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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 September 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:
Title of Each Class Name of Each Market
------------------- on Which Listed
---------------
Common Stock, $.001 par value OTC
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 November 10, 1997, 47,266,464 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 OTC Bulletin Board on November 10, 1997 of $.25) of
Consolidated Eco-Systems, Inc. held by non-affiliates of the registrant at that
date was approximately $11,026,440.
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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......................................................... 7
2. Changes in Securities..................................................... 8
3. Defaults Upon Senior Securities........................................... 8
4. Submission of Matters to a Vote of Security Holders....................... 8
5. Other Information......................................................... 8
6. Exhibits and Reports of Form 8-K.......................................... 8
Signatures................................................................ 9
2
<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 September 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 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.
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.
The Company has reached agreements with certain remaining debenture
holders to convert the remaining portions of convertible debentures at a
conversion price of $.45 per share. Each debenture holder converting at such
price provided a complete release of liability to the Company and its officers
and directors. However, the Company is obligated to use its best efforts to
obtain shareholder approval of a plan that would allow for additional stock to
be provided to certain debenture holders who sustained losses by virtue of
making conversions at $.45 per share. As of November 10, 1997, approximately
$1,221,454 of the debentures remain unconverted.
On October 13, 1997, the Company was notified that its listing on
the Nasdaq Stock Market SmallCap Market had been terminated. The decision to
de-list the stock has been appealed to a review committee of the Nasdaq Stock
Market, Inc. The Company has been notified that it may submit additional
documentation for review on or before December 10, 1997. The Company's stock is
currently listed on the Over-the-Counter Bulletin Board operated by the National
Association of Securities Dealers.
3
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Forward Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q
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, 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.
Results of Operations
The following analysis and discussion highlights significant factors
affecting the Company's financial condition and results of operations for the
quarter and nine months ended September 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 above.
The Company's financial information includes information
attributable to the acquisition of 7-7, Inc. on September 30, 1996. Because the
acquisition was accounted for as a purchase, financial results for the quarter
and nine months ended September 30, 1996 do not include results of operations
for 7-7, Inc.. The Company's financial information includes consolidated
financial information for the Company's subsidiaries, including Consolidated
Environmental Services, Inc. ("CESI"), Cierra, Inc. ("Cierra"), Exsorbet
Technical Services, Inc. d/b/a SpilTech Services ("SpilTech"), Eco Acquisition,
Inc. d/b/a Eco Systems ("Eco Systems"), Larco Environmental Services, Inc.
("Larco"), KR Industrial Services of Alabama, Inc. ("KRISA"), and 7-7, Inc.
("7-7").
Sales. Consolidated sales for the three months ended September 30,
1997 were $6,837,600, compared to $7,305,636 for the three months ended
September 30, 1996. The decrease in sales was associated primarily with the
shutdown of unprofitable operations in the Company's construction subsidiary,
CESI. The Company determined during the second quarter of 1997 to cease
operations of CESI due to losses of the subsidiary attributable to bonding
difficulties, smaller profit margins, and increased competition. Total sales of
CESI for the three months ended September 30, 1997 were $21,303, compared to
$1,951,394 for the three months ended September 30, 1996. The decrease in
consolidated sales was also due, in part, to the sale of the emergency response
division of Larco, which was sold during the first quarter of 1997. Larco
revenues for the three months ended September 30, 1996 included revenues from
providing emergency response services.
Consolidated sales for the third quarter of 1997 were attributable
in large part to increased sales efforts in the industrial services division of
the Company, consisting of KRISA, Larco, and SpilTech. For the three months
ended September 30, 1997, sales at KRISA were $1,596,839, sales at Larco were
$1,340,521, and sales at SpilTech were $682,833. For the three months ended
September 30, 1997, overall sales by Eco-Systems, Inc., the Company's
engineering subsidiary, were $1,098,248, while sales at Cierra were $37,684.
During the third quarter of 1997, the Company determined that it was
not profitable to continue operations of Cierra, an engineering subsidiary based
in Little Rock, Arkansas. Cierra was directly competing with Eco Systems, the
Company's primary consulting subsidiary. While operations at Cierra were
discontinued, the majority of Cierra's employees were offered new employment
with Eco Systems.
