As filed with the U.S. Securities and Exchange Commission on May 6, 1999
SEC File No.: 333-72345
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
TECHNICAL ENVIROMENT SOLUTIONS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 3273 98-0149351
-------------------------- ------------------------- ------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code No.)
C/O TES GmbH
25 Impler Strasse
81371, Munich
Germany
(Address of registrant's principal executive offices)(Postal Code)
---------------
Copies to:
Henry F. Schlueter Paul Maricle
Schlueter & Associates, P.C. Rossi & Maricle P. C.
1050 17th Street, Suite 1700 370 17th Street, Suite 4250
Denver, Colorado 80265 Denver, Colorado 80202-4004
(303) 292-3883 (303) 623-5600
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. /___/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /___/
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /___/ If delivery of the prospectus is expected to be
made pursuant to Rule 434, please check the following box. /___/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------
Title of each class of Amount to Proposed maximum Proposed maximum Amount of
Securities to be to be offering aggregate registration
registered registered(1) price per share(2) offering price fee
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
no par value 8,300,237 $3.00 $24,900,711 $6,923.00 (3)
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) Based on the number of shares of TES common stock to be issued to the
stockholders of ENTECS upon consummation of the merger as provided in the
merger agreement attached as Appendix A to the proxy statement/prospectus
forming a part of this Registration Statement.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 adopted under the Securities Act of 1933, as amended.
(3) Fee previously paid with initial filing.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
[ENTECS LOGO]
[________________, 1999]
Dear Stockholder:
I am pleased to forward the enclosed proxy statement/prospectus for the
special meeting of stockholders of Environmental Technologies and Software
Solutions, Inc. ("ENTECS") to be held on ______________, 1999 at ____ a.m. local
time, at ENTECS' facilities located at 25 Impler Strasse, 81371, Munich,
Germany. The purpose of the special meeting is vote upon the combination of
ENTECS with Technical Environment Solutions, Inc. ("TES") through the merger of
TES Acquisition Corp. ("TES Acquisition"), a wholly-owned subsidiary of TES,
with and into ENTECS.
The merger is subject to the terms and conditions of an agreement and plan
of merger, dated as of ________________, 1999, by and among TES, TES
Acquisition, and ENTECS. In the merger, TES Acquisition will be merged with and
into ENTECS; ENTECS will be the surviving corporation and will become a
wholly-owned subsidiary of TES. As a result of the merger, each outstanding
share of ENTECS' common stock will be converted, without any action on the part
of the stockholder, into the right to receive 6.93 shares of TES common stock.
The shares of TES common stock held by TES stockholders prior to the merger will
remain unchanged by the merger. Based on the number of shares of ENTECS common
stock outstanding as of December 31, 1998, we expect that, as a result of the
merger, TES will issue approximately 11,355,643 million shares of TES common
stock.
The ENTECS board of directors has carefully reviewed and considered the
terms and conditions of the merger agreement and the proposed merger. The board
unanimously believes the terms and conditions of the merger agreement and the
proposed merger are fair to, and in the best interest of, the ENTECS
stockholders. The board has unanimously approved the terms and conditions of the
merger agreement and the merger, and unanimously recommends that the ENTECS
stockholders vote "For" approval of the merger agreement and the merger.
The merger agreement and the consummation of the merger must be approved by
the holders of a majority of the outstanding shares of ENTECS common stock. Your
vote on this matter is very important. We urge you to review carefully the
enclosed material and to return your proxy promptly.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE MARK, SIGN,
DATE AND PROMPTLY RETURN YOU PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN
THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. YOU SHOULD NOT SEND IN THE STOCK
CERTIFICATE(S) FOR YOUR ENTECS COMMON STOCK AT THIS TIME.
On behalf of the board, I thank you for your support and urge you to vote
FOR approval of the merger agreement and the consummation of the merger.
Sincerely,
----------------------------------------
Gerd Behrens, President
<PAGE>
ENVIRONMENTAL TECHNOLOGIES AND SOFTWARE SOLUTONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ____________________, 1999
To the Stockholders of Environmental Technologies and Software Solutions, Inc.
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Environmental
Technologies and Software Solutions, Inc., a Colorado corporation ("ENTECS"),
will be held at ________a.m., local time, on __________________, 1999 at ENTECS'
facilities located at 25 Impler Strasse, 81371, Munich, Germany for the
following purposes:
1. To vote upon a proposal to approve (a) the agreement and plan of
merger, dated as of _________________, 1999, by and among Technical
Environment Solutions, Inc., a Colorado corporation ("TES"), TES
Acquisition Corp., a Colorado corporation and a wholly-owned
subsidiary of TES ("TES Acquisition"), and ENTECS, and (b) the merger
of TES Acquisition with and into ENTECS. Upon the merger, among other
things, ENTECS will become a wholly-owned subsidiary of TES, and each
outstanding share of ENTECS common stock, no par value per share, will
be converted, without any action on the part of the stockholder, into
the right to receive 6.93 shares of TES common stock.
2. To grant the board of directors of ENTECS discretionary authority to
adjourn the special meeting to solicit additional votes for approval
of the merger agreement and the merger.
3. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of the special
meeting.
The foregoing items of business are more fully described in the proxy
statement/prospectus, which is attached to and made a part of this notice, and
which you are urged to read carefully.
The board of directors has fixed the close of business on _____________,
1999 as the record date for determining stockholders entitled to notice of and
to vote at the special meeting and any adjournment or postponement of the
special meeting. Approval of the merger agreement and the merger will require
the affirmative vote of the holders of a majority of the outstanding shares of
ENTECS common stock.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------
Frank Behrens, Secretary
[LOCATION]
__________, 1999
1
<PAGE>
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT
THE SPECIAL MEETING. ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN
PERSON EVEN IF SUCH STOCKHOLDER HAS RETURNED A PROXY.
2
<PAGE>
PROXY STATEMENT/PROSPECTUS
ENVIRONMENTAL TECHNOLOGIES SOLUTIONS, INC.
PROXY STATEMENT
For Special Meeting of Stockholders
To be Held on _____________________
The boards of directors of Technical Environment Solutions, Inc. ("TES")
and Environmental Technologies and Software Solutions, Inc. ("ENTECS") have
agreed to merge TES Acquisition Corp. ("TES Acquisition"), a subsidiary of TES,
into ENTECS. ENTECS would become a wholly-owned subsidiary of TES. ENTECS
stockholders would receive 6.93 shares of TES common stock for each share of
ENTECS common stock which they owned before the merger.
Your vote on the merger is important to us. Please vote your shares of
common stock by completing the enclosed proxy card and returning it to us in the
enclosed envelope. This proxy statement has information about the special
meeting of ENTECS stockholders and was prepared by management for the board of
directors.
This proxy statement was first mailed to stockholders on ____________,
1999.
- --------------------------------------------------------------------------------
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
PROSPECTUS
______________ Shares of Common Stock
no par value
The merger cannot be completed unless the ENTECS stockholders approve it.
The ENTECS board of directors has scheduled a special meeting of stockholders to
vote on the merger as follows:
- --------------------------------------------------------------------------------
(Day and Date)
- --------------------------------------------------------------------------------
(Time)
- --------------------------------------------------------------------------------
(Place)
This document gives you detailed information about the two companies and
the proposed merger. TES has provided the information about TES and ENTECS has
provided the information about ENTECS. Please see "Additional Information" on
page __ for additional information about TES and ENTECS on file with the U.S.
Securities and Exchange Commission.
---------------------------------
The above matters are discussed in detail in this proxy statement/prospectus.
The proposed merger is a complex transaction. You should read and carefully
consider this entire proxy statement/prospectus, particularly the risk factors
beginning on page __.
---------------------------------
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this proxy statement/prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
---------------------------------
___________, 1999.
3
<PAGE>
TABLE OF CONTENTS
Page
Question and Answers About the ENTECS/TES Merger 6
Summary 9
General ...................................................... 9
The Parties, Affiliation and Market
Information.................................................. 9
The Special Meeting .......................................... 10
The Merger ................................................... 11
Summary Historical and Pro Forma Financial Data .............. 12
Risk Factors .......................................................... 16
TES May Not Be Able to Profitably Operate Its Own Recycling
Facility or Its Own Job Training Program .................... 16
TES Needs Additional Financing ............................... 16
TES is Dependent on Certain Key Employees .................... 16
TES Derives a Significant Portion of its Revenues
from One Customer ........................................... 16
TES' Business is Dependent upon Environmental Regulation ..... 17
TES and its Customers are Subject to Regulation .............. 17
TES is Exposed to Potential Environmental Liability .......... 17
Trading of TES' Securities on the Electronic Bulletin Board
and Classification as Penny Stock May Negatively Impact
the Liquidity of TES' Securities ............................ 17
TES Must Respond to Technological Change ..................... 18
TES Faces Competition From Other Recyclers and From
New Products and Materials ................................... 18
There is a Limited Public Market for TES' Common Stock ....... 18
TES' Stock Price May Fluctuate Based on Internal
and External Factors ........................................ 19
TES' Management Doesn't Intend to Pay Dividends .............. 19
Current Management Will Continue to Control TES After
the Merger .................................................. 19
The Trading Price of TES' Stock Could be Negatively Affected
by Future Sales of the Shares to be Issued in the Merger
and Upon Exercise of Options Which Could be Granted in
the Future .................................................. 19
Forward-Looking Statements ............................................ 19
The Special Meeting ................................................... 20
General ...................................................... 20
Matters to be Considered at the Special Meeting .............. 20
Voting at the Special Meeting; Record Date; Abstentions ...... 21
Proxies ...................................................... 21
Dissenters' Rights ........................................... 22
Expenses of Solicitation ..................................... 22
Recommendation of the Board of Directors ..................... 22
The Merger ............................................................ 23
Background and Reasons for the Merger ........................ 23
Effects of the Merger......................................... 23
Recommendation of the Board of Directors ..................... 24
Federal Income Tax Considerations in the United States ....... 24
Income Tax Considerations in Germany ......................... 25
Dissenters' Rights ........................................... 27
Interests of Certain Persons in the Merger ................... 27
4
<PAGE>
Financing of the Merger ...................................... 29
Accounting Treatment ......................................... 29
The Merger Agreement .................................................. 30
General ...................................................... 30
Effective Time of the Merger ................................. 30
Exchange of Certificates ..................................... 30
Fractional Shares ............................................ 30
Representations .............................................. 31
Conduct of Business Pending the Merger ....................... 31
Conditions to Consummation of the Merger ..................... 32
Termination .................................................. 33
Expenses and Fees ............................................ 34
Unaudited Pro Forma Combined Condensed Financial Statements ........... 35
Technical Environment Solutions, Inc. and Environmental
Technologies and Software Solutions, Inc. Pro Forma
Combined Condensed Balance Sheet ............................ 36
Technical Environment Solutions, Inc. and Environmental
Technologies and Software Solutions, Inc. Pro Forma
Combined Condensed Statement of Operations for the Year
ended December 31, 1998 ..................................... 37
Technical Environment Solutions, Inc. and Environmental
Technologies and Software Solutions, Inc. Notes to Pro
Forma Combined Condensed Financial Statements ............... 38
Selected Financial Data of TES ........................................ 39
TES Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 40
Selected Financial Data of ENTECS ..................................... 44
ENTECS Management's Discussion and Analysis of Financial Condition
and Resultsof Operations .................................... 45
Business of TES ....................................................... 46
Business of ENTECS .................................................... 53
Material Contracts Between TES and ENTECS ............................. 56
Security Ownership of Certain Beneficial Owners and Management of TES . 58
Directors and Executive Officers of TES ............................... 59
Certain Relationships and Related Transactions ........................ 63
Security Ownership of Certain Beneficial Owners and
Management of ENTECS ........................................ 64
Directors and Executive Officers of ENTECS ............................ 65
Description of TES Capital Stock ...................................... 67
Legal Opinions ........................................................ 67
Experts ............................................................... 67
Additional Information ................................................ 68
Index to Financial Statements ......................................... 69
Appendix A -- Agreement and Plan of Merger (1)
Appendix B -- Opinion of Schlueter & Associates, P.C.
Appendix C -- Opinion of Rossi & Maricle, P.C.
Appendix D -- Section 7-113-102 of the Colorado Business Corporation Act
(1) Previously filed.
5
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE ENTECS/TES MERGER
Q: Why are the two companies proposing to merge?
A: The companies have complementary product lines. After the merger, we expect
to offer customers a wider range of environmental protection products and
to capture a larger market share for these products.
In addition, after the merger, TES will have a larger base of existing
customers, allowing us to target these customers with incremental product
and service offerings and to increase revenues from these offerings.
