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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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.)
6807 West 12th Street
Little Rock, AR 72204
(Address of principal executive offices)
Registrant's telephone number, including area code: (501) 664-7745
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Name on Each Market
Title of Each Class on Which Listed
------------------- ---------------
Common Stock, $.001 par value NASDAQ
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 |_|
As of August 18, 1997, 43,855,547 shares of the registrant's common stock were
outstanding. The aggregate market value of the common stock (based upon the high
trading price on the Nasdaq SmallCap Market on August 18, 1997 of $.3125) of
Consolidated Eco-Systems, Inc. held by non-affiliates of the registrant at that
date was approximately $910,770.
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<PAGE>
TABLE OF CONTENTS
Item Page
PART I
1. Financial Statements...................................................3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................................3
PART II
1. Legal Proceedings......................................................8
2. Changes in Securities..................................................8
3. Defaults Upon Senior Securities........................................9
4. Submission of Matters to a Vote of Security Holders....................9
5. Other Information......................................................9
6. Exhibits and Reports of Form 8-K.......................................9
Signatures............................................................10
<PAGE>
PART I
Item 1. Financial Statements.
The Registrant's financial statements and financial data are attached to
this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following analysis and discussion highlights the significant factors
affecting the Company's financial condition and results of operations for the
quarter ended June 30, 1997. 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.
Significant Events Affecting Operations
Between December 20, 1996 and January 22, 1997, the Company issued
$5,000,000 in debentures convertible into common stock of the Company at eighty
percent (80%) of the average five day closing bid of the Company's common stock
on the five day period immediately prior to conversion. In connection with the
debentures, the Company agreed to file a registration statement with the United
States Securities and Exchange Commission within five days of issuance of each
debenture and to cause the registration statement to become effective within 60
days. The debentures provided that if the registration statement did not become
effective within 60 days that the debenture holders would be entitled to recover
$25 per each $1,000 of debentures held for each month that the registration
statement did not become effective.
In May 1997, the Company entered into modification agreements with the
holders of $5 million of 8% convertible debentures of the Company issued during
December 1996 and January 1997. Pursuant to the modification agreements, the
Company issued new debentures to 14 of such holders in the approximate principal
amount of $3,339,000 in exchange for the surrender of $2,637,500 of outstanding
debentures and the waiver by the debenture holders of liquidated damages in the
approximate amount of $225,000 and the release by such debenture holders of
certain potential claims against the Company. Further, the Company issued
104,954 shares of its Common Stock to the remaining five holders in payment of
contractual liquidated damages in connection with the late registration of the
shares of common stock issuable upon conversion of such holders debentures.
During July, 1997, one of the debenture holders, The Shaar Fund, attempted
to convert separate portions of its convertible debenture into common stock of
the Company. The Company declined to honor the conversions because it believed
that it had valid defenses to honoring such conversions. The Shaar Fund notified
the Company on or about August 1, 1997 that it was entitled to approximately
5,800,000 shares of common stock of the Company and demanded delivery of such
shares. On August 3, 1997, the Company reached a settlement agreement with The
Shaar Fund whereby the Company delivered 2,200,000 shares of common stock to The
Shaar Fund. The Shaar Fund agreed to a conversion price of $.45 per share with
respect to all of its remaining debenture for which conversion notices had been
previously received by the Company. On or about August 13, 1997, the Company
issued an additional 1,333,333 shares of common stock to The Shaar Fund in
satisfaction of such conversions and in full satisfaction of all claims of The
Shaar Fund. The Shaar Fund also agreed to provide $100,000 to the Company for
reimbursement of expenses incurred by the Company, to pay up to $50,000 for
future legal fees of the Company associated with claims surrounding the
debentures issued in December, 1996 and January, 1997, and to release the
Company from any additional claims.