4
<PAGE>
Gross Profit. For the three months ended September 30, 1997, gross
profit was $1,740,160 or 25.4% as a percentage of sales, as compared to
$1,928,002 or 26.3% as a percentage of sales for the three months ended
September 30, 1996. Total cost of sales for the third quarter of 1997 were
$5,097,441 or 74.5% as a percentage of overall sales revenues, compared to
$5,377,634 or 73.6% as a percentage of overall sales revenues for the three
months ended September 30, 1996. The percentage of gross profit compared to
revenues decreased primarily due to a significant increase of cost of sales at
CESI as a percentage of revenues and the addition of the cost of sales at 7-7 as
a percentage of revenue.
Cost of sales for CESI during the three months ended September 30,
1997 were $263,500 or 1236.9% as a percentage of overall sales revenues. The
amount was attributable to costs related to closing down of operations of CESI.
The Company believes that with this discontinuation of operations that CESI will
not be a significant contributing factor to future sales costs. Cost of sales at
7-7 were $1,992,445 or 96.7% as a percentage of revenues. The Company is
exploring alternatives to decrease the cost of sales as a percentage of revenues
at 7-7. In September, 1997, the Company assigned Samuel Williams, its Chief
Operating Officer, to assist in operations at 7-7. In November, 1997, Mr.
Williams was appointed President of 7-7, overseeing all of the activities of the
7-7 subsidiary.
For the three months ended September 30, 1997, total cost of sales
in the Company's industrial services subsidiaries were $2,111,180 or 58.3% as a
percentage of consolidated sales. Total cost of sales at Eco-Systems for the
same period was $643,526, or 58.6% as a percentage of sales. The Company
believes that continued implementation of its current business plan, including
continued cost cutting and elimination of unprofitable divisions or subsidiaries
will result in an increase in the percentage of gross profitability as compared
to sales.
Total Costs and Expenses. For the three months ended September 30,
1997 and 1996, total costs and expenses were $786,477 and $1,639,904,
respectively. The decrease was due primarily to a decrease in general and
administrative expenses from $1,275,170 in the third quarter of 1996 to $786,477
in the third quarter of 1997. The Company attributes the decrease in general and
administrative expenses to cost cutting and consolidation of certain
administrative functions as part of its current business plan, which resulted in
cost savings to the Company. Total marketing expenses for the third quarter of
1997 were $0, as compared to $364,734 for the third quarter of 1996. The
decrease in marketing expenses was due primarily to implementation of cost
cutting associated with the Company's current business plan, elimination of
certain marketing positions, and by accounting for the salary of the Company's
National Sales Manager as a general and administrative expense.
Other Income (Expense). For the three months ended September 30,
1997, the Company had other expenses of ($587,499), as compared to other
expenses of ($271,424) for the three months ended September 30, 1996. Other
expenses for the third quarter of 1997 included an expense of attributable to
the mortgage and lease of its real estate facility in Mulberry, Arkansas. The
Company is currently negotiating with interrested parties concerning the sale or
lease of the real estate and equipment located on such property.
Net Income. For the three months ended September 30, 1997 and 1996,
net pre-tax income was $366,183 and $16,674, respectively. Net income after
deduction for income tax provisions for the three months ended September 30,
1997 and 1996 was $208,538 and $10,339, respectively. Net income per share for
the third quarter of 1997 and 1996 was approximately $.01 and $.00,
respectively.
Nine Months Ended September 30, 1997 Compared to the Nine Months
Ended September 30, 1996.
Sales. For the nine months ended September 30, 1997 and 1996, sales
were $24,120,390 and $22,419,265, respectively. The increase in sales was due
primarily to increased marketing efforts in the industrial service division of
the Company resulting in total sales of $10,446,520 for the first nine months of
1997 and due to sales of $6,657,588 attributable to 7-7 in the first nine months
of 1997. Total sales from CESI for the first nine months of 1997 were
$2,623,005, compared to $3,787,499 for the first nine months of 1996.
Gross Profit. For the nine months ended September 30, 1997, gross
profit was $4,942,929 or 20.4% as a percentage of sales, as compared to
$8,301,120 or 37% as a percentage of sales for the nine months ended September
30, 1996. Cost of sales for the nine months ended September 30, 1997 were
$19,177,461 or 79.5% as a percentage of revenues, compared
5
<PAGE>
to $14,118,145 or 63% as a percentage of revenues for the nine months ended
September 30, 1996. The percentage of gross profit compared to revenues
decreased primarily due to a significant increase of cost of sales at CESI as a
percentage of revenues and the addition of the cost of sales at 7-7.
