreement, or any default or claimed breach of
this Agreement, all such disputes shall be submitted to arbitration for
resolution. Both WSC and Exsorbet shall select an arbitrator to participate in
the proceedings. The two arbitrators who are selected shall select a neutral
arbitrator. The arbitration proceeding shall be conducted in accordance with the
rules of the American Arbitration Association. All provisions of the "Uniform
Arbitration Act" in effect within the State of Arkansas shall govern the
arbitration proceedings. The term "Uniform Arbitration Act" refers to Arkansas
Act 260 of 1969, as amended, and includes Ark. Code Ann. Sections 16-108-102 et
seq. and Ark. Code Ann. Sections 16-108-201 et seq. The arbitrators award shall
be governed by the statutes contained in the "Uniform Arbitration Act." Either
party may apply to a court of competent jurisdiction to compel arbitration
proceedings in accordance with the "Uniform Arbitration Act" and this Agreement.
The provisions of this paragraph shall be construed as an irrevocable agreement
to submit any disputes arising under this Agreement, as defined above, to
arbitration. In the arbitration proceedings, the arbitration panel shall be
vested with full authority to resolve all issues of fact whatsoever. An
arbitration award may consist of any remedy that would otherwise be available at
law or in equity.
41. Material Terms. It is specifically understood that the lease of the
"plant" and the manufacturing of quality Exsorbet products are both material
terms of this Agreement.
42. Confidentiality. It is specifically understood and agreed that WSC and
its officers, agents, and employees will gain confidential information regarding
manufacturing, distribution, selling, shipment, and processing of Exsorbet
products during the term of this Agreement. WSC agrees that neither it, nor its
officers, agents, or employees will make any use of such information in
competition with Exsorbet during the term of this Agreement, or for a period of
three years following the conclusion of this Agreement. The geographical area
covered by this provision shall include the entire continental United States as
Exsorbet products are sold throughout such area. In the event that the time
period of three years is construed as overly broad, the time period shall be
limited to one year following the expiration of this Agreement.
43. Events of Default. At the option of the non-defaulting party, the
following events shall constitute a default under the terms of this Agreement:
(i) failure to comply with a material term of this Agreement following thirty
days written notice; (ii) the occurrence of an event of default specified in
paragraph 29; (iii) the filing of a voluntary petition for relief pursuant to
the Bankruptcy laws of the United States (11 United States Code Section 1101, et
seq.) by such party; (iv) the filing of an involuntary petition for relief
against such party pursuant to the Bankruptcy laws of the United States (11
United States Code Section 1101, et seq.) which is not dismissed after more than
sixty days; (v) the appointment of a receiver for such party; or (vi) any other
event, action, or inaction which would reasonably justify the other party in
believing that the obligations of such party pursuant to this Agreement would
not be met, following written notice of such event, action, or inaction and
thirty (30) days opportunity to cure. In the event that
<PAGE>
the non-defaulting party exercises its option to declare any of the above
events, actions, or inactions an event of default, written notice of such
election shall be provided to the other party.
44. Attorney's Fees. In the event of litigation resulting under this
Agreement, the prevailing party shall be entitled to recover its reasonably
incurred expenses and attorney's fees.
45. Waiver. No action or inaction under this Agreement by either party
shall be deemed to be a continuing waiver of any provision contained herein.
46. Paragraph Headings. Paragraph headings are for convenience only and
shall not alter the meanings of the written paragraphs.
47. Construction. This Agreement shall be liberally construed to
effectuate the intention of the parties as evidenced herein. This Agreement
shall be construed in accordance with the laws and statutes of the State of
Arkansas, without regard to its provisions concerning conflicts or choice of
laws.
48. Notices. All notices given to Exsorbet under this Agreement shall be
provided to Charles E. Chunn, Jr., 1401 South Waldron Road, Suite 201, Fort
Smith, AR 72901. All notices given to WSC under this Agreement shall be provided
to Chander Jadhwani, 8400 Brookfield Avenue, Brookfield, Ill 60513. Either party
may change the address or person to whom such notices are sent by providing
written notice to the other party. All notices shall be sent by overnight
courier addressed to the address specified above.
49. Assignment of Distribution Rights. Exsorbet irrevocably assigns to WSC
all of its rights, duties, and obligations existing under an exclusive
distributorship agreement assigned to it by Marketing Co., Inc. WSC accepts such
assignment subject to all contingencies and known distributorship agreements,
assuming the same position as Exsorbet would otherwise have and retain under
such agreement if this Agreement were not in existence.
50. Binding Effect. This Agreement shall be binding upon, and shall inure
to the benefit of, the successors and permitted assigns of all parties hereto.
EXSORBET INDUSTRIES, INC.,
an Idaho corporation
By: ______________________________
Officer
WASTE SOLUTIONS CORPORATION,
an Illinois corporation
<PAGE>
By: ______________________________
d Officer
___________________________________
John Guira
___________________________________
Chander Jadhwani
Exhibit 21.1
List of Subsidiaries of the Company
Consolidated Environmental Services, Inc., an Arkansas corporation.
Cierra, Inc., an Arkansas corporation, wholly-owned by Consolidated
Environmental Services, Inc..
Eco-Acquisition, Inc., an Arkansas corporation, d/b/a Eco-Systems, Inc.
Exsorbet Administration, Inc., an Arkansas corporation.
Exsorbet Equipment Leasing, Inc., an Arkansas corporation.
Exsorbet Farms, Inc., an Arkansas corporation.
Exsorbet Industries, Inc., an Arkansas corporation.
Exsorbet Technical Services, Inc., an Arkansas corporation, d/b/a SpilTech
Services, Inc.
Larco Environmental Services, Inc., an Louisiana corporation.
KR Industrial Service of Alabama, Inc., an Alabama corporation.
7-7, Inc., an Arkansas corporation.
CONSENT OF COOPER, SHUFFIELD & COMPANY
As independent public accountants, we hereby consent to the use in this
Form 10-K of all of our prior reports utilized or mentioned in this report.
COOPER, SHUFFIELD & COMPANY
By: /s/ Dennis G. Cooper
-----------------------
Dennis G. Cooper
Little Rock, AR
April 7, 1997
CONSENT OF MOORE STEPHENS FROST
As independent public accountants, we hereby consent to the use in this
Form 10-K of our report dated March 24, 1997.
Little Rock, AR
April 7, 1997
/s/ Moore Stephens Frost
---------------------------
MOORE STEPHENS FROST
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,730,966
<SECURITIES> 0
<RECEIVABLES> 9,093,135
<ALLOWANCES> (716,977)
<INVENTORY> 537,637
<CURRENT-ASSETS> 374,824
<PP&E> 28,882,482
<DEPRECIATION> (3,287,813)
<TOTAL-ASSETS> 45,876,875
<CURRENT-LIABILITIES> 22,571,328
<BONDS> 6,203,999
0
0
<COMMON> 15,114
<OTHER-SE> 17,086,434
<TOTAL-LIABILITY-AND-EQUITY> 45,876,875
<SALES> 29,998,228
<TOTAL-REVENUES> 29,998,228
<CGS> 20,739,198
<TOTAL-COSTS> 20,739,198
<OTHER-EXPENSES> 13,812,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,192,062
<INCOME-PRETAX> (5,745,429)
<INCOME-TAX> 1,551,765
<INCOME-CONTINUING> (4,193,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,193,664)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
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