During August, 1997, the Company determined that it did not have adequate
common stock remaining to honor debentures issued during December, 1996 and
January, 1997, and modified in May, 1997. As of August 15, 1997 approximately
$2,200,000 of such debentures remain outstanding and unconverted due to
inability of the Company to honor such conversions. The Company is required
under the terms of the debentures, and due to demands by debenture holders, to
call a shareholder meeting and seek an increase in the number of authorized
shares of common stock.
3
<PAGE>
Results of Operations
Restated Financial Information. The Company's financial information for
1995 has been restated to reflect the acquisitions of Consolidated Environmental
Services, Inc., Eco-Systems, Inc., LARCO Environmental Services, Inc., and KR
Industrial Service of Alabama, Inc. The Company's financial information for 1996
has been restated to reflect the acquisitions of LARCO Environmental Services,
Inc. and KR Industrial Service, Inc.
Three Months Ended June 30, 1997 Compared to the Three Months Ended June
30, 1996
Sales. For the three months ended June 30, 1997 and 1996, sales were
$7,563,372 and $7,276,802, respectively. Overall sales for the three months
ended June 30, 1996 does not include sales for 7-7, Inc., which was not acquired
until September 30, 1997. Overall sales for the three months ended June 30, 1997
include sales for 7-7, Inc. of $1,879,607. Overall sales at 7-7 are expected to
rise during the third and/or fourth quarters of 1997 due to the continued use of
extensive marketing efforts, including the use of the Company's national
marketing manager at 7-7. The Company believes that the additional marketing
efforts at 7-7 will have a significant impact on sales made by 7-7 during the
third and fourth quarters of 1997.
For the three months ended June 30, 1997, overall sales by Consolidated
Environmental Services, Inc. decreased from $2,433,850 to $650,727. The
operations conducted by Consolidated Environmental Services, Inc. have consisted
of work which typically requires bonding capabilities that the Company has not
been able to maintain during 1997.
For the three months ended June 30, 1997, overall sales by Eco-Systems,
Inc., the Company's engineering subsidiary, were $1,279,955, as compared to
$958,107 for the three months ended June 30, 1996. The Company believes that the
rise in overall sales at Eco-Systems, Inc. are attributable to more extensive
marketing efforts.
For the three months ended June 30, 1997, overall sales by Exsorbet
Technical Services, Inc. d/b/a SpilTech Services were $601,788, as compared to
$470,057 for the three months ended June 30, 1996. The Company believes that the
increase in sales at SpilTech are attributable to more aggressive marketing
efforts and by the provision of more industrial service type work to utility and
commercial clients.
Cost of Sales. For the three months ended June 30, 1997 and 1996, the cost
of sales were $6,647,504 and $4,250,786, respectively, or 87.9% as a percentage
of sales as compared to 58.4%, respectively. The cost of sales increased due to
increased sales costs incurred as the result of the acquisition of 7-7, Inc.,
and sales costs associated with operations at Consolidated Environmental
Services, Inc. and Larco Environmental Services, Inc. For the three months ended
June 30, 1996, the cost of sales at 7-7, Inc. were $1,876,214 or 99.8% of
overall sales of 7-7. Management views the cost of sales at 7-7 as being largely
attributable to the extensive marketing efforts at 7-7, Inc., which are targeted
at obtaining long term contracts for the recycling services of 7-7. The Company
believes that when additional long term contracts for the recycling services of
7-7 are obtained, the cost of sales as a percentage of sales will decrease.
For the three months ended June 30, 1997, the cost of sales at
Consolidated Environmental Services, Inc. were $1,388,766, or 213% as a
percentage of sales. For the three months ended June 30, 1996, the cost of sales
of Consolidated Environmental Services, Inc. was $1,453,371, or 59.7% as a
percentage of sales. The increase in cost of sales as a percentage of overall
sales is related primarily to the closing out of long term contracts.
For the three months ended June 30, 1997, the cost of sales at Larco
Environmental Services, Inc. were $1,083,146, or 77.9% as a percentage of sales.