Also, if we are successful in integrating the ENTECS and TES products and
thus expanding our sales, the larger base of products and sales revenue
should make it easier for us to raise additional capital.
To review the reasons for the merger in greater detail, please see pages __
through __.
Q: What will I receive in the merger?
A: Each ENTECS stockholder will receive 6.93 shares of TES common stock for
each share of ENTECS common stock they own as of the date of the merger. No
fractional shares will be issued in connection with the merger. Rather,
ENTECS stockholders will receive cash instead of fractional shares.
If you own shares of TES common stock as of the date of the merger, you
will continue to hold those shares after the merger.
Q: What will the relative ownership percentages of the ENTECS and TES
stockholders be following the merger?
A: Immediately after the merger, TES stockholders will own approximately 31.5%
of the outstanding TES shares and ENTECS stockholders will own
approximately 68.5% of the outstanding TES shares.
Q: When will ENTECS stockholders be permitted to sell the TES shares they
receive in the merger?
A: Immediately following the merger, each ENTECS stockholder, except those who
are officers, directors, or 10% stockholders of TES, will be entitled to
sell or transfer the TES common stock received by that stockholder in the
merger.
Q: When and where is the meeting?
A: The ENTECS meeting is scheduled to take place on ________, 1999 at 9:00
a.m. at 25 Impler Strasse, 81371, Munich, Germany.
6
<PAGE>
Q: When do you expect the merger to be completed?
A: We expect to complete the merger shortly after receiving stockholder
approval at the meeting.
Q: What do I need to do now?
A: If you are an ENTECS stockholder, please carefully read and consider the
information contained in this document, then fill out and sign your proxy
card. Please mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares may be represented at the meeting.
Your proxy card will instruct the persons named on the card to vote your
shares at the meeting as you direct on the card. If you do not vote or you
abstain, the effect will be a vote against the merger. The Board of
Directors of ENTECS unanimously recommends that you vote in favor of the
proposed merger.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker to vote
your shares.
Q: May I change my vote after I have mailed my signed proxy card?
A: You may change your vote at any time before your proxy is voted at the
meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy
card to ENTECS at 25 Impler Strasse, 81371, Munich, Germany. Third, you can
attend the meeting and vote in person. Simply attending the meeting,
however, will not revoke your proxy; you must vote at the meeting. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
Q. Should I send in my stock certificates now?
A: No. After the merger is completed, ENTECS stockholders will receive written
instructions for exchanging their stock certificates. TES stockholders will
keep their existing certificates.
Q: What are the tax consequences of the merger?
A: It is anticipated that the exchange of shares by ENTECS stockholders in the
merger will be tax-free to ENTECS stockholders for U.S. federal income tax
purposes, except for taxes due on cash received instead of fractional
shares. The merger will be tax free to TES stockholders for U.S. federal
income tax purposes. However, its anticipated that there may be tax
liability which may be incurred to German citizens under Germany's tax
provisions. To review the tax consequences to stockholders in greater
detail, see pages __ through __.
7
<PAGE>
Q: What will the ENTECS stockholders' tax basis be in the TES common stock
they receive in the merger?
A: The tax basis in the shares of TES common stock each ENTECS stockholder
receives in the merger will equal the current tax basis in such
stockholder's ENTECS common stock, reduced by the amount of basis allocable
to fractional shares for which the stockholder receives a cash payment.
Q. Who can help answer my questions about the merger?
A. If you have more questions about the merger, you should contact:
Gerd Behrens, President
Technical Environment Solutions, Inc.
25 Impler Strasse
81371, Munich
Germany
8
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this proxy statement/prospectus. We refer you to the more detailed
information contained in this proxy statement/prospectus and the appendices to
this proxy statement/prospectus.
General
This proxy statement/prospectus relates to the proposed merger of TES
Acquisition with and into ENTECS in accordance with an agreement and plan of
merger, dated ________, 1999. A copy of the merger agreement is attached to this
proxy statement/prospectus as Appendix A.
The Parties, Affiliation and Market Information
-----------------------------------------------
TES TES is a non-operating holding company which conducts
operations in Germany through two wholly-owned German
subsidiaries - Technical Environment Solutions GmbH and TES
Oecon AG. Since 1994, TES has been engaged in the marketing
of recycling services on a contract basis primarily for
electronic scrap and other valuable waste materials in
cooperation with specialist waste disposal companies. The
address and telephone number for TES and its subsidiaries
are: Technical Environmental Solutions, Inc., c/o TES GmbH,
25 Impler Strasse, 81371, Munich, Germany; Telephone No. 49
089 720 15 100.
ENTECS ENTECS is a non-operating holding company which conducts
operations entirely in Germany through two wholly-owned
German subsidiaries - ENTECS Umwelttechnik GmbH and ENTECS
Software und Umweltmanagement GmbH. ENTECS is active in the
recycling of various waste products within the environmental
protection industry, which is expected to grow rapidly due
to increasing investments being made to comply with
environmental regulation by both private enterprises and
public institutions. The environmental protection industry
is also expected to continually create new jobs because of
the dynamic growth in the area. ENTECS holds the exclusive
licensing rights to a new recycling system for the capture
and re-use of cement waste and waste water that is generated
by concrete mixing plants. The system, known as the
"BRS-Compact," is in the process of being patented both as a
technology and as a process. ENTECS' subsidiary, ENTECS
Umwelttechnik GmbH, owns an artificial peat production
system which produces three grades of high-quality
all-natural artificial peat products. The address and
telephone number for ENTECS and its subsidiaries is
Environmental Technologies and Software Solutions, Inc., c/o
ENTECS Umwelttechnik GmbH, 25 Impler Strasse, 81371, Munich
Germany; Telephone No. 49 089 720 15 300.
Affiliation TES and ENTECS may be considered to be "affiliates" as that
term is defined in the rules and regulations under the
Securities Act of 1933, as amended because of the common
9
<PAGE>
stock ownership of the two companies vested in members of
the Behrens family, and the directorships and executive
offices held by Gerd Behrens and Frank Behrens in both
companies. Further, members of the Behrens family may be
considered to be "promoters" and "parents" of both TES and
ENTECS within the meaning of the rules and regulations
promulgated under the Securities Act.
Market
Information TES' common stock began trading in the over-the-counter
market during the fourth calendar quarter of 1998. The first
quotation for TES' common stock was reported in the NASD's
Electronic Bulletin Board on October 23, 1998. The high bid
during the period from October 23 to December 31, 1998, was
$3.50 and the low bid was $0.75. The closing bid price was
$1.75 and the closing ask price was $3.625 on March 31,
1999.
There is no public market for ENTECS' common stock. From
inception to the present, ENTECS offered its common stock in
private sales at prices ranging from $5.81 per share to
$7.00 per share.
The Special Meeting
Time, Date and
Place The special meeting of ENTECS' stockholders will be held on
_______________, 1999, at _______ a.m., local time, at 25
Impler Strasse, 81371, Munich, Germany.
Record Date;
Shares Entitled
to Vote Only holders of record of shares of ENTECS common stock at
the close of business on ___________, 1999 are entitled to
notice of and to vote at the ENTECS special meeting. As of
that date, there were _______________ shares of ENTECS
common stock outstanding. Each share will be entitled to one
vote on each matter acted upon at the special meeting.
Purpose of the
Meeting The purpose of the ENTECS special meeting is to vote upon a
proposal to approve the merger agreement and the merger of
TES Acquisition with and into ENTECS.
Votes Required The merger must be approved by the holders of a majority of
the outstanding shares of ENTECS common stock. TES
stockholders do not need to approve the merger; however, the
board of directors of TES has approved the merger and TES,
as the sole stockholder of TES Acquisition, will vote in
favor of the merger. The officers and directors of ENTECS,
who beneficially own 890,000 shares of ENTECS common stock,
or approximately 54.3% of issued and outstanding shares,
have advised that they intend to vote all shares which they
beneficially own in favor of the merger.
10
<PAGE>
Dissenters'
Rights Any holder of record of ENTECS common stock who does not
vote in favor of the merger and delivers a demand for
payment prior to the vote on the merger at the ENTECS
special meeting may demand payment for his or her shares if
the merger is approved. Failure to comply in a timely manner
with each of the procedural requirements specified by
Colorado law will result in the loss of dissenters' rights.
See "The Merger - Dissenters' Rights."
Special Approvals Except for the registration statement of which this proxy
statement/prospectus is a part being declared effective by
the United States Securities and Exchange Commission and the
filings that must be made with the Colorado Secretary of
State's office to effect the merger, management is not aware
of any federal or state regulatory compliance requirements
that must be met or approvals that must be obtained for the
merger to occur.
The Merger
Effects of the
Merger Upon consummation of the merger, TES Acquisition, a
wholly-owned subsidiary of TES, will be merged with and into
ENTECS and ENTECS will become a wholly-owned subsidiary of
TES. Each share of ENTECS common stock outstanding
immediately prior to the merger will be converted into the
right to receive 6.93 shares of TES common stock. Based upon
the number of shares of ENTECS common stock expected to be
outstanding immediately prior to the merger, the
stockholders of ENTECS will have the right to receive an
aggregate of approximately 11,355,650 shares of TES common
stock upon consummation of the merger, which will constitute
approximately 68.5% of the TES common stock issued and
outstanding after the merger.
Following the merger, the board of directors of TES will
consist of Gerd Behrens, Frank Behrens, and Dieter
Gastinger. Jutta Behrens, who is presently a director of
TES, and Yvonne Marquard, who is presently a director of
ENTECS, will resign at the effective time of the merger. The
executive officers of TES following the merger are
anticipated to be: Gerd Behrens-Chairman of the Board and
President, Frank Behrens-Secretary and a Director, Jutta
Behrens-Treasurer, and Dieter Gastinger-Senior Vice
President. The articles of incorporation and bylaws of TES,
as in effect at this time, will govern the rights, duties
and privileges of the TES stockholders after the merger.
Management does not believe that there are any material
differences between the rights set forth in the articles of
incorporation and bylaws of ENTECS and those set forth in
the articles of incorporation and bylaws of TES.
11
<PAGE>
Reasons for the
Merger The companies have complementary product lines. After the
merger, we expect to offer customers a wider range of
environmental protection products and to capture a larger
market share for these products. As a result, management
expects the merger to result in administrative efficiencies,
increased financial strength, and increased market
potential, including global markets, for the added products
that TES will acquire from ENTECS. Management expects that
TES will be able to better position itself in the
environmental protection industry as a result of the merger
with a combination of ENTECS' innovative technologies and
TES' certified recycling services. Management believes that
as a result of the merger, TES also will be more efficient
in its services to its customers and assistance to them in
complying with government environmental regulation since all
activities will be conducted under the umbrella of TES. In
addition, after the merger, TES will have a larger base of
existing customers, allowing us to target these customers
with incremental product and service offerings and to
increase revenues from these offerings. Also, if we are
successful in integrating the ENTECS and TES products and
thus expanding our sales, the larger base of products and
sales revenue should make it easier for us to raise
additional capital.
Recommendation
of the Board of
Directors ENTECS' board of directors has approved the merger by
unanimous vote, believes the merger is in the best interests
of ENTECS' stockholders, and recommends its approval by
ENTECS stockholders.
Certain United
States Federal
Income Tax
Considerations Management expects that the merger will constitute a
tax-free reorganization for federal income tax purposes and
that ENTECS stockholders who are U.S. citizens will not
recognize gain with respect to the shares of TES common
stock received by them as a result of the merger. See "The
Merger - United States Federal Income Tax Considerations."
Certain German
Income Tax
Considerations Management expects that some ENTECS stockholders may
recognize taxable income for German income tax purposes with
respect to the shares of TES common stock received by them
as a result of the merger. See "The Merger - Income Tax
Considerations in Germany."
12
<PAGE>
Effective Time of
the Merger Management expects the merger to become effective on
____________, 1999, at the time the articles of merger
between ENTECS and TES Acquisition are filed with the
Colorado Secretary of State and certain other conditions set
forth in the merger agreement are satisfied. See "The Merger
Agreement - Effective Time of the Merger."