Cost of sales for CESI during the nine months ended September 30,
1997 were $2,623,005 or 122.7% as a percentage of revenues. The amount was
attributable to costs related to closing down of operations of CESI. The Company
believes that with this discontinuation of operations that CESI will not be a
significant contributing factor to future sales costs. Cost of sales at 7-7 for
the nine months ended September 30, 1997 were $6,402,177 or 96.2% as a
percentage of revenues.
For the nine months ended September 30, 1997, cost of sales in the
Company's industrial services subsidiaries (KRISA, Larco, and SpilTech) were
$6,955,445 or 66.6% as a percentage of consolidated sales in such subsidiaries.
Cost of sales at Eco-Systems for the same period was $1,918,738 or 54.8% as a
percentage of sales, while cost of sales during the same time period at Cierra
were $480,332, or 83.9% as a percentage of sales.
Total Operating Expenses. For the nine months ended September 30,
1997 and 1996, costs and operating expenses were $8,305,970 and $4,328,266,
respectively. The increase resulted from an increase in general and
administration expenses. For the nine months ended September 30, 1997, general
and administrative expenses were $7,642,099 and $3,172,917, respectively. The
Company has implemented a plan to cut its general and administrative expenses
which includes consolidation of most administrative functions to a centralized
location, utilization of quantity discounts or negotiated prices for
administrative purchases and services, and other costs cuts. The Company
believes that these measures are significantly reducing general and
administrative expenses. Of the $7,642,099 in general and administrative
expenses incurred during the nine months ended September 30, 1997, $6,855,622
were incurred during the first six months of 1997.
Net Income. For the nine months ended September 30, 1997 and 1996,
net pre-tax income (loss) was ($6,195,134) and $3,332,791, respectively. For the
nine months ended September 30, 1997 and 1996 net income (loss) after provisions
for income taxes was ($4,253,158) and $2,066,332, respectively. For the nine
months ended September 30, 1997 and 1996, net income (loss) per share was
approximately ($.14) and $.19, respectively.
Financial Condition and Liquidity
At September 30, 1997, total assets were $8,687,169, reflecting a
decrease from the September 30, 1996 level of $14,946,895. At September 30,
1997, total current liabilities were $19,855,651, reflecting an increase over
the September 30, 1996 level of $14,673,678. This resulted in a current ratio of
.58 and 1.02, respectively at September 30, 1997 and 1996. This level of
liquidity has caused the Company to have some difficulty in satisfying short
term obligations. Therefore, 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 Company has also utilized
methods of more promptly collecting its receivables to satisfy outstanding
obligations. The Company continues to negotiate for more favorable financing
terms with certain lenders.
The level of liquidity was affected by certain adjustments made by
the Company during the second quarter of 1997. During such time period, the
Company made adjustments which affect the current level of liquidity, including
writing down: approximately $667,000 relating to a loss on real estate;
approximately $495,000 resulting from the write down of a long term contract;
approximately $625,000 related to receivables that are uncollectible;
approximately $942,000 related to a contract that is uncollectible;
approximately $1,183,900 related to equipment; approximately $210,000 related to
uncollectible rental income; and approximately $187,000 in prepaid expenses.
During September, 1997, Hibernia National Bank ("Hibernia") and
Larco Environmental Services, Inc. entered into an agreement whereby Hibernia
agreed to allow Larco to place its debt with another institution on or before
November 30, 1997 without further payment of a default interest rate or
declaration of default. The current amount of debt due from Larco to Hibernia is
$697,150. The Company believes that it will be able to place such debt with an
alternative lender within a time frame which is acceptable to Hibernia.
6
<PAGE>
During the three months ended September 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.
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 believes that it
has defenses to payment of the note.
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 Company has negotiated an agreement for
extension of the debt which will be formalized by a signed document after the
preparation of this document.
PART II
Item 1. Legal Proceedings.
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. A
judgment has been entered against the Company in the sum of approximately
$96,365. The judgment has been partially satisfied and the Company continues to
contact the insurance vendor to arrange for suitable time payment of the
judgment amount.
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. While the Company
disputed any liability in the case, a judgment in the amount of approximately
$54,046. The Company deemed that the cost of an appeal would exceed any material
benefit to the Company and has elected to forego an appeal in such proceeding.
The Company believes that the judgment is being registered as of the time of
preparation of this document and is making arrangements with the former employee
for partial payment of the judgment and to arrange for suitable time payment of
the total amount due.
During September, 1997, two former employees of KRISA brought suit
against the Company and KRISA. One suit was brought in the Circuit Court of
Jefferson County, Alabama. The other brought suit in the Circuit Court of
Winston County, Alabama. The employees claim that the Company and KRISA failed
to comply with the terms of contractual arrangements with the individual
employee. Both suits seek damages in excess of $50,000. The Company and KRISA
believe that there are adequate defenses to the litigation and that the
litigation will have no material adverse effect on the Company.