For the three months ended June 30, 1996, the cost of sales were $629,217, or
49% as a percentage of sales. The increase in cost of sales as a percentage of
overall sales is due to increased market competition in the Lake Charles,
Louisiana area where Larco is based. Management has utilized increased marketing
efforts and decreased overall costs as a result of the problem.
4
<PAGE>
Total Operating Expenses. For the three months ended June 30, 1997 and
1996, total operating expenses were $5,530,414 and $1,557,957, respectively. The
increase resulted primarily from an increase in general and administrative
expenses from $1,162,141 for the three months ended June 30, 1996 to $4,986,126
for the three months ended June 30, 1997.
For the three months ended June 30, 1997, total general and administrative
expenses of Exsorbet Industries, Inc. (the Arkansas subsidiary) were $1,690,496,
as compared to $105,852 for the three months ended June 30, 1996. The increase
in general and administrative expenses resulted primarily from a write down of
an intangible asset, a non-competition agreement that was deemed to no longer be
of value to the Company, expenses incurred in connection with the issuance of
stock options which had been issued at the time of certain acquisitions during
1996, and the write down of a portion of a contract that the Company believes to
be uncollectible in the amount of approximately $942,000. These expenses are
expected to be non-recurring. For the three months ended June 30, 1997, total
general and administrative expenses of Consolidated Environmental Services, Inc.
were $772,835, of which $250,000 is a write down for bad debt.
Net Income. For the three months ended June 30, 1997 and 1996, net income
(loss) was ($4,626,013) and $803,375, respectively. Net income (loss) per share
was approximately ($.25) and $.08, respectively.
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30,
1996
Sales. For the six months ended June 30, 1997 and 1996, sales were
$17,282,790 and $15,039,167, respectively. The increase in sales was due
primarily to sales by 7-7, Inc. of $4,597,386 for the six months ended June 30,
1997. 7-7 was not acquired by the Company until September 30, 1996, and its
sales for the six months ended June 30, 1996 were not included.
For the six months ended June 30, 1997 and 1996, sales by Consolidated
Environmental Services, Inc. were $2,601,703 and $4,125,937, respectively. The
operations conducted by Consolidated Environmental Services, Inc. have consisted
of work which typically requires bonding capabilities that the Company has not
been able to maintain during 1997.
Cost of Sales. For the six months ended June 30, 1997 and 1996, the cost
of sales was $13,830,020 and $8,485,384, respectively, or 80% as a percentage of
sales as compared to 56.4%, respectively. The cost of sales increased as the
result of the acquisition of 7-7, Inc. Cost of sales at 7-7, Inc. for the six
months ended June 30, 1997 were $4,289,382 or 93.3% as a percentage of sales.
Cost of sales as a percentage of sales are expected to decrease as long term
contracts for 7-7, Inc.'s recycling process are obtained.
For the six months ended June 30, 1997, the cost of sales at Consolidated
Environmental Services, Inc. was $2,706,081, or 104% as a percentage of sales.
For the three months ended June 30, 1996, the cost of sales of Consolidated
Environmental Services, Inc. were $2,570,404, or 62.3% as a percentage of sales.
For the six months ended June 30, 1997, the cost of sales at Larco
Environmental Services, Inc. was $2,280,595, or 78.3% as a percentage of sales.
For the six months ended June 30, 1996, the cost of sales was $2,280,428 or
63.9% as a percentage of sales.
Total Operating Expenses. For the six months ended June 30, 1997 and 1996,
total operating expenses were $7,769,493 and $2,867,774, respectively. The
increase resulted from an increase in marketing and general administration
expenses. The increase in operating expenses is due primarily to increased
administrative expenses resulting from the increased expenses associated with
the acquisitions made by the Company in 1996 and certain write-downs taken by
the Company. During the six months ended June 30, 1997, the Company wrote down
an intangible asset, a non-competition agreement that was deemed to no longer be
of value to the Company, expenses incurred in connection with the issuance of
stock options which had been issued at the time of certain acquisitions during
1996, and the write down of a portion of a contract that the Company believes to
be uncollectible in the amount of approximately $942,000. These expenses are
expected to be non-recurring.