13
<PAGE>
Summary Historical and Pro Forma Financial Data
Set forth below are summary historical financial data and comparative
per-share data of TES and ENTECS. The summary historical financial data and
comparative per-share data are based upon the historical financial statements of
TES and ENTECS, including the notes to those financial statements, included at
the end of this proxy statement/prospectus, and should be read in conjunction
with those financial statements. The summary pro forma combined condensed
financial data should be read in conjunction with the unaudited pro forma
combined condensed financial statements, including the notes to those unaudited
pro forma financial statements, appearing elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Summary Financial Data
Year Ended December 31,
-----------------------------------------------------------------------------------
1995 1996 1997 1998 1998
Statement of Operations Data: DM DM DM DM US $
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 577,564 293,814 427,822 610,056 365,960
Gross Profit 226,200 116,471 248,132 407,882 244,680
Income (loss) from operations (97,772) (165,143) (638,564) (996,486) (597,772)
Net income (loss) (121,587) (207,420) (666,092) (1,066,813) (639,960)
Earnings (loss) per share (0.08) (0.14) (0.40) (0.61) (0.37)
December 31, 1998
-----------------
DM US $
------ ------
Balance Sheet Data:
Working capital (168,467) (101,060)
Current assets 292,335 175,366
Current liabilities 460,802 276,426
Total assets 814,977 488,888
Total liabilities 979,471 587,565
Stockholders' equity (164,494) (98,677)
14
<PAGE>
Environmental Technologies and Software Solutions, Inc.
Summary Financial Data
Year Ended December 31,
-----------------------
1997 1998 1998
---- ---- ----
Statement of Operations Data: DM DM US $
Revenue -- 69,369 41,613
Income (loss) from Operation (343,614) (1,393,650) (827,622)
Net income (loss) (344,625) (1,378,707) (817,775)
Earnings (loss) per share (0.33) (0.99) (0.59)
December 31, 1998
-----------------
DM US $
------ ------
Balance Sheet Data:
Working capital (deficit) (78,743) (47,235)
Current assets 571,462 342,809
Current liabilities 650,205 390,044
Total assets 2,527,699 1,516,315
Total liabilities 650,205 390,044
Stockholders' equity 1,877,494 1,126,271
15
<PAGE>
Technical Environment Solutions, Inc.
and
Environmental Technologies and Software Solutions, Inc.
Summary Unaudited Pro Forma Combined Condensed Financial Data
Year Ended
December 31, 1998
-----------------
DM
Statement of Operations Data:
Sales 679,425
Gross profit 463,247
Net income (loss) (2,445,520)
Income (loss) per share (0.19)
December 31, 1998
-----------------
DM
Balance Sheet Data:
Working capital (247,210)
Current assets 863,797
Current liabilities 1,111,007
Total assets 3,054,007
Total liabilities 1,341,007
Stockholders' equity 1,713,000
</TABLE>
16
<PAGE>
RISK FACTORS
The risk factors discussed below should be considered in conjunction with
the other information contained in this proxy statement/prospectus.
TES May Not be Able to Profitably Operate Its Own Recycling Facility or Its
Planned Job Training Program . Although TES has been in business since 1994,
until recently its operations consisted mainly of the marketing and sale of
recycling services to larger companies. TES did not have its own recycling
facility but contracted as a "middle-man" to deliver material from larger
companies to certain recyclers. Approximately one year ago, TES commenced
operating its own recycling facility. There can be no assurance that it will be
able to successfully market and conduct its recycling services. Further,
although TES has developed plans to open a job training program for the
recycling industry, there can be no assurance that it will be able to
successfully open its job training facility or that, if opened, TES will be able
to operate the facility on a profitable basis. There can be no assurance that,
even after the expenditure of substantial funds and efforts, TES will ever
achieve or maintain an adequate level of business or profitability. The failure
to successfully market, sell, and conduct recycling operations would have a
material adverse effect on TES' financial condition and results of operations.
The failure to successfully open its job training facility and operate that
facility on a profitable basis could also have a material adverse effect on TES'
financial condition and results of operations.
TES Needs Additional Financing. TES' business is capital intensive. TES is
currently experiencing a liquidity crisis and must raise additional funds.
Further, TES has not generated sufficient cash-flow to fund its operations and
activities. TES has no commitments for any future financing and there can be no
assurance that TES will be able to obtain additional financing in the future
from either debt or equity financings, bank loans, or other sources on
acceptable terms or at all. If available, any additional equity financings may
be dilutive to TES' stockholders and any debt financings may contain restrictive
covenants and additional debt service requirements, which could adversely affect
TES' operating results. If TES is unable to obtain necessary financing, it will
be required to significantly curtail its activities or cease operations.
TES Is Dependent on Certain Key Employees. TES' success depends to a
significant extent upon the continued services of Gerd Behrens, its president,
and Frank Behrens, its secretary, and after the merger it will also depend on
the services of Dieter Gastinger, a director and consultant to ENTECS. The loss
of any of these persons could have a material adverse effect on TES' results of
operations. Further, TES believes that its success will depend in large part
upon its ability to attract and retain highly skilled technical, managerial,
sales, and marketing personnel. There can be no assurance that TES will be
successful in attracting and retaining the personnel it requires to develop and
market its recycling business or its job training program in a successful
manner. Presently, TES' wholly owned subsidiary, TES GmbH, has entered into an
employment agreement with Gerd Behrens to ensure the availability of his
services to the subsidiary. The employment agreement may be terminated by either
party only upon six months notice. In addition, TES has a consulting agreement
with Frank Behrens personal consulting firm.
TES Derives a Significant Portion of its Revenues from One Customer. A
significant portion of TES' revenues have been derived from a limited number of
customers. In fiscal 1998, revenues from TES' largest customer amounted to 10%
of its total revenues, and in fiscal 1997, four customers each accounted for
17
<PAGE>
10%, or 40% total, of TES' total revenues. TES' management expects that TES will
continue to be dependent upon a limited number of customers for significant
portions of its revenues in future periods. There can be no assurance that
revenues from customers that accounted for significant revenues in past periods,
individually or as a group, will continue, or if continued will reach or exceed
historical levels in any future period. TES' operating results may in the future
be subject to substantial period-to-period fluctuations as a consequence of such
customer concentration.
TES' Business is Dependent on Environmental Regulation. German federal,
state, and local environmental legislation and regulations mandate stringent
waste management and operations practices, which require substantial capital
expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by TES. The level of enforcement activities by federal, state, and local
environmental protection and related agencies, and changes in regulations and
waste generator compliance activities, will also affect demand. To the extent
that the burdens of complying with such laws and regulations may be eased as a
result of, among other things, political factors, or that suppliers of
manufacturing by-products and other industrial wastes find alternative means to
comply with applicable regulatory requirements, TES' ability to procure such by
products and wastes and the demand for its services could be adversely affected,
which could have a material adverse effect on TES' business, financial
condition, and results of operations. Any changes in these regulations which
increase compliance standards may require TES to change or improve its
processes.
TES and its Customers are Subject to Regulation. TES and its customers
operate in a highly regulated environment, and any future facilities may be
required to have various federal, state, and/or local government permits and
authorizations, registrations, and/or exemptions. Any of these permits or
approvals may be subject to denial, revocation, or modification under various
circumstances. Failure to comply with the conditions of such permits, approvals,
registrations, authorizations, or exemptions may adversely affect the operation
of TES' business and may subject TES to federal, state, or locally-imposed
penalties. TES' ability to satisfy the permitting requirements for a particular
facility does not assure that permitting requirements for other facilities will
be satisfied. In addition, if new environmental legislation is enacted or
current regulations are amended or are interpreted or enforced differently, TES
or its customers may be required to obtain additional operating permits,
registrations, certifications, exemptions, or approvals. There can be no
assurance that TES or its customers will meet all of the applicable regulatory
requirements.
TES is Exposed to Potential Environmental Liability. TES' business exposes
it to the risk that harmful substances may be released or escape into the
environment from its facilities, processes, or equipment, resulting in potential
liability for the clean-up or re-mediation of the release and/or potential
personal injury associated with the release. Additionally, TES is potentially
subject to regulatory liability for the generation, transportation, treatment,
storage, or disposal of waste, both hazardous and non-hazardous, if it does not
act in accordance with the requirements of federal or state hazardous waste
regulations or facility specific regulatory determinations, authorizations, or
exemptions.
18
<PAGE>
TES also may be exposed to certain environmental risks resulting from the
actions of the suppliers of the products that it recycles and other suppliers of
industrial waste. Although TES maintains general liability insurance, this
insurance is subject to coverage limits and generally excludes coverage for
losses or liabilities related to environmental damage or pollution. Although TES
conducts and plans to conduct its operations prudently with respect to
environmental regulations and management plans to structure TES' relationships
with customers and contractors in a manner so as to minimize TES' exposure to
environmental liabilities, TES' business, financial condition, and results of
operations could be materially adversely affected by an environmental claim that
is not covered or is only partially covered by insurance or other available
remedy.
Trading of TES' Securities on the Electronic Bulletin Board and
Classification as Penny Stock May Negatively Impact the Liquidity of TES'
Securities.
o Electronic Bulletin Board. Trading in TES' securities is being
conducted in the over-the-counter market in the NASD's "Electronic
Bulletin Board" because TES does not presently meet the requirements
for inclusion in either the NASDAQ SmallCap Market or the NASDAQ
National Market. TES may never meet the requirements for inclusion in
either of those two markets. As a result of trading on the Bulletin
Board, it may be more difficult to obtain quotations of the market
price of TES' securities. Consequently, the liquidity of TES'
securities could be impaired, not only in the number of securities
which could be bought and sold, but also through delays in the timing
of transactions, reduction in security analysts' and the news media's
coverage of TES, and lower prices for TES' securities than might
otherwise be attained.
o Penny Stock. TES' securities come within the definition of "penny
stock" contained in Rule 3a51-1 under the Securities Exchange Act of
1934. Classification as a penny stock may adversely affect the ability
of broker-dealers to sell TES' securities and may adversely affect the
ability of TES' stockholders to sell any of their securities in the
secondary market because of the following requirements which are
unique to penny stock:
o Rule 15g-9 imposes additional sales practice requirements on
broker-dealers that sell penny stock to persons other than
established customers and "accredited investors" which are
generally defined as individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000 or $300,000
together with their spouses. For transactions covered by such
rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale.
o Prior to any transaction in a penny stock, unless exempt, the
rules require delivery of a disclosure schedule prepared by the
Securities and Exchange Commission relating to the penny stock
market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered
representative and current quotations for the securities.
o Rule 15g-6 requires broker dealers to send customers with penny
stock held in an account with the broker-dealer, monthly
statements disclosing recent price information for penny stocks
and information on the limited market in penny stocks.
19
<PAGE>
TES Must Respond to Technological Change. TES' future success will depend
significantly on its ability to enhance its recycling capabilities in a manner
which keeps pace with technological developments and evolving industry
standards. There can be no assurance that TES will be successful in enhancing
its recycling capabilities or meeting customer requirements adequately. TES'
delay or failure to develop or acquire technological improvements or to adapt to
technological change would have a material adverse effect on TES' business,
results of operations, and financial condition.
TES Faces Competition From Other Recyclers and From New Products and
Materials. The market for TES' services and recycled products is competitive and
subject to rapid change. TES' competitors may develop alternative methodologies
that are superior to TES' methodologies or that achieve greater market
acceptance. Further, the market for recycled products and raw material is
dependent to some extent upon prices for new products and material, and
perceptions as to the quality of recycled products or material. To the extent
that the prices of new products or material are competitive with the prices
offered by TES, sales of TES' recycled products may be adversely affected.
Accordingly, there can be no assurance that TES will be able to compete
successfully with its present or potential competition, or that competition will
not have a material adverse effect on TES' results of operations and financial
condition.
There is a Limited Public Market for TES' Common Stock. Until recently,
there was no public market for TES' common stock. At the present time there is
only a limited market for TES' common stock. There can be no assurance that an
active trading market will develop or be sustained in the future for TES'
securities.
TES' Stock Price May Fluctuate Based on Internal and External Factors. The
market price of TES' common stock could be subject to significant fluctuations
in response to variations in actual and anticipated quarterly operating results,
changes in earnings estimates by analysts, announcements of new products or
technological innovations by TES or its competitors, and other events or
factors. In addition, the stocks of many companies have experienced extreme
price and volume fluctuations that have often been unrelated to the companies'
operating performance.
TES' Management Doesn't Intend to Pay Dividends. TES has not paid any cash
dividends on its common stock and does not expect to declare or pay any cash or
other dividends in the foreseeable future. Further, TES had negative working
capital of $101,060 and a net deficit of $98,677 at December 31, 1998 and is
therefore currently prohibited from paying dividends to its stockholders under
Colorado law.
Current Management Will Continue to Control TES After the Merger. Prior to
the merger between TES Acquisition and ENTECS, the officers and directors of TES
own approximately 64.3% of the outstanding shares of TES' common stock. After
the merger, TES' officers and directors will own approximately 78.4% of the
outstanding shares of TES' common stock. Due to their stock ownership, the
officers and directors will be in a position to elect the board of directors
and, therefore, to control the business and affairs of TES, including certain
significant corporate actions such as acquisitions, the sale or purchase of
assets, and the issuance and sale of TES' securities.