In October, 1997, the Company was notified that a judgment had been
entered against CESI in the County Court of Dallas County, Texas in the total
sum of $13,071. The Company has no acknowledgment that it was ever served with
process in the litigation and is exploring its options in regard to the
litigation.
On or about November 5, 1997, the Company was notified that an Ohio
corporation had brought suit against the Company and 7-7 seeking damages against
7-7 and the Company in the sum of $117,460.66. The Company believes that it has
no liability whatsoever on the alleged claim and does not believe that the claim
will have any material adverse effect on the Company. The Company does not
believe that it was a party to any contractual arrangement. The Company is
investigating the allegations regarding 7-7 at the present time.
The Company was notified in September and October, 1997 that certain
vendors providing services at the site of contractual services being performed
by CESI had made claim against the performance bond surety in connection with
two particular contracts previously performed by CESI. In connection with one of
these jobs, certain sums are being held as a retainage that will be used to
reimburse, in whole or in part, the bonding company. The Company does not
believe that the making of the claims will have a material adverse effect on the
Company.
7
<PAGE>
On September 25, 1997, a vendor of CESI filed suit against CESI in
the Circuit Court of Pulaski County, Arkansas seeking approximately $38,000 for
breach of contract. The Company believes that sums retained in connection with a
particular contract performed by CESI will be available to satisfy in whole, or
in part, the damages claimed. The Company does not believe that the litigation
will have a material adverse impact on the Company.
On October 28, 1997, a vendor of CESI filed suit against CESI in the
Circuit Court of Pulaski County, Arkansas seeking approximately $36,500 for
breach of contract. The Company believes that sums retained in connection with a
particular contract performed by CESI will be available to satisfy in whole, or
in part, the damages claimed. The Company does not believe that the litigation
will have a material adverse impact on the Company
On August 22, 1997, a vendor of 7-7 filed suit against 7-7 and the
Company in the Court of Common Pleas of Dauphin County, Pennsylvania. The suit
seeks approximately $31,000 in damages. The Company continues to investigate the
matter but believes that it is obligated to the vendor. The Company does not
believe that the litigation will have an adverse impact on the Company.
Item 2. Changes in Securities.
During the three months ended September 30, 1997, the holders of
certain of the Company's convertible debentures issued between December 20, 1996
and January 22, 1997 converted such debentures into common stock of the Company
pursuant to a special arrangement. See Item 2, Significant Events Affecting
Operations. As of November 10, 1997, approximately $1,221,454 in such debentures
remain unconverted.
Item 3. Defaults Upon Senior Securities.
The Company was unable during the three months ended September 30,
1997 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. The Company was able to negotiate with
certain holders of debentures for conversion of the debentures into the
Company's common stock at a price equivalent to $.45 per share, which was in
excess of the conversion price stated in the debenture. The Company is obligated
to use its best efforts to seek shareholder approval of a plan which will allow
certain debenture holders converting their debentures at the price of $.45 per
share to receive discounted warrants for the Company's stock to satisfy certain
of their losses.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
The Company incorporates herein Form 8-K filed on August 19, 1997 in
connection with reporting information concerning expected financial results.
8
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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/ Original signed by James J. Connors, Jr.
--------------------------------------------------
JAMES J. CONNORS, JR.
President
Date: November 12, 1997.