5
<PAGE>
Net Income. For the six months ended June 30, 1997 and 1996, net income
(loss) was ($4,461,696) and $2,055,993, respectively. For the six months ended
June 30, 1997 and 1996, net income (loss) per share was approximately ($.24) and
$.08, respectively.
Three Months Ended June 30, 1996 Compared to the Three Months Ended June
30, 1995
Sales. For the three months ended June 30, 1996 and 1995, sales were
$7,276,802 and $6,491,506, respectively. The increase in sales was due primarily
to a higher level of technical expertise in providing products and services to
clients and cross selling of products and services between the various
subsidiaries of the Company.
Cost of Sales. For the three months ended June 30, 1996 and 1995, the cost
of sales were $4,250,786 and $4,154,623, respectively, or 58.4% as a percentage
of sales as compared to 64.0%, respectively. The cost of sales as a percentage
of sales decreased as management gained better control of the cost factors
associated with producing the Company's products and providing the services
offered by the Company, as well as the Company's ability to provide services
within the framework of the various subsidiaries.
Total Operating Expenses. For the three months ended June 30, 1996 and
1995, total operating expenses were $1,557,957 and $1,228,516, respectively. The
increase resulted from an increase in marketing and general administration
expenses.
Net Income. For the three months ended June 30, 1996 and 1995, net income
was $803,438 and $595,013, respectively. For the three months ended June 30,
1996 and 1995, net income per share was approximately $.08 and $.06,
respectively.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30,
1995
Sales. For the six months ended June 30, 1996 and 1995, sales were
$15,039,167 and $11,078,050, respectively. The increase in sales was due
primarily to a higher level of technical expertise in providing products and
services to clients and cross selling of products and services between the
various subsidiaries of the Company.
Cost of Sales. For the six months ended June 30, 1996 and 1995, the cost
of sales were $8,485,384 and $7,303,205 respectively, or 56.4% as a percentage
of sales as compared to 67.0%, respectively. The cost of sales as a percentage
of sales decreased as management gained better control of the cost factors
associated with producing the Company's products and providing the services
offered by the Company, as well as the Company's ability to provide services
within the framework of the various subsidiaries.
Total Operating Expenses. For the six months ended June 30, 1996 and 1995,
total operating expenses were $2,867,774 and $1,964,879, respectively. The
increase resulted from an increase in marketing and general administration
expenses.
Net Income. For the three months ended June 30, 1996 and 1995, net income
was $803,438 and $595,013, respectively. For the three months ended June 30,
1996 and 1995, net income per share was approximately $.08 and $.06,
respectively.
6
<PAGE>
Financial Condition and Liquidity
At June 30, 1997, total current assets were $5,884,341 reflecting a
decrease from the June 30, 1996 level of $12,931,445. At June 30, 1997, total
current liabilities were $15,162,524, reflecting an increase over the June 30,
1996 level of $8,844,450. This resulted in a current ratio of .37 and 1.46. This
level of liquidity has caused the Company to have difficulty in satisfying short
term obligations. The Company deemed that it was more prudent to sell certain
assets that were not providing substantial benefit to the Company to satisfy
some of its short term obligations. The assets sold by the Company consist
primarily of equipment that had been utilized in the construction business of
Consolidated Environmental Services, Inc. The Company believes that it is more
cost effective to rent such equipment in the future if a need for such equipment
arises.
On July 25, 1997, Hibernia National Bank ("Hibernia") declared Larco
Environmental Services, Inc. in default of its obligations. Hibernia contends
that Larco is in default of its obligations and that it has accelerated all debt
owed by Larco. That amount is approximately $1,070,750. The Company believes
that it is current in the payment of all obligations to Hibernia. The Company
has notified Hibernia that it is current in the payment of its obligations and
has made demand for withdrawal of the declaration of default. If Hibernia fails
to withdraw its declaration of default and is successful in accelerating payment
from Larco, the acceleration would have a material adverse effect on Larco. The
Company believes that it would prevail in any litigation with Hibernia in regard
to the declaration of default.