20
<PAGE>
The Trading Price of TES' Stock Could be Negatively Affected by Future
Sales of the Shares to be Issued in the Merger and Upon Exercise of Options
Which Could be Granted in the Future. Management expects that approximately
11,355,650 shares of TES common stock will be issued to the ENTECS stockholders
a result of the merger. In addition, TES' board of directors has adopted a stock
option plan under which it could issue up to 500,000 shares of common stock.
Although, to date, no options have been granted under the stock option plan,
sales of the TES shares being issued in the merger and of shares issued on
exercise of any options which might be issued in the future under the stock
option plan could have a depressive effect upon the trading price of the common
stock. In addition, the existence of options may adversely affect the terms on
which TES may obtain additional equity capital in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus that are
not statements of historical facts are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements regarding
anticipated cost savings resulting from the merger, TES' future economic
performance and financial position, business strategy, budgets, reserve
estimates, expected future production, and plans and objectives of management
for future operations including plans and objectives relating to the development
and conduct of the recycling business and the job training business.
Forward-looking statements are subject to risks, uncertainties, and other
factors which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements. They are based
on assumptions, including the following:
o that TES will be able to develop its recycling business and develop
and establish its job training programs
o that competitive conditions within the recycling industry will not
change materially or adversely
o that demand for TES' recycling services and recycled materials and
products will remain strong
o that TES will retain key management personnel
o that TES' forecasts will accurately anticipate market demand
o that there will be no material adverse change in TES' operations or
business.
These assumptions 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 TES. Although TES believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward- looking information will be realized.
In addition, as disclosed under "Risk Factors," the business and operation of
TES are subject to substantial risks which increase the uncertainty inherent in
the forward-looking statements. Because of the significant uncertainties
21
<PAGE>
inherent in the forward-looking information included in this proxy
statement/prospectus, the inclusion of such information should not be regarded
as a representation by TES or any other person that the objectives or plans of
TES will be achieved.
Management of TES intends that the forward-looking statements contained in
this proxy statement/prospectus be subject to the safe harbors created by
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All subsequent written and oral forward-looking statements
relating to the matters described in this proxy statement/prospectus and
attributable to TES or to persons acting on its behalf are expressly qualified
in their entirety by the statements made in this section and in the "Risk
Factors" section of this proxy statement/prospectus.
THE SPECIAL MEETING
General
This proxy statement/prospectus is being furnished to holders of ENTECS
common stock in connection with the solicitation of proxies by the ENTECS board
of directors for use at the ENTECS special meeting of stockholders to be held on
____________, 199__ at 25 Impler Strasse, 81371, Munich, Germany, commencing at
_____ a.m., local time. This proxy statement/prospectus and the accompanying
forms of proxy are first being mailed to ENTECS stockholders on or about
__________, 199__.
Matters to be Considered at the Special Meeting
At the ENTECS special meeting, holders of ENTECS common stock will consider
and vote upon (1) a proposal to approve the merger of TES Acquisition with and
into ENTECS in accordance with an agreement and plan of merger dated _________,
1999 among TES Acquisition, TES, and ENTECS; (2) a proposal to grant the ENTECS'
board of directors discretionary authority to adjourn the special meeting to
solicit additional votes for approval of the merger agreement and the merger;
and (3) such other matters as may properly come before the special meeting or
any adjournments or postponements of the special meeting.
Voting at the Special Meeting; Record Date; Abstentions
The ENTECS board of directors has fixed ___________, 199__ as the record
date for the determination of ENTECS' stockholders entitled to notice of and to
vote at the special meeting. Accordingly, only holders of record of shares of
ENTECS common stock on the record date will be entitled to notice of and to vote
at the special meeting. As of the record date, there were ____________ shares of
ENTECS common stock outstanding, held by approximately _____ holders of record.
Each holder of record of shares of ENTECS common stock on the record date is
entitled to one vote per share on each proposal properly submitted to a vote at
the special meeting. The presence, in person or by properly executed proxy, of
the holders of a majority of the outstanding shares of ENTECS common stock is
necessary to constitute a quorum at the special meeting.
22
<PAGE>
Under the Colorado Business Corporation Act, the merger must be approved by
the affirmative vote of the holders of a majority of the outstanding shares of
ENTECS common stock. As of the record date, directors and executive officers of
ENTECS who may be deemed to be beneficial owners of approximately 890,000
shares, or 54.31% of the outstanding shares, of such stock, have advised ENTECS
that they intend to vote or direct the vote of all shares of such stock over
which they have voting control for approval of the merger.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence or absence of a quorum at the ENTECS
meeting. Broker non-votes are shares held by brokers or nominees that are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote on a particular matter.
Proxies
The ENTECS proxy accompanying this proxy statement/prospectus is solicited
on behalf of the ENTECS board of directors for use at the special meeting. You
are requested to complete, date, and sign the accompanying proxy and promptly
return it in the accompanying envelope to ENTECS' transfer agent, Corporate
Stock Transfer, Inc. or otherwise mail it to ENTECS. ENTECS stockholders who
hold their ENTECS common stock in the name of a bank, broker or other nominee
should follow the instructions provided by their bank, broker or nominee on
voting their shares. All shares of ENTECS common stock that are entitled to vote
and are represented at the special meeting by properly executed proxies received
prior to or at the special meeting, and are not revoked, will be voted at the
special meeting in accordance with the instructions indicated on such proxies.
If the instruction is to abstain, the shares represented by the proxy will be
deemed to be present at the special meeting but will not be voted with respect
to the merger, thereby having the same effect as a vote against the merger. If
no instructions are indicated, the proxy will be voted FOR approval of the
merger.
In the event that a quorum is not present at the time the ENTECS meeting is
convened, or if for any other reason ENTECS believes that additional time should
be allowed for the solicitation of proxies, ENTECS may adjourn the ENTECS
meeting with or without a vote of the stockholders. If ENTECS proposes to
adjourn the ENTECS meeting by a vote of the stockholders, the persons named in
the enclosed form of proxy will vote all shares of ENTECS common stock for which
they have voting authority in favor of an adjournment.
ENTECS' board of directors does not presently intend to bring any other
business before the special meeting and, so far as is known to ENTECS' board of
directors, no other matters are to be brought before the special meeting. As to
any business that may properly come before the special meeting, however, it is
intended that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies.
An ENTECS stockholder who has given a proxy may revoke it at any time
before it is exercised at the special meeting by
o delivering a written notice to ENTECS' secretary, bearing a date later
than the date of the proxy, stating that the proxy is revoked;
23
<PAGE>
o signing and so delivering a proxy relating to the same shares and
bearing a later date than the date of the previous proxy prior to the
vote at the special meeting; or
o attending the special meeting and voting in person.
The presence of an ENTECS stockholder of record without voting at the
meeting will not automatically revoke a proxy, and any revocation during the
meeting will not affect votes previously taken. ENTECS stockholders who hold
their ENTECS common stock in the name of a bank, broker or other nominee should
follow the instructions provided by their bank, broker or nominee in revoking
their previously voted shares.
Dissenters' Rights
Under the Colorado Business Corporation Act, any holder of record of ENTECS
common stock who does not vote in favor of the merger and delivers a demand for
payment prior to the vote on the proposed merger at the ENTECS special meeting
may demand a cash payment for the "fair value" of his or her shares of ENTECS
common stock. If the parties cannot agree to an appropriate "fair value," it
would be determined in judicial proceedings. Management cannot predict what the
determination of "fair value" would be if its is determined by judicial
proceedings. In order to exercise such right, a stockholder must comply with
each of the procedural requirements of the Colorado Business Corporation Act. A
description of those requirements are provided in "The Merger - Dissenters'
Rights." The failure to take any of the steps required in a timely manner will
result in a loss of dissenters' rights.
Expenses of Solicitation
TES and ENTECS will share the cost of solicitation of proxies from ENTECS
stockholders estimated to be $___________ plus reasonable out-of-pocket
expenses. In addition to solicitation by mail, the directors, officers, and
employees of ENTECS may solicit proxies from stockholders by telephone,
facsimile, or in person, following the original mailing of the proxies and other
soliciting materials. Arrangements will also be made with custodians, nominees,
and fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees, and fiduciaries,
and TES and ENTECS will reimburse such holders for their reasonable expenses.
Recommendation of the Board of Directors
The ENTECS board of directors has unanimously approved the merger agreement
and the merger, believes that the terms of the merger agreement are fair to, and
the merger is in the best interests of, ENTECS and its stockholders and,
therefore, recommends that the holders of ENTECS common stock vote for approval
and adoption of the merger agreement and the consummation of the merger.
The matters to be considered at the special meeting are of great importance
to the stockholders of ENTECS. Accordingly, ENTECS stockholders are urged to
read and carefully consider the information presented in this proxy
statement/prospectus and to complete, date, sign, and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
24
<PAGE>
THE MERGER
Background and Reasons for the Merger
Germany has adopted some of the strictest laws and regulations in the world
relating to the recycling of business waste products. These laws and regulations
apply to a myriad of different types of waste products. TES and ENTECS are each
in the business of providing products and services to assist German businesses
in complying with such laws and regulations. Both TES and ENTECS were founded by
Gerd Behrens, president of each company. Because TES and ENTECS recycle
different types of product waste, Mr. Behrens initially believed it more
efficient to contain the operations in separate entities. TES' focus has been
upon electronic scrap and ENTECS' focus has been upon wood products and
concrete. However, in June 1998 Mr. Behrens began to explore the feasibility of
combining the operations of TES and ENTECS under one entity. The executive and
administrative offices of both companies are presently at the same location.
Management expects that the merger will ultimately result in administrative
efficiencies by reducing the overhead of maintaining two holding companies,
increased financial strength, and increased market potential, including global
markets for all products. Management expects that TES will be able to better
position itself in the environmental protection industry as a result of the
merger with a combination of the innovative technologies of ENTECS and the
certified recycling services of TES. Management believes that compliance with
governmental regulations following the merger will be simplified since the
compliance function is expected to be performed by a single group of employees
rather than two separate groups with all activities conducted under the umbrella
of TES.
TES intends to operate the two subsidiaries it presently owns, TES GmbH and
TES Oecon AG, and the two present subsidiaries of ENTECS, ENTECS Umwelttechnik
GmbH and ENTECS Software and Umweltmanagement GmbH, under the umbrella of TES as
a holding company providing management services to its subsidiaries. This will
permit the consolidation of management expertise into one company. The
operations of each subsidiary will be better able to complement each other in
this way. For example, the training operations of TES Oecon AG will be able to
offer new training courses for services and technologies that are developed by
or as a result of the consulting services provided by ENTECS Software and
Umweltmanagment GmbH. Each of the present TES and ENTECS subsidiaries will
continue after the merger to offer the same products and services as they
presently offer. The management of TES also anticipates the development of new
products and services in the environmental service industry as a result of the
closer interaction of the subsidiary's management and marketing personnel.
Effects of the Merger
Upon consummation of the merger, TES Acquisition, a wholly-owned subsidiary
of TES, will be merged with and into ENTECS and ENTECS will become a
wholly-owned subsidiary of TES. Each share of ENTECS common stock outstanding
immediately prior to the merger will be converted into the right to receive 6.93
shares of TES common stock.
Management determined the exchange ratio by calculating the ratio of the
net capital contributions made by the TES stockholders and the ENTECS
stockholders to the total of the net capital contributions of both companies.
With this ratio, management computed the number of total TES shares to be
25
<PAGE>
outstanding after the merger by dividing the TES shares outstanding before the
merger by TES' ratio of the net capital contribution computed above. Management
then computed the number of TES shares to be issued to ENTECS stockholders by
subtracting the number of TES shares outstanding before the merger from the
number to be outstanding after the merger. The exchange ratio equals the number
of TES shares to be issued to ENTECS stockholders as a result of the merger
divided by the number of shares of ENTECS common stock outstanding before the
merger.
Based upon the number of shares of ENTECS common stock expected to be
outstanding immediately prior to the merger, the stockholders of ENTECS will
have the right to receive an aggregate of approximately 11,355,650 shares of TES
common stock upon consummation of the merger. Subsequent to the merger, the
ENTECS stockholders will control approximately 68.5% of the issued and
outstanding shares of TES.
Dieter Gastinger has been nominated for election to the board of directors
subsequent to the Merger. Mr. Gastinger is presently an officer and director of
ENTECS. (See "Directors and Officers of ENTECS"). The Board of Directors of TES
following the merger will consist of Gerd Behrens, Frank Behrens, and Dieter
Gastinger. Jutta Behrens, who is presently a director of TES, and Yvonne
Marquard, who is presently a director of ENTECS, will resign at the effective
time of the merger. The executive officers of TES following the merger are
anticipated to be: Gerd Behrens-Chairman of the Board and President, Frank
Behrens-Secretary and a Director, Jutta Behrens-Treasurer, and Dieter
Gastinger-Senior Vice President.