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and 1996
September 30, September 30,
1997 1996
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 391,723 $ 2,909,451
Accounts receivable - Net
of allowances $ 5,413,158 5,828,857
Notes receivable $ 0 1,404,126
Inventories - supplies $ 1,062,501 558,197
Other current assets $ 1,819,786 4,246,264
------------ ------------
Total current assets 8,687,168 14,946,895
------------ ------------
Net property, plant and equipment $ 21,366,102 25,058,871
------------ ------------
Other assets
Intangible assets, net $ 5,197,413 14,935,895
Due from shareholders $ 87,368 1,416,532
Deferred income taxes $ 1,420,506
Other assets $ 840,585 398,266
------------ ------------
Total other assets 7,545,872 16,750,693
------------ ------------
Total assets $ 37,599,142 $ 56,756,459
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 1997 1996
------------- -------------
Notes payable $ 11,299,578
Current maturities - LTD $ 731,000 8,321,037
Accounts payable - trade $ 5,345,451 5,709,835
Accrued liabilities $ 1,687,329 642,806
Current deferred income taxes $ 792,293
------------ ------------
Total current liabilities 19,855,651 14,673,678
------------ ------------
Long-term debt $ 3,041,991 9,254,050
------------ ------------
Deferred income tax liability ($ 1,017,979) 692,742
------------ ------------
Shareholders' equity
Common stock $ 15,114 14,606
Additional paid-in capital $ 24,702,242 28,708,015
Retained earnings (deficit) ($ 5,697,877) 3,413,368
------------ ------------
19,019,479 32,135,989
Treasury stock, at cost (3,300,000)
------------ ------------
Total shareholders' equity 15,719,479 32,135,989
------------ ------------
Total liabilities and equity $ 37,599,142 $ 56,756,459
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96 Ended 9/30/97 Ended 9/30/96
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 6,837,600 $ 7,305,636 $ 24,120,390 $ 22,419,265
Cost of sales 5,097,441 5,377,634 19,177,461 14,118,145
------------ ------------ ------------ ------------
Gross profit 1,740,159 1,928,002 4,942,929 8,301,120
------------ ------------ ------------ ------------
Cost and expenses
Marketing expenses 0 364,734 663,871 1,155,349
General and administrative 786,477 1,275,170 7,642,099 3,172,917
------------ ------------ ------------ ------------
Total cost and expenses 786,477 1,639,904 8,305,970 4,328,266
------------ ------------ ------------ ------------
Income (loss) from operations 953,682 288,098 (3,363,041) 3,972,854
Other income (expense), net (587,499) (271,424) (2,832,093) (640,063)
------------ ------------ ------------ ------------
Income before income tax provisions (benefits) 366,183 16,674 (6,195,134) 3,332,791
Income tax (benefits) provisions 140,211 6,335 (1,941,976) 1,266,459
------------ ------------ ------------ ------------
Net income $ 225,972 $ 10,339 ($ 4,253,158) $ 2,066,332
============ ============ ============ ============
Earnings per common share
and common share equivalent 0.01 0.00 (0.14) 0.19
Weighted average shares outstanding 34,551,556 10,859,539 31,274,218 10,859,539
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Consolidated Eco-Systems, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended 9/30/97 Ended 9/30/96 Ended 9/30/97 Ended 9/30/96
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash (used) provided by operating activities ($ 1,676,902) $ 1,609,016 ($ 555,935) $400,467
------------ ------------ ------------ ------------
Cash flows from investing activities:
Net purchase of property, plant, and equipment
and proceeds from sale of property plant and
equipment (425,520) (5,102,988) (4,228,567) (10,147,583)
Change in other assets (303,535) (337,605) (716,749) (814,151)
------------ ------------ ------------ ------------
Net cash (used) provided by investing activities (729,055) (5,440,593) (4,945,316) (10,961,734)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds (repayments) on notes payable and
long-term debt 2,391,340 767,264 3,162,008 9,228,477
Recision of stock options 0 0 0 0
Issuance of equity debentures 0 0 0 0
Issuance of common stock 260,084 3,313,235 2,871,089 3,313,235
------------ ------------ ------------ ------------
Net cash (used) provided by financing activities 2,391,340 4,080,499 3,162,008 12,541,712
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (14,617) 248,922 (2,339,243) 1,980,445
Cash and cash equivalents - beginning of the period 406,340 2,608,076 2,730,966 877,183
------------ ------------ ------------ ------------
Cash and cash equivalents - ending of the period $391,723 $2,856,998 $391,723 $2,857,628
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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 nine months ended September 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.
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 391,723
<SECURITIES> 0
<RECEIVABLES> 5,665,554
<ALLOWANCES> (242,396)
<INVENTORY> 1,062,501
<CURRENT-ASSETS> 8,687,168
<PP&E> 21,366,102
<DEPRECIATION> (3,904,636)
<TOTAL-ASSETS> 37,599,142
<CURRENT-LIABILITIES> 19,855,651
<BONDS> 0
0
0
<COMMON> 15,114
<OTHER-SE> 15,704,365
<TOTAL-LIABILITY-AND-EQUITY> 37,599,142
<SALES> 24,120,390
<TOTAL-REVENUES> 24,120,390
<CGS> 19,177,461
<TOTAL-COSTS> 19,177,461
<OTHER-EXPENSES> 8,305,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,614,595
<INCOME-PRETAX> (4,253,158)
<INCOME-TAX> (1,941,976)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,253,158)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
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