During the three months ended June 30, 1997, working capital needs were
met primarily from cash generated from operations and from short term borrowing.
The Company has frequently utilized short term borrowings with certain of its
receivables as security through factoring companies for operating needs. The
Company is attempting to refinance the majority of its outstanding obligations.
For the three months ended June 30, 1997, the Company determined to make
adjustments for assets that it believed were no longer of value or were worth
less than their current carrying value. As a result, the Company incurred the
following expenses: approximately $667,000 relating to a loss on real estate;
approximately $495,000 resulting from the write off of long term contracts;
approximately $400,000 on a contract that had previously been amortized over a
long term basis but which the Company determined is no longer of value;
approximately $200,000 related to the issuance of stock options in connection
with acquisitions; approximately $625,000 related to receivables that the
Company determined to be uncollectible; approximately $942,000 related to a
contract that the Company believes is uncollectible; approximately $2,300,000
related to equipment that was worth less than its current carrying value;
approximately $187,000 related to a loss on the sale of equipment; approximately
$210,000 related to a rental income receivable which management believes is
uncollectible; approximately $187,000 in prepaid expenses which are no longer of
value; and approximately $400,000 related to closing out long term contracts.
Management does not believe that these expenses will recur.
On September 30, 1996, the Company issued a promissory note to Calvin F.
Lowe, II in the aggregate principal amount of $300,000. The note was issued at
the time of acquisition of 7-7, Inc. by the Company. Mr. Lowe was the largest
shareholder of 7-7, Inc. prior to its acquisition by the Company. The issued
note was due on or about December 1, 1996. The Company was unable to pay the
amount due at maturity and has been successful in obtaining either extensions of
time to pay the debt from Mr. Lowe or a waiver of the right to immediately claim
the amount due. During August, 1997, Mr. Lowe has notified the Company that he
might demand payment on the note on or before October 15, 1997. Also, on
September 30, 1996, the Company issued promissory notes in the total amount of
$900,000 to the holders of stock of 7-7, Inc. at the time of its acquisition by
the Company. The notes were amortized over a five year period with the first
installment being due on December 1, 1996, and continuing every quarter
thereafter until the entire amount was paid in full. The Company was unable to
pay the amount due on December 1, 1996, and has not paid any amount due since
such time. The Company has successfully obtained either extensions or waivers
from the persons to whom the notes were given. While the Company believes that
it has defenses available to claims which may be brought on all the notes, there
can be no assurance that additional extensions or waivers will be provided. A
judgment in favor of the note holders could have a material adverse impact on
the Company.
7
<PAGE>
In November, 1996, the Company issued a promissory note in the principal
amount of $3,300,000 to American Physicians Service Group, Inc. ("APS"), a Texas
corporation. The note is due on September 30, 1996. The Company believes that it
will not be able to satisfy the note at the time of its maturity. The Company
believes that APS will agree to extend the maturity debt based upon certain
concessions by the Company. Failure to APS to extend the maturity date would
have a material adverse impact on the Company.
PART II
Item 1. Legal Proceedings.
On August 13, 1997, the Company entered into an agreement in resolution of
claims filed by former employees of the Company who had filed suit against the
Company in the Circuit Court of Crawford County, Arkansas seeking total damages
of approximately $2,650,000 for violations of the Arkansas Civil Rights Act and
for the common law tort of outrage. The Company believed that the amount of the
settlement, $17,500, was less than future costs and expenses that would be
incurred with the litigation. While management believed that it had meritorious
defenses to the cause of action, the Company deemed that the settlement amount
would be less than the future costs which would be incurred in defending the
matter.