The articles of incorporation and bylaws of TES, as in effect at this time
will govern the rights, duties and privileges of the TES stockholders subsequent
to the merger. Management does not believe that there are any material
differences between the rights set forth in the articles of incorporation and
bylaws of ENTECS and those set forth in the constituent documents of TES. For a
description of the rights and preferences of the TES common stock, see
"Description of TES Capital Stock."
Recommendation of the Board of Directors
The board of directors of ENTECS, by unanimous vote, has determined the
merger to be in the best interests of ENTECS' stockholders, approved the merger
agreement, and recommended that ENTECS stockholders vote FOR the proposal to
approve the merger agreement, the merger, and the transactions contemplated by
the merger agreement and the merger.
Federal Income Tax Considerations in the United States
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of ENTECS common stock for TES
common stock under the merger that are generally applicable to holders of ENTECS
common stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, existing and proposed Treasury
Regulations under the Internal Revenue Code, and current administrative rulings
and court decisions, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to TES, ENTECS,
or ENTECS' stockholders as described in this discussion.
26
<PAGE>
ENTECS stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular ENTECS
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who do not hold their ENTECS
common stock as capital assets, or who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of the
merger under foreign, state, or local tax laws, or the tax consequences of
transactions effectuated prior or subsequent to, or concurrently with, the
merger, whether or not any such transactions are undertaken in connection with
the merger, including without limitation any transaction in which shares of
ENTECS common stock are acquired or in which shares of TES common stock are
disposed. Accordingly, ENTECS stockholders are urged to consult their own tax
advisors as to the specific tax consequences to them of the merger, including
the applicable federal, state, local, and foreign tax consequences.
The merger is intended to constitute a reorganization. If the merger does
qualify as a reorganization, then, subject to the limitations and qualifications
referred to in this discussion, the merger will generally result in the
following federal income tax consequences:
1. No gain or loss will be recognized by ENTECS' stockholders solely upon
their receipt of TES common stock in exchange for ENTECS common stock
in the merger except to the extent of cash received instead of a
fractional share of TES common stock.
2. The aggregate tax basis of the TES common stock received by ENTECS
stockholders in the merger, reduced by any tax bases attributable to
fractional shares deemed to be disposed of, will be the same as the
aggregate tax basis of the ENTECS common stock surrendered in exchange
for the TES common stock.
3. The holding period of the TES common stock received by each ENTECS
stockholder in the merger will include the period for which the ENTECS
common stock surrendered in exchange for the TES common stock was
considered to be held, provided that the ENTECS common stock so
surrendered is held as a capital asset at the time of the merger.
4. Cash payments received by ENTECS' stockholders instead of a fractional
share will be treated as if the fractional share of TES common stock
had been issued in the merger and then redeemed by TES. An ENTECS
stockholder receiving such cash will recognize gain or loss upon the
payment of the cash, measured by the difference, if any, between the
amount of cash received and the basis in the fractional share.
5. Neither TES, TES Acquisition, nor ENTECS will recognize material
amounts of gain solely as a result of the merger.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service in connection with the merger. The consummation of the
merger is conditioned on the receipt by TES and ENTECS of an opinion from
Schlueter & Associates, P.C. to the effect that the merger will constitute a
reorganization. ENTECS stockholders should be aware that the tax opinion does
not bind the IRS and the IRS is therefore not precluded from successfully
asserting a contrary opinion. The tax opinion will be subject to certain
assumptions and qualifications, including but not limited to the truth and
accuracy of certain representations made by TES, ENTECS, and TES Acquisition.
27
<PAGE>
A successful IRS challenge to the reorganization status of the merger would
result in ENTECS stockholders recognizing taxable gain or loss with respect to
each share of common stock of ENTECS surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
effective date of the merger, of the TES common stock received in exchange for
the ENTECS common stock. In such event, a stockholder's aggregate basis in the
TES common stock received in the merger would equal its fair market value, and
the stockholder's holding period for that stock would begin the day after the
merger.
Income Tax Considerations in Germany
The following discussion summarizes the material German income tax
considerations relevant to the exchange of shares of ENTECS common stock for TES
common stock under the merger that are generally applicable to holders of ENTECS
common stock. This discussion is based on currently existing provisions of the
tax law in Germany. The tax law in Germany relating to sale of stock in
companies was recently updated. In March 1999, Germany enacted
"Steuerentlastungsgesetz 1999/2000/2002," which impacts gains from the sale of
capital stock, in addition to other features. Most features of this law were
retroactive to January 1, 1999, including that section of the
Steuerentlastungsgesetz which pertains to sales of investments and shares in
stock companies, called "Kapitalgesellschaften." Measures of the
Steuerentlastungsgesetz relating to value added tax, however, are effective
April 1, 1999.
As a result of the Kapitalgesellschaften, it is possible that German
citizens holding shares of ENTECS common stock may incur tax liability from the
exchange of their ENTECS stock for TES stock under the terms of the merger
agreement. This possibility is based upon the following general assumptions
under the Kapitalgesellschaften:
1. The ENTECS stockholder holds his ENTECS shares privately, and not as
company property;
2. The ENTECS stockholder is a German citizen not subject to other tax
limitations under German law (unbeschrankte Steuerplicht); and
3. The investment in ENTECS qualifies as moveable property under Article
13 of the double taxation agreement between Germany and the United
States, dated August 29, 1989.
Within the general assumptions stated above, an ENTECS stockholder may be
subject to taxation if the sale of a private investor's investment in a stock
company results in a gain. A gain from the sale of an investment in a stock
company is generally realized if the sales price of stock less the selling costs
of the stock sold exceeds the investor's acquisition costs.
Under the Kapitalgesellschaften, the merger of ENTECS with TES may qualify
as a sale of shares. In this scenario, any gain would be determined by the
market value of the TES shares received in exchange for the ENTECS stockholders
shares plus the value of any additional monetary consideration received, such as
cash for fractional shares. For example, if the market value of TES shares on
the date of the merger exceeded the ENTECS stockholders acquisition cost of his
28
<PAGE>
or her ENTECS shares, a gain would result. In determining if a gain resulted
from the exchange of stock, any additional consideration such as cash received
for fractional shares would be added to the market value of the TES shares
exchanged. If, on the other hand, the acquisition costs of the ENTECS
stockholder's stock is equal to or greater than the market value of the TES
shares (plus any additional consideration) then no gain would result and the
ENTECS stockholder will incur no tax liability resulting from the merger.
There are additional considerations which may impact the taxability of the
merger under the Kapitalgesellschaften. Where a gain has resulted, as described
above, from the exchange of ENTECS stock under the terms of the merger, and the
ENTECS stockholder has held his or her ENTECS shares in excess of twelve months
from the date of purchase, no tax liability will be incurred by the ENTECS
stockholder. Generally, only ENTECS stockholders who have held their ENTECS
shares for twelve months or less will incur tax liability. However, if an ENTECS
stockholder holds a material investment in ENTECS stock, then the exchange of
their shares will result in tax liability, regardless of the length of time they
held their ENTECS stock. A material investment is defined as an investment in
ten percent or more of a company's stock. Thus, ENTECS stockholders who hold
more than ten percent of ENTECS stock and receive a gain from the sale or
exchange of their shares, will incur tax liability even if they held the stock
longer than twelve months.
ENTECS stockholders may incur further tax liability other than that
specified by the Kapitalgesellschaften. Given the third assumption stated above
that the ENTECS stockholder's investment in ENTECS stock qualifies as moveable
property as in Article 13 of the double taxation agreement between the United
States and Germany, the ENTECS stockholder may be subject to taxation in the
German state where he or she resides. We do not discuss the tax liabilities
which may result to ENTECS stockholders by the German state in which they reside
any further in this document.
Dissenters' Rights
Under Section 7-113-102 of the Colorado Business Corporations Act,
stockholders are entitled to payment of the fair value of their shares in the
case of a merger requiring stockholder approval. In order to assert dissenter's
rights, a stockholder who wishes to assert such rights must, before a vote is
taken, deliver a written notice to ENTECS stating that the stockholder intends
to demand payment for his/her shares if the proposed action is taken. In
addition, the stockholder must not vote in favor of the proposed action. See
Section 7-113-202 of the Colorado Business Corporations Act. TES' stockholders
will not have dissenters' rights under the Colorado Business Corporation Act in
connection with the merger.
Pursuant to Section 7-113-203 of the Colorado Business Corporations Act, if
the proposed corporate action is approved by a vote of the stockholders, the
corporation must send a notice to the dissenters who properly notified the
corporation of their intention to dissent before the vote was taken. This
notice, known as the "dissenter's notice" in Colorado, must be sent by the
corporation no later than ten days after the corporate action was taken. This
notice to the dissenting stockholders will state where a dissenting stockholder
must demand payment and how to surrender his/her stock certificates in exchange
for payment of the fair value of the surrendered stock certificates, and
indicate the date by which the corporation must receive the payment demand and
certificates.
29
<PAGE>
When the dissenting stockholder receives the dissenter's notice from the
corporation, he/she must then demand payment for his/her shares, certify that
he/she was a stockholder before the date set for the right to dissent, and
deposit his/her stock certificates as directed in the dissenter's notice. Once
the dissenting stockholder complies with these conditions, the corporation must
then pay the dissenting stockholder an amount that the corporation believes to
be the fair value of the surrendered stock certificates.
A copy of the sections of the Colorado Business Corporation Act that
discuss the rights of stockholders to dissent from a transaction is attached as
Appendix D to this proxy statement/prospectus.
Because of the complexities of these provisions of the Colorado law, ENTECS
stockholders who are considering pursuing dissenters' rights may wish to consult
legal counsel.
Interests of Certain Persons in the Merger
The members of the TES board of directors have interests in the merger that
are in addition to their interests as stockholders of TES, and certain members
of the ENTECS board of directors and management have interests in the merger
that are in addition to their interests as stockholders of ENTECS. The TES board
of directors and the ENTECS board of directors were aware of these interests and
considered them in approving the merger agreement and the transactions
contemplated in the merger agreement.
In considering the recommendation of the ENTECS board of directors with
respect to the merger, stockholders of ENTECS should be aware that certain
officers and directors of ENTECS have interests in the merger, including those
referred to below, that presented them with potential conflicts of interests.
The ENTECS board of directors was aware of these potential conflicts and
considered them along with the other matters described in "The Special Meeting
- -- Board Recommendation" and "The Merger and Related Transactions -- Reasons for
the Merger."
The officers and directors and key consultants of ENTECS include
individuals who are also officers and directors or consultants of TES. These
individuals include Gerd Behrens, Frank Behrens, Yvonne Marquard, and Karsten
Behrens.
Gerd Behrens, the president and a director of ENTECS, is also the chairman
of the board and the president of TES. Gerd Behrens owns 500,000 shares, or
30.5%, of ENTECS common stock.
Frank Behrens, the secretary and a director of ENTECS, is also the
secretary and a director of TES. Frank Behrens owns 200,000 shares, or 12.2%, of
ENTECS common stock. Further, Frank Behrens received 35,000 DM in consultant
fees and 42,500 DM compensation in 1998 for serving as managing director of
ENTECS Software und Umweltmanagement GmbH.
30
<PAGE>
Karsten Behrens served as a consultant to both ENTECS and TES. He owns
200,000 shares, or 12.2% of ENTECS common stock. Karsten Behrens also received
52,500 DM in consultant fees from ENTECS in 1998.
Yvonne Marquard served as a consultant to both ENTECS and TES. She owns
90,000 shares, or 5.5%, of ENTECS common stock. She also received 162,809 DM in
consultant fees from ENTECS in 1998.
Gerd and Jutta Behrens are husband and wife, and Frank Behrens and Karsten
Behrens are the sons of Gerd and Jutta Behrens. Frank Behrens and Karsten
Behrens are brothers.
TES GmbH, a wholly owned subsidiary of TES, has entered into an employment
agreement with Gerd Behrens under which Mr. Behrens will be paid approximately
6,500 DM per month. Further, TES has a consulting agreement with Jutta Behrens'
accounting firm under which Mrs. Behrens' firm is paid 500 DM per month in
exchange for providing the services of Jutta Behrens to TES. Also, TES has a
consulting agreement with Frank Behrens' personal consulting firm, under which
the firm will be paid 30 DM per hour for providing the services of Frank Behrens
to TES. Karsten Behrens serves on the board of directors of TES Oecon AG, and as
such there is a consulting agreement with Karsten Behrens' personal consulting
firm under which his firm is paid an hourly fee of 50 DM per hour for services
as needed. See "Directors and Officers of TES - Employment and consulting
agreements" for further discussion of these arrangements.
TES and ENTECS have each entered into consulting agreements with Yvonne
Marquard. Under the ENTECS agreement she has been paid a consulting or finder's
fee based upon the difference between 20% of the gross proceeds raised and the
amount of commission or fees actually paid to brokers or finders for the sale of
ENTECS' securities. Ms. Marquard was paid approximately 162,809 DM under the
terms of this agreement in 1998. Ms. Marquard is the wife of Michael Marquard,
who is an employee of TES.
The merger agreement provides that TES will, from and after the effective
date of the merger, indemnify, defend, and hold harmless the present and former
officers, directors, employees, and agents of ENTECS in respect of acts or
omissions occurring on or before the effective date of the merger, in each case
to the full extent TES is permitted under Colorado law, the ENTECS articles of
incorporation, or the ENTECS bylaws or any indemnification agreement to which
ENTECS is a party, in each case as in effect on the date of the merger
agreement.
Financing the Merger
The merger will be a stock for stock transaction. Stockholders of ENTECS
will receive shares of the common stock of TES in exchange for their shares of
ENTECS common stock. Cash will be paid to ENTECS stockholders instead of
fractional shares, which is not expected to be material. Expenses and other
costs of the merger will be paid from funds generated by the operations of TES.
31
<PAGE>
Accounting Treatment
The merger will be accounted for by TES as a business combination of
entities under common control in accordance with U.S. generally accepted
accounting principles. Under the purchase method of accounting, the purchase
price of the ENTECS capital stock, including direct and incremental costs of the
merger, will be allocated to the assets acquired and liabilities assumed based
on their estimated fair value, with the excess purchase consideration allocated
to goodwill.
32
<PAGE>
THE MERGER AGREEMENT
The description of the merger agreement set forth in this section is a
summary of the material provisions of the merger agreement, a copy of which is
attached as Appendix A to this proxy statement/ prospectus. This description is
qualified in its entirety by reference to the merger agreement.
General
TES, TES Acquisition, and ENTECS have entered into the merger agreement,
which provides (1) that TES Acquisition, a wholly-owned subsidiary of TES, will
be merged with and into ENTECS, and (2) that at the time the merger becomes
effective each share of outstanding ENTECS common stock will be converted into
the right to receive 6.93 shares of TES common stock. The merger is subject to
the satisfaction of a number of conditions, including the approval of the
stockholders of ENTECS.
Effective Time of the Merger
The closing will occur, and the merger will become effective, upon
1. the approval of the merger agreement by the ENTECS stockholders;
2. the acceptance for filing of articles of merger between TES
Acquisition and ENTECS with the Colorado Secretary of State; and
3. the satisfaction or waiver of the other conditions set forth in the
merger agreement.
It is anticipated that the articles of merger will be filed on
________________, 1999.
Exchange of Certificates
Corporate Stock Transfer of Colorado will act as exchange agent in
connection with the merger. As soon as practicable after the effective date of
the merger, the exchange agent will send a notice and transmittal form to ENTECS
stockholders to be used in forwarding their ENTECS stock certificates for
surrender and exchange for the merger consideration. Please do not surrender
your ENTECS certificates for exchange until you receive the transmittal form and
instructions. The instructions will include procedures concerning lost
certificates.
Each holder of ENTECS common stock will be entitled, upon surrender to the
exchange agent, to receive in exchange for his shares of ENTECS common stock
certificates representing the number of whole shares of TES common stock into
which his shares of ENTECS common stock were converted in the merger, together
with any cash payable instead of fractional shares. Until so surrendered, the
certificates representing shares of ENTECS common stock will be deemed to
represent the number of whole shares of TES common stock into which the shares
of ENTECS common stock were converted.
33
<PAGE>
ENTECS stockholders should not send any stock certificates
with their proxy cards
Fractional Shares
Certificates representing fractional shares of TES common stock will no be
issued in the merger. Fractional share interests will not entitle the owner to
vote or to any other rights of a stockholder of TES. Instead of the issuance of
any fractional share of TES common stock, each holder of ENTECS common stock who
otherwise would be entitled to receive a fractional share of TES common stock in
the merger will receive, upon surrender for exchange, an amount in cash
determined by multiplying (1) the amount of $4.00 by (2) the fraction of a TES
share to which such holder would otherwise be entitled. If more than one
certificate representing shares of ENTECS common stock is surrendered for the
account of the same stockholder of record, the number of full shares of TES
common stock for which certificates will be delivered will be computed on the
basis of the aggregate number of shares of ENTECS common stock represented by
the certificates surrendered by that stockholder.
Representations
The parties make various representations and warranties in the merger
agreement, including representations and warranties by each of ENTECS and TES as
to:
o organization and good standing,
o capitalization,
o authorization of the merger agreement and the absence, except as
specified, of the need for governmental or third party consents to the
merger,
o compliance with applicable law,
o accuracy of financial statements,
o absence of material undisclosed liabilities and the absence of
material adverse changes in the financial or other condition,
operations, or business of ENTECS and TES, taken as a whole,
o absence of pending or threatened material litigation,
o absence of employee benefit plans and collective bargaining
agreements,
o material compliance with applicable environmental laws and
regulations, and
o absence of brokers or finders.
34
<PAGE>
Conduct of Business Pending the Merger
TES and ENTECS have agreed to conduct their operations, except as otherwise
provided in the merger agreement, according to their normal course of business
until consummation of the merger. Further, TES and ENTECS have each agreed that,
among other things, until the consummation of the merger, unless the other
agrees in writing or as otherwise required or permitted by the merger agreement,
it will not:
o issue any shares of capital stock, effect any stock split, or
otherwise change its capitalization as it existed on the date the
merger agreement was signed;
o declare, set aside, or pay any dividend or other distribution, whether
in cash, stock, or property or any combination of cash, stock, or
property, in respect of any of its capital stock;
o amend or propose to amend its articles of incorporation or bylaws;
o acquire, sell, lease, encumber, transfer, or dispose of any assets
except in the ordinary course of business;
o incur any indebtedness for borrowed money or guarantee any such
indebtedness issued, sell any debt securities, warrants or rights to
acquire any debt securities, guarantee any debt of others, make any
loans, advances, or capital contributions, or mortgage, pledge, or
otherwise encumber any material assets or create any material lien
thereupon except in the ordinary course of business;
o pay, discharge, or satisfy any claims, liabilities, or obligations
except in the ordinary course of business; or
o change any accounting principles or practices except as required by
generally accepted accounting principles.
Conditions to Consummation of the Merger
The obligations of TES and ENTECS to complete the merger are subject to the
following conditions:
o ENTECS' stockholders must approve all transactions contemplated by the
merger agreement; .
o The relevant governmental authorities must grant all required
authorizations, consents, orders or approvals;
o The registration statement which contains this proxy statement/prospectus
shall have become effective under the Securities Act and must not be the
subject of any stop order or proceedings seeking a stop order;
35
<PAGE>
o There must not be any law, order, injunction, or other legal restraint or
prohibition enjoining or preventing the consummation of the merger;
o The representations and warranties of TES , TES Acquisition and ENTECS
contained in the merger agreement must be true and correct as of the
closing;
o Neither party to the merger agreement may have suffered any material
adverse change to its business or financial condition;
o Each party to the merger agreement may have performed all obligations
required to be performed under the merger agreement except where the
failure to perform would not have a material adverse effect;
o Each party must have furnished to the other an opinion of its counsel to
the effect that the respective party and each of its respective
subsidiaries, among other conditions:
o is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Colorado;
o has the corporate power to carry on its business as it is being
conducted on the closing date of the merger agreement;
o has validly issued its capital stock and such capital stock is outstanding,
fully paid and nonassessable, and that between the date of the merger
agreement and the closing date thereof, no additional shares of its capital
stock have been issued;.
Additional Conditions of Obligation of ENTECS are as follows:
o TES must have received the opinion of ENTECS' tax counsel to the effect
that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and that TES Acquisition and ENTECS will each be
a party to that reorganization within the meaning of Section 368(b) of the
Code.
Termination
The merger agreement may be terminated at any time prior to
effectiveness of the merger, whether before or after stockholder approval of the
merger, by
o mutual consent of TES and ENTECS,
o either TES or ENTECS if the merger is not consummated before June 30,
1999 unless the failure to consummate the merger by that date is due
to the action or failure to act of the party seeking to terminate the
agreement,
o either TES or ENTECS if
36
<PAGE>
- the conditions to that party's obligations have become impossible to
satisfy; or
- any permanent injunction or other order of a court or other
competent authority preventing the consummation of the merger has
become final and non-appealable,
o ENTECS if it has received a proposal from a third party which
contemplates a transaction which the board of directors determines,
after consultation with its legal and financial advisors, is more
favorable than the transactions contemplated by the merger agreement,
unless, within five days of receipt by TES of notice of such
third-party transaction, TES and ENTECS agree to a transaction which
the board of directors determines, after such consultation, is more
favorable than such third- party transaction, or
o TES or ENTECS if ENTECS fails to obtain the required approval of its
stockholders upon a vote held at a duly held meeting of stockholders
or at any adjournment thereof for the purpose of obtaining such vote.
If the merger agreement is terminated and abandoned, the merger agreement
will immediately become void and have no effect, without any liability on the
part of any party to the merger agreement or its affiliates, directors,
officers, or stockholders, except with respect to confidentiality obligations
and indemnification provisions relating to brokers or finders or other such
persons or entities.
Expenses and Fees
Whether or not the merger is consummated, all expenses incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement will be paid by the party incurring such costs and expenses,
except that the printing and mailing costs associated with this proxy
statement/prospectus shall be borne equally by TES and ENTECS. In addition to
printing and mailing expenses, such costs and expenses consist primarily of
legal and accounting fees, tax opinion fees, and filing fees under federal and
state regulatory laws and are estimated to be ________________________.
37
<PAGE>
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed statement of
operations of TES and ENTECS gives effect to the proposed merger as if such
transaction occurred at the beginning of the period presented. The unaudited pro
forma condensed combined statement of operations for the year ended December 31,
1998 is derived from the audited statements of operations of TES and ENTECS.
The unaudited pro forma combined condensed balance sheet at December 31,
1998 gives effect to the proposed merger of TES and ENTECS as if such
transaction occurred on December 31, 1998. The unaudited pro forma condensed
combined balance sheet is derived from the historical balance sheet of TES and
ENTECS as of December 31, 1998.
The unaudited pro forma combined condensed financial data do not reflect
the effects of any anticipated changes to be made by TES in its operations from
the historical operations, are presented for informational purposes only and
should not be construed to be indicating the results of operations or the
financial position of TES that actually would have occurred had the proposed
merger been consummated as of the dates indicated or the results of operation or
the financial position of TES in the future.
The following pro forma combined condensed financial data and notes are
qualified in their entirety by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operation," the consolidated financial statements and notes thereto of TES
and ENTECS and other historical information included elsewhere in this document.
38
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
and
Environmental Technologies and Software Solutions, Inc.
Pro Forma Combined Condensed Balance Sheet
December 31, 1998
(Unaudited)
Pro Forma Pro Forma
TES ENTECS Adjustments Combined
DM DM DM DM
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash 166,970 393,080 -- 560,050
Accounts receivable 103,361 2,230 -- 105,591
Inventory -- 120,000 -- 120,000
Prepaid expenses 22,004 56,152 -- 78,156
---------- ---------- ---------- ----------
Total current assets 292,335 571,462 -- 863,797
Property and equipment, net 162,642 544,442 -- 707,084
Investments 10,000 -- -- 10,000
Note receivable - non current 50,000 -- -- 50,000
Intangible assets -- 1,123,126 -- 1,123,126
Due from affiliated company -- 288,669 (288,669)(3) --
Other assets 300,000 -- 300,000
---------- ---------- ---------- ----------
814,977 2,527,699 (288,669) 3,054,007
========== ========== ========== ==========
Liabilities and stockholders' equity
Current liabilities:
Notes payable - banks 29,541 -- -- 29,541
Notes payable - others 80,000 -- -- 80,000
Accounts payable 102,536 135,552 -- 238,088
Accounts payable - related party 35,928 225,000 -- 260,928
Other current liabilities 212,797 289,653 -- 502,450
---------- ---------- ---------- ----------
Total current liabilities 460,802 650,205 -- 1,111,007
Loans from stockholders 230,000 -- -- 230,000
Loans from affiliated companies 288,669 -- (288,669)(3) --
Common stock 2,260,155 3,600,826 -- 5,860,981
Accumulated deficit (2,424,649) (1,723,332) -- (4,147,981)
---------- ---------- ---------- ----------
Total stockholders' equity (164,494) 1,877,494 -- 1,713,000
---------- ---------- ---------- ----------
814,977 2,527,699 (288,669) 3,054,007
========== ========== ========== ==========
See accompanying notes.