During July, 1997, an insurance vendor brought suit against the Company in
the Circuit Court of Sebastian County, Arkansas. The Company admits that it owes
an amount to the vendor, but disputes the amount of the debt. The amount sought
is approximately $100,000. While any judgment that might be rendered is not
believed to have a substantial long term impact, such judgment could have an
adverse impact on the Company's immediately available operating capital.
During July, 1997, a former employee of the Company brought suit against
the Company in the District Court of Tulsa County, Oklahoma claiming that the
Company had breached a prior settlement agreement. Under the prior agreement,
the Company was obligated to pay $3,000 per month to the employee in settlement
of certain claims for commissions, compensation, and other matters. The
settlement agreement provides that if the Company defaults in making any payment
for five days or longer that the entire remaining amount may be accelerated by
the employee. The employee claims that she is entitled to recover approximately
$59,000, contending that the Company defaulted in making a payment or payments
for five days or longer. The Company believes that any default was waived by the
employee and has sought permission of the Court to continue paying the $3,000
monthly payments into the registry of the Court pending the litigation. While
any judgment that might be rendered is not believed to have a substantial long
term impact, any judgment that might be rendered in such cause could have an
adverse impact on operating capital of the Company.
Item 2. Changes in Securities.
Between December 20, 1996 and January 22, 1997, the Company issued
$5,000,000 in debentures convertible into common stock of the Company at eighty
percent (80%) of the average five day closing bid of the Company's common stock
on the five day period immediately prior to conversion. In connection with the
debentures, the Company agreed to file a registration statement with the United
States Securities and Exchange Commission within five days of closing each
debenture and to cause the registration statement to become effective within 60
days. The debentures provided that if the registration statement did not become
effective within 60 days that the debenture holders would be entitled to recover
$25 per each $1,000 of debentures held.
In May 1997, the Company entered into modification agreements with the
holders of $5 million of 8% convertible debentures of the Company issued during
December 1996 and January 1997. Pursuant to the modification agreements, the
Company issued new debentures to 14 of such holders in the approximate principal
amount of $3,339,000 in exchange for the surrender of $2,637,500 of outstanding
debentures and the waiver by the debenture holders of liquidated damages in the
approximate amount of $225,000 and the release by such debenture holders of
certain potential claims against the Company. Further, the Company issued
104,954 shares of its Common Stock to the remaining five holders in payment of
contractual liquidated damages in connection with the late registration of the
shares of common Stock issuable upon conversion of such holders debentures.
8
<PAGE>
Item 3. Defaults Upon Senior Securities.
The Company is unable to honor conversions of its convertible debentures
issued in December, 1996 and January, 1997, and modified in May, 1997 due to the
lack of available authorized shares of common stock. Pursuant to the terms of
the debentures, and based upon demands by a certain holder, the Company will be
required to call a shareholder's meeting and seek approval of the amendment of
its articles of incorporation with an increase in the number of available
authorized shares.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
During July, 1997, the Company named Robert Steelhammer of Houston, TX as
its chairman of the board of directors. During July, 1997, Mr. Steelhammer
resigned as chairman of the board of directors. Also, during July, 1997, Edward
L. Schrader resigned as a director from the Company pursuant to the terms of an
agreement reached with the Company. Under the terms of the agreement, the
Company and Dr. Schrader agreed to waive any contractual claims that either
might have against the other, with the exception that Dr. Schrader did not waive
any right to continued indemnity, including indemnity provided by resolution of
the Board of Directors. Following the resignation of Robert Steelhammer, the
Company's Board of Directors named James J. Connors, Jr. as its chairman.
Item 6. Exhibits and Reports on Form 8-K.
None.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOLIDATED ECO-SYSTEMS, INC.
By: /s/ James J. Connors, Jr.
-------------------------------------
JAMES J. CONNORS, JR.