39
<PAGE>
Technical Environment Solutions, Inc.
and
Environmental Technologies and Software Solutions, Inc.
Pro Forma Combined Condensed Statement of Operations
December 31, 1998
(Unaudited)
Pro Forma Pro Forma
TES ENTECS Adjustments Combined
DM DM DM DM
----------- ----------- ----------- -----------
Net sales 610,056 69,369 -- 679,425
Cost of sales 202,174 14,004 -- 216,178
----------- ----------- ----------- -----------
Gross profit 407,882 55,365 -- 463,247
General and administrative 1,404,368 1,449,015 -- 2,853,383
Losses of unconsolidated subsidiary 49,000 -- -- 49,000
Interest income (19,668) (18,581) 7,515(3) (30,734)
Interest expense 40,995 2,166 (7,515)(3) 35,646
----------- ----------- ----------- -----------
Net income before taxes (1,066,813) (1,377,235) -- (2,444,048)
Taxes on income -- 1,472 -- 1,472
----------- ----------- ----------- -----------
Net income (loss) (1,066,813) (1,378,707) -- (2,445,520)
=========== =========== =========== ===========
Basic income per share (0.20) (1.00) -- (0.19)
=========== =========== =========== ===========
Weighted average shares 5,224,830 1,378,707 8,177,710(4) 14,781,247
=========== =========== =========== ===========
See accompanying notes.
40
</TABLE>
<PAGE>
Technical Environment Solutions, Inc.
And
Environmental Technologies and Software Solutions, Inc.
Notes to Pro Forma Combined Condensed Financial Statements
December 31, 1998
(unaudited)
1. TES and ENTECS have signed a letter of intent, dated December 10, 1998, in
which they propose to enter into a definitive agreement and plan of merger
providing for the merger of a wholly-owned subsidiary of TES into ENTECS.
Under the terms of the Agreement, the holders of ENTECS Common Stock will
receive 6.93 shares of TES Common Stock for each outstanding share of
ENTECS' Common Stock. Accordingly, the pro forma condensed combined
financial statements as of December 31, 1998 give effect to the issuance of
11,355,643 TES common shares and assumes the Merger with ENTECS will be
accounted for as a reorganization of companies under common control. The
accounting for the merger is expected to be similar to that of a pooling of
interests.
2. The pro forma condensed combined statement of operations gives effect to
the merger of TES with ENTECS as if the merger occurred on January 1 of the
period indicated.
3. Inter-company advances, accrued interest thereon and amounts of interest
income and expense have been eliminated.
4. The pro forma weighted average shares outstanding for basic earnings (loss)
per share gives effect to the issuance of 6.93 shares of TES stock in
exchange for each share of ENTECS stock outstanding for the period
presented, weighted for the period such shares were actually outstanding.
41
<PAGE>
SELECTED FINANCIAL DATA OF TES
The following selected financial data should be read in conjunction with
the financial statements and related notes to the financial statements appearing
elsewhere in this proxy statement/prospectus. The selected financial data as of
December 31, 1997 and 1998 and for each of the two years in the period ended
December 31, 1998, have been derived from the financial statements of TES that
have been audited by TES' independent auditors and are included elsewhere in
this proxy statement/prospectus. The selected financial data provided below are
not necessarily indicative of the future results of operations or financial
performance of TES.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
Statement of Operations Data: 1995 1996 1997 1998 1998
---- ---- ---- ---- ----
DM DM DM DM US $
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 577,564 293,814 427,822 610,056 365,960
Cost of Operations 351,364 177,343 179,690 202,174 121,280
---------- ---------- ---------- ---------- ----------
Gross Profit 226,200 116,471 248,132 407,882 244,680
Other Costs and Expenses:
General and Administrative 323,972 281,614 652,519 1,305,774 783,308
General and Administrative - related parties -- -- 234,177 98,594 59,145
---------- ---------- ---------- ---------- ----------
Income (loss) from operations (97,772) (165,143) (638,564) (996,486) (597,772)
Other Income and (expense):
Interest Income 4,780 1,240 19,190 19,668 11,798
Losses of unconsolidated subsidiary -- -- -- (49,000) (29,394)
Interest Expense - related party -- -- (18,100) (24,418) (14,648)
Interest Expense (28,595) (43,517) (28,618 (16,577) (9,944)
---------- ---------- ---------- ---------- ----------
(23,815) (42,277) (27,528) (70,327) (42,188)
Income (loss) before income taxes (121,587) (207,420) (666,092) (1,066,813) (639,960)
Provision for income taxes -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) (121,587) (207,420) (666,092) (1,066,813) (639,960)
========== ========== ========== ========== ==========
Basic income (loss) per share: (0.08) (0.14) (0.40) (0.61) (0.37)
========== ========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding 1,507,176 1,508,134 5,028,813 5,224,830 5,224,830
========== ========== ========== ========== ==========
December 31. 1997 December 31. 1998
----------------- -----------------
DM US $ DM US $
Balance Sheet Data:
Working capital 653,996 364,932 (168,467) (101,060)
Current assets 1,188,826 663,370 292,335 175,366
Current liabilities 534,830 298,438 460,802 276,426
Total assets 1,697,536 947,233 814,977 488,888
Total liabilities 769,130 429,178 979,471 587,565
Stockholders' equity 928,406 518,055 (164,494) (98,677)
</TABLE>
42
<PAGE>
TES Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in TES' statements of
operations:
<TABLE>
<CAPTION>
Fiscal year ended
December 31
-----------
1996 1997 1998
---- ---- ----
DM DM DM
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of Operations 60.4 39.6 33.1
Gross Profit 39.6 60.4 66.9
General and administrative 95.8 195.3 230.2
Income (loss) from operations (56.2) (134.9) (163.3)
Interest income .4 4.2 3.2
Losses of Unconsolidated Subsidiary - - (8.0)
Interest expense (14.8) (10.3) (6.7)
------ ------ ------
Net income (70.6) (140.9) (174.8)
====== ====== ======
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales for the year ended December 31, 1998, were 610,056 DM, an increase of
156,147 DM, or 25.6%, as compared to the year ended December 31, 1997. This
increase in sales resulted principally from increased production volume in TES'
recycling business, including increased production volume at its new Landsberg
facility during its first operational year.
Cost of operations for the year ended December 31, 1998 was 202,174 DM, an
increase of 22,484 DM, or 12.5%, as compared to the year ended December 31,
1997. This increase in cost of operations resulted principally from increased
operating cost directly attributable to the increase in sales. Operating costs
are principally comprised of disposal costs and transportation costs. These
categories of cost increased proportionately with the increased production
volume contributing to the increase in sales. However, TES was able to achieve
reduced unit costs in these categories as a result of the increased unit volume.
General and administrative expenses for the year ended December 31, 1998
were 1,404,368 DM, an increase of 517,672 DM, or 58.4%, as compared to the year
ended December 31, 1997. This increase in general and administrative expenses
was due to increased lease costs resulting from the lease and opening of the
Landsberg facility and to staffing and labor expenses related to the increased
production volume in TES' recycling business. TES also incurred increased
general and administrative expenses as a result of increased marketing
activities and additional professional services resulting from TES' merger plans
with ENTECS.
43
<PAGE>
As a result of the above factors, the operating loss for the year ended
December 31, 1998 was 996,486 DM, an increase in the operating loss of 384,009
DM, or 62.7%, as compared to the year ended December 31, 1997.
Interest income increased minimally for the year ended December 31, 1998 as
compared to the previous year. Interest income was 19,668 DM for the year ended
December 31, 1998 and was 19,190 DM for the year ended December 31, 1997.
Interest expenses for the year ended December 31, 1998 were 40,995 DM, a
decrease of 5,723 DM, or 12.3%, compared to the previous year. This decrease was
a result of TES' payment of 180,000 DM loan in early 1998.
TES incurred a loss from its unconsolidated subsidiary for the year ended
December 31, 1998 of 49,000 DM. No such loss was incurred in the previous year.
The loss of 49,000 DM from its unconsolidated subsidiary is a result of TES
reporting its share of losses of its investment in a subsidiary, T-Cycle
Computer Service, a German company engaged in the dismantling and disposing of
surplus electronic equipment in Germany. TES had paid 49,000 DM for its
investment in T-Cycle and accounted for this investment under the equity method
of accounting. T-Cycle has filed for bankruptcy under German law.
As a result of the above factors, the net loss for the year ended December
31, 1998 was 1,066,813, an increase of 426,808 DM, or 66.7%, as compared to the
year ended December 31, 1997.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997, were 423,300 DM, an increase of
129,486 DM, or 44.1%, as compared to the year ended December 31, 1996. Cost of
operations for the year ended December 31, 1997, was 179,690 DM, an increase of
2,347 DM, or 1.3%, as compared to the year ended December 31, 1996. Gross profit
for the year ended December 31, 1997, was 274,219 DM, an increase of 157,748 DM,
or 135.4%, as compared to the year ended December 31, 1996. These increases were
primarily due to an increase in the number of sales persons employed by TES from
one manager/sales person to four full-time sales persons. Management believes
that the increase in sales and the corresponding increase in gross profit is
directly attributable to the increase in the number of persons engaged in
marketing.
General and administrative expenses for the year ended December 31, 1997,
were 886,696 DM, an increase of 605,082 DM, or 214.9%, as compared to the year
ended December 31, 1996. This increase was principally due to the increased
costs, both direct and indirect, associated with the increase in the number of
sales persons, and increased costs for staffing and equipping the Landsberg
facility and bringing that facility into operation.
As a result of these factors, the operating loss for the year ended
December 31, 1997, was (612,477 DM), an increase in the loss of 447,334 DM, or
270.9%, as compared to the year ended December 31, 1996. In addition, these
factors resulted in a loss for the year ended December 31, 1997, of (640,005 DM)
compared to a loss of (207,420 DM) for the year ended December 31, 1996, an
increase in the loss of (432,585 DM).
44
<PAGE>
Liquidity and Capital Resources
TES is currently experiencing a liquidity crisis and must raise additional
funds, although management anticipates that TES has sufficient funds available
through borrowing from affiliates to continue operations through December 31,
1999 . TES has not generated sufficient cash-flow to fund its operations and
activities, by itself. TES traditionally relied principally upon internally
generated funds and loans from its principal stockholder and his wife to finance
its operations and growth.
During the six months ended June 30, 1997, TES received 2,208,550 DM from
an offering of its common stock conducted solely in Germany to German citizens.
At March 31, 1998, TES had working capital of 179,215 DM and cash of 386,775 DM.
At December 31, 1998 TES had negative working capital of 168,467 DM and cash had
decreased to 166,970 DM. Further, TES has a net deficit of 164,494 DM at
December 31, 1998.
Currently, TES is borrowing funds from ENTECS to meet its working capital
needs. Based upon recent sales of stock by ENTECS, management believes that it
will have sufficient funds to satisfy its cash requirements until December 31,
1999. Management intends to raise additional funds as necessary through further
public offerings of its stock in the second half of the current fiscal year and
through bank loans or loans from private investors, if necessary.
Management has no plans at this time to materially reduce the number of its
employees or dispose of any of TES' assets. TES has future minimum lease
obligations totaling 1,066,560 DM through 2003. See the Notes to Consolidated
Financial Statements of TES located elsewhere this document.
Year 2000 Compliance
The Year 2000 ("Y2K") computer problem refers to the potential for system
and processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
ENTECS has the exclusive distribution rights to Fabius, which is a software
product designed to assist companies with environmental compliance. TES has been
advised by the developer of Fabius that it is Y2K compliant. In addition, TES
has tested Fabius for Y2K compliance, and based upon the results of those tests,
management believes that Fabius is Y2K compliant. However, TES' testing of
Fabius does not cover every possible computing environment. Accordingly, some
customers may have Y2K problems with products that TES believes are Y2K
compliant. For instance, users of Fabius may be operating on older versions of
hardware platforms than the hardware platforms tested.
TES also may be affected by Y2K issues related to non-compliant internal
systems developed by TES or by third-party vendors. TES has reviewed its
internal systems, including its accounting system, and has found them to be Y2K
compliant. TES is not currently aware of any Y2K problem relating to any of its
internal, material systems and management does not believe that it has any
material systems that contain embedded chips that are not Y2K compliant.
45
<PAGE>
TES' internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of TES, such as a prolonged loss of electrical or telephone service,
Y2K problems at such third parties will not have a material impact on TES. TES
has no contingency plan for systemic failures such as loss of electrical or
telephone services. TES' contingency plan in the event of a non-systemic failure
is to establish relationships with alternative suppliers or vendors to replace
failed suppliers or vendors. Other than the previously described testing, and
remedying problems identified by testing or from external sources, TES has no
other contingency plans or intention to create other contingency plans.