President
Date: August 19, 1997
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
(unaudited) (audtied)
------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 406,340 $ 2,730,966
Accounts receivable - trade, net of
allowance for doubtful accounts 4,571,418 6,661,832
Notes receivable 40,000 1,097,576
Cost and estimated earnings in excess
of billings on uncompleted contracts 42,189 495,796
Inventories - supplies 373,181 537,637
Other current assets 451,213 495,778
------------ ------------
Total current assets 5,884,341 12,019,585
------------ ------------
Net property, plant and equipment 20,426,527 25,594,669
------------ ------------
Other assets
Intangible assets, net of amortization 5,237,871 5,865,310
Due from shareholders 1,654,816 1,679,043
Deferred income taxes 2,844,375 309,481
Other assets 349,650 408,787
------------ ------------
Total other assets 10,086,712 8,262,621
------------ ------------
Total assets $ 36,397,580 $ 45,876,875
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable 6,256,035 11,631,582
Current maturies of long-term debt 3,014,895 4,217,427
Accounts payable - trade 4,800,485 5,342,375
Billings in excess of costs and estimated
earnings on uncompleted contracts 65,220 74,482
Accrued liabilities 808,582 1,067,611
Current deferred income taxes 217,307 237,851
------------ ------------
Total current liabilities 15,162,524 22,571,328
------------ ------------
Long-term debt 5,984,199 6,203,999
------------ ------------
Shareholders' equity
Common stock 15,114 15,114
Additional paid-in capital 24,442,158 21,831,153
Retained earnings (deficit) (5,906,415) (1,444,719)
------------ ------------
18,550,857 20,401,548
Treasury stock, at cost (3,300,000) (3,300,000)
------------ ------------
Total shareholders' equtiy 15,250,857 17,101,548
------------ ------------
Total liabilities and shareholders' equity $ 36,397,580 $ 45,876,875
============ ============
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended June 30, Year to date ended June 30,
---------------------------- ---------------------------
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 7,563,372 $ 7,276,802 $ 17,282,790 $ 15,039,167
Cost of sales 6,647,504 4,250,786 13,830,020 8,485,384
------------ ------------ ------------ ------------
Gross profit 915,868 3,026,016 3,452,770 6,553,783
------------ ------------ ------------ ------------
Cost and expenses
Marketing expenses 544,288 395,816 663,871 786,842
General and administrative 4,986,126 1,162,141 7,105,622 2,080,932
------------ ------------ ------------ ------------
Total cost and expenses 5,530,414 1,557,957 7,769,493 2,867,774
------------ ------------ ------------ ------------
Income (loss) from operations (4,614,546) 1,468,059 (4,316,723) 3,686,009
Other income (expense), net (2,188,415) (172,192) (2,244,595) (369,892)
------------ ------------ ------------ ------------
Income before income tax provisions (benefits) (6,802,961) 1,295,867 (6,561,318) 3,316,117
Income tax (benefits) provisions (2,176,948) 492,492 (2,099,622) 1,260,124
------------ ------------ ------------ ------------
Net income (loss) $ (4,626,013) $ 803,375 $ (4,461,696) $ 2,055,993
============ ============ ============ ============
Earnings per common share and
common share equivalent $ (0.25) $ 0.08 $ (0.24) $ 0.19
============ ============ ============ ============
Weighted average shares outstanding 18,868,877 10,634,020 18,868,877 10,634,020
============ ============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended June 30, Year to date ended June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash (used) provided by operating activities $ 327,621 $ 8,660 $ 540,507 ($1,758,845)
----------- ----------- ----------- -----------
Cash flows from investing activites:
Net purchase of property, plant, and equipment
and proceeds from sale of property plant and
equipment 1,104,000 (3,231,644) 1,825,559 (4,011,611)
Change in other assets (2,518) (1,477,968) (5,773) (1,245,413)
----------- ----------- ----------- -----------
Net cash (used) provided by investing activities 1,101,482 (4,709,612) 1,819,786 (5,257,024)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds (repayments) on notes payable and
long-term debt (1,975,819) 2,072,049 (7,228,390) 3,747,393
Proceeds from issuance of debentures -- 5,000,000 -- 5,000,000
Recission of stock options -- -- (292,695) --
Issuance of equity debentures -- -- 2,836,166 --
----------- ----------- ----------- -----------
Net cash (used) provided by financing activities (1,975,819) 7,072,049 (4,684,919) 8,747,393
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (546,716) 2,371,097 (2,324,626) 1,731,524
Cash and cash equivalents - beginning of the period 953,056 237,609 2,730,966 877,183
----------- ----------- ----------- -----------
Cash and cash equivalents - ending of the period $ 406,340 $ 2,608,706 $ 406,340 $ 2,608,707
=========== =========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
1. Basis of Consolidations
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three months and six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1997.
2. Sale of Certain Assets
On February 27, 1997 Larco Environmental Services, Inc. sold all of the
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 National Bank. 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.
3. Issuance of Debentures
During December 1996, the Company began issuing 8% Convertible Equity
Debentures. A total of $3,000,000 was issued during 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 $3,000,000, less issue costs, have been reflected as
additional paid-in capital in the accompanying financial statements. Under
the terms of these debentures, the Company is subject to liquidated
damages of approximately $125,000 per month if the stock to be issued
pursuant to conversion of the debentures is not registered within 60 days
of the date of issuance of the debentures.
4. Write Off of Certain Assets
During the second quarter of 1997, management elected to write down
certain assets to reflect their current estimated fair market value. As a
result, the Company incurred the following expenses: approximately
$667,000 relating to a loss on real estate; approximately $495,000
resulting from the write off of long term contracts; approximately
$400,000 on a contract that had previously been amortized over a long term
basis but which the Company determined is no longer of value;
approximately $200,000 related to the issuance of stock options in
connection with acquisitions; approximately $625,000 related to
receivables that the Company determined to be uncollectible; approximately
$942,000 related to a contract that the Company believes is uncollectible;
approximately $2,300,000 related to equipment that was worth less than its
current carrying value; approximately $187,000 related to a loss on the
sale of equipment; approximately $210,000 related to a rental income
receivable which management believes is uncollectible; approximately
$187,000 in prepaid expenses which are no longer of value; and
approximately $400,000 related to closing out long term contracts.
Management does not believe that these expenses will recur.
5. Rescission of Stock Options
On March 30, 1997, Larry Woodcock rescinded an option to acquire 200,000
shares of common stock which were issued on or about June 26, 1996.
One-half of the options were exercisable on or after June 26, 1997 and the
other half were exercisable after June 26, 1998. The exercise price of the
options was $.25 per share. On March 30, 1997, Ken McDonald rescinded an
option an option to acquire 514,469 shares of common stock which were
issued on or about June 26, 1997. One-half of the options were exercisable
on or after June 27, 1997 and the other half were exercisable after June
27, 1997. The exercise price of the options was $.25 per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 406,340
<SECURITIES> 0
<RECEIVABLES> 5,620,584
<ALLOWANCES> (966,977)
<INVENTORY> 373,181
<CURRENT-ASSETS> 5,884,341
<PP&E> 23,987,976
<DEPRECIATION> (3,561,449)
<TOTAL-ASSETS> 36,397,580
<CURRENT-LIABILITIES> 15,162,524
<BONDS> 5,984,199
0
0
<COMMON> 15,114
<OTHER-SE> 15,235,743
<TOTAL-LIABILITY-AND-EQUITY> 36,397,580
<SALES> 17,282,790
<TOTAL-REVENUES> 17,282,790
<CGS> 13,830,020
<TOTAL-COSTS> 13,830,020
<OTHER-EXPENSES> 7,769,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,244,595
<INCOME-PRETAX> (6,561,318)
<INCOME-TAX> (2,099,622)
<INCOME-CONTINUING> (4,461,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,461,696)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