Any failure by TES or its licensor to make Fabius Y2K compliant could
result in a decrease in sales of Fabius, an increase in allocation of resources
to address Y2K problems of its customers without additional revenue commensurate
with such dedication of resources, or an increase in litigation costs relating
to losses suffered by Fabius' customers due to such year 2000 problems. Failures
of TES' internal systems could temporarily prevent it from processing orders,
issuing invoices, and could require it to devote significant resources to
correcting such problems. But to management's knowledge, the internal accounting
systems have been attested by the supplier as Y2K compliant. Due to the general
uncertainty inherent in the year 2000 computer problem, resulting from the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, TES
is unable to determine at this time whether the consequences of Y2K failures
will have a material impact on its business, results of operations, and
financial condition.
46
<PAGE>
SELECTED FINANCIAL DATA OF ENTECS
The following selected financial data should be read in conjunction with
the financial statements and related notes to the financial statements appearing
elsewhere in this proxy statement/prospectus. The selected financial data as of
December 31, 1997 and 1998 and for the two years ended December 31, 1998, have
been derived from the financial statements of ENTECS that have been audited by
ENTEC's independent auditors and are included elsewhere in this proxy
statement/prospectus. The selected financial data provided below is not
necessarily indicative of the future results of operations or financial
performance of ENTECS.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1998 1998
---- ---- ----
DM DM US $
-- -- ----
Statement of Operations Data:
<S> <C> <C>
Revenues -- 69,369 41,613
Cost of Operations -- 14,004 8,401
Other Costs and Expenses:
General and administrative 256,114 1,231,359 738,668
General and administrative - related parties 87,500 217,656 130,567
---------- ---------- ----------
Income (loss) from operations (343,614) (1,393,650) (836,023)
Other Income and (expense):
Interest income 783 11,066 6,638
Interest income - related parties -- 7,515 4,508
Interest expense - related parties -- (1,682) (1,009)
Interest expense (1,794) (484) (290)
---------- ---------- ----------
(1,011) 16,415 9,847
Income (loss) before income taxes (344,625) (1,377,235) (826,176)
Provision for income taxes -- (1,472) (883)
---------- ---------- ----------
Net income (loss) (344,625) (1,378,707) (827,059)
========== ========== ==========
Basic income (loss) per share: (0.33) (0.99) (0.60)
========== ========== ==========
Weighted average common and
common equivalent shares outstanding 1,033,751 1,387,134 1,387,134
========== ========== ==========
December 31, 1997 December 31, 1998
----------------- -----------------
Balance Sheet Data: DM US $ DM US $
Working Capital (deficit) (227,687) (127,049) (78,743) (47,235)
Current assets 327,354 182,665 571,462 342,809
Current liabilities 555,041 309,714 650,205 390,044
Total assets 2,142,880 1,195,737 2,527,699 1,516,315
Total liabilities 1,486,236 829,327 650,205 390,044
Stockholders' equity 656,644 366,410 1,877,494 1,126,271
</TABLE>
47
<PAGE>
ENTECS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General and Results of Operations
ENTECS is in the business of recycling and disposal of waste materials,
development and construction of new technologies in the environmental area, and
development, production, and sale of software programs for environmental and
recycling solutions.
ENTECS was incorporated in Colorado in May 1997. It has recorded limited
sales during the period presented and is considered to be in its development
stage. ENTECS' operations to date have been carried out solely within Germany by
its wholly-owned subsidiaries, ENTECS Umwelttechnik GmbH (formerly ENTECS
Umweltmanagement GmbH until March 1998), formed in July 1997 and ENTECS Software
and Umweltmanagement GmbH, formed in March 1998.
ENTECS has incurred accumulated deficits through December 31, 1998 of
1,723,332 DM. Since ENTECS has recorded revenues of only 69,369 DM since its
inception, this deficit has occurred principally as a result of incurring
general and administrative expenses. Since inception ENTECS has incurred
1,792,629 DM in general and administrative expenses. 1,449,015 DM of these
expenditures were incurred in the year ended December 31, 1998 and 343,614 DM
were incurred from inception of the company through December 31, 1997. This
increase of 1,105,401 DM, or 322%, was the result of primarily increased
operating activities as ENTECS incurred development costs. Included in general
and administrative expenses are 305,156 DM paid to related parties since the
ENTECS' inception.
Liquidity and Capital Resources
As of December 31, 1998, ENTECS had cash and cash equivalents of 393,080 DM
and a negative working capital of 78,743 DM. ENTECS has financed its operations
since inception principally through the sale of its common stock. Since
inception, ENTECS has received proceeds from the sale of its common stock of
3,600,826 DM.
ENTECS used 742,264 DM of the proceeds from the sale of common stock to
finance its operations.
Cash used in investing activities since inception was 1,669,706 DM of which
593,750 DM were used for the purchase of license rights, 705,756 DM were used to
purchase fixed assets, and 370,200 DM were advanced to TES.
ENTECS has also used the proceeds from the sale of common stock to make
repayments to affiliated companies of 391,695 DM and to make repayments to
related parties of 287,500 DM. These repayments to affiliated companies and
related parties reflect principally the repayment of funds paid by such parties
for license fees on behalf of ENTECS.
48
<PAGE>
Year 2000 Compliance
ENTECS may be affected by Y2K issues related to non-compliant internal
systems developed by ENTECS or by third-party vendors. ENTECS has reviewed its
internal systems, including its accounting system, and has found them to be Y2K
compliant. ENTECS is not currently aware of any Y2K problem relating to any of
its internal, material systems and does not believe that it has any material
systems that contain embedded chips that are not Y2K compliant.
ENTECS' internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of ENTECS, such as a prolonged loss of electrical or telephone
service, Y2K problems at such third parties will not have a material impact on
ENTECS. ENTECS has no contingency plan for systemic failures such as loss of
electrical or telephone services. ENTECS' contingency plan in the event of a
non-systemic failure is to establish relationships with alternative suppliers or
vendors to replace failed suppliers or vendors. Other than the previously
described testing, and remedying problems identified by testing or from external
sources, ENTECS has no other contingency plans or intention to create other
contingency plans.
49
<PAGE>
BUSINESS OF TES
General Information
TES was incorporated under the laws of Colorado in June 1994. It is a
non-operating holding company. TES' operations are conducted entirely in
Germany. It has two wholly-owned subsidiaries that have been established under
the laws of Germany. Operations are conducted through these subsidiaries:
namely, Technical Environment Solutions GmbH ("TES GmbH") and TES Oecon AG
("Oecon"). TES GmbH was formed in May, 1992 and TES Oecon AG was formed in July,
1997 and commenced operations in October, 1997. Unless the context otherwise
requires, references to TES include its subsidiaries. Since 1994, TES has been
engaged in the marketing of recycling services on a contract basis primarily for
electronic scrap and other valuable waste materials in cooperation with
specialist waste disposal companies. Recently, TES commenced recycling
activities at its own facility in Landsberg a. Lech, Germany, which is southwest
of Munich. The recycling activities are conducted principally within the TES
GmbH subsidiary. Management intends to significantly expand this operation in
the future. Management also intends to develop a job training school, the Oecon
Institute, to provide training and education for positions in the recycling
industry. Management intends to focus TES' job training programs upon providing
job education and training for the long-term unemployed and disadvantaged. The
training programs are conducted within the TES Oecon AG subsidiary.
During February, 1998, TES also acquired a 49% ownership interest in
T-Cycle Computer Service and Verwertungs GmbH, a German company engaged in
dismantling and disposing of surplus electronic equipment. TES paid 49,000 DM
for its investment in T-Cycle. TES has accounted for this investment under the
equity method of accounting in accordance with U.S. generally accepted
accounting principles. Subsequent to its investment in T-Cycle, and during its
fiscal year ended December 31, 1998, TES has written off its investment in
T-Cycle as a result of heavy losses incurred by T-Cycle and the subsequent
filing of bankruptcy under German law by T-Cycle.
A significant portion of TES' revenues have been derived from a limited
number of customers. In fiscal 1998, revenues from TES' largest customer
amounted to 10% of its total revenues, and in fiscal 1997, four customers each
accounted for 10%, or 40% total, of TES' total revenues. TES' management expects
that TES will continue to be dependent upon a limited number of customers for
significant portions of its revenues in future periods.
TES has not expended a material amount of time for research and development
in the past two fiscal years. Such costs, if they are incurred, are expensed in
the period they are incurred.
TES is engaged principally in the business of helping other businesses
comply with the cost and effect of German environmental laws. As such, TES has
reported in its financial statements substantial amounts for the category "cost
of operations" which is composed of the costs TES incurred to dispose of
environmental waste for its customers. These costs, however, are directly borne
by TES' customers and not by TES. TES has not incurred material costs of its own
in complying with applicable environmental law.
50
<PAGE>
Recycling
TES offers to its customers a service intended to assist the customer in
complying with all environmental regulation to which it is subject. In doing so,
TES provides to its customers a service which disassembles, removes,
re-utilizes, re-processes, and markets and sells the re-cycled materials to
others. Its waste disposal services also include archiving the recycled
materials and documenting the path of movement and end location of that
material. This has the additional function of serving as verification for
government agencies and environmental protection groups that the waste has been
locally disposed.
TES' strategies mainly emphasize the technologically feasible reutilization
of scrap electrical and electronic equipment in a manner that not only
demonstrates economic and ecological responsibility but also achieves maximum
conservation of resources through optimum recovery of recyclable materials. TES
provides its employees with the training necessary to operate automated systems
utilized to disassemble and process the materials to be recycled. TES' processes
ensure that the materials, once disposed of, enter the reprocessing cycle and
satisfy all legal regulations.
Germany has strict laws relating to the recycling and disposal of all
manufactured products. The basis for the German environmental legislation with
respect to the treatment of waste product is called "Kreislaufwirtschafts-und
Abfallgesetz, which was effective October, 1996. The German law was enacted, in
part, to comply with requirements of the European Union. All European countries
participating in the European Union must enact such environmental laws. In
practice these laws are enacted in phases. The focus of these phases is to enact
legislation which first promotes attempts to avoid the creation of waste, second
to recycle the waste and third to deposit or incinerate the waste. Germany is a
small country with a large population. Landfill space is extremely limited.
Therefore, the government requires that electronic scrap as well as an array of
other manufactured product waste be disposed of either by incineration or by
depositing it in abandoned underground coal or salt mines. Hence disposal of
most waste in Germany is more expensive than it is in the United States.
Disposal of waste also becomes more expensive as legislation becomes more
directed to recycling or avoidance which is the trend with the European Union
dictated requirements.
Because of the requirements of the European Union, even stricter laws
regarding recycling of electronic products such as televisions, computers,
computer monitors, radios, telephones, and virtually every other type of
electronic product are anticipated by TES' management. It is expected that these
laws will require that the old products be broken down into smaller components,
and to the extent possible that these components be re-used or recycled rather
than simply being incinerated. In order to prepare for what the industry views
as inevitable recycling requirements, many larger companies have already begun
to voluntarily comply with proposed recycling standards and are shipping all
used and obsolete electronic products to recycling centers such as that operated
by TES.
TES also utilizes its manufacturing equipment to convert certain types of
glass from cathode ray tubes ("CRTs"), computer components, and certain other
manufacturing by-products and industrial wastes into manufacturing raw materials
that may be resold.
51
<PAGE>
TES employs a two-tier strategy:
o decentralized disassembly
o centralized processing and re-use.
Management intends to use a wide variety of collection points as it grows in the
future in order to provide full geographic coverage of Germany's waste disposal
needs. At this time, TES can cover the southern portions of Germany with its own
collection center, the Landsberg facility. TES has not yet expanded into
northern Germany because the cost of shipping the electronic scrap to Landsberg
in Bavaria is economically unfeasible.
One important aspect of TES' service strategy is that all recycling and
disposal paths are fully documented. Each customer who recycles electronic scrap
through TES receives a printout documenting the disposal pursuant to the
recycling laws. To accomplish this, TES and its associates offer a fully
comprehensive program to register and sort spent electronic equipment using TES'
own "RNP" data processing system, a software program that supports the exchange
of data between TES, manufacturers, and waste reprocessing companies.
The RNP database also contains:
o model and order number of electronic products
o size and weight of electronic products
o analysis of materials in electronic products
Another module in the RNP database is a logistics program likewise
developed by TES. This program covers:
o collection and disposal
o transportation and warehousing
o disposal and recycling
o documentation of each piece of equipment
o for fixed assets bookkeeping
o for the tax authorities
o for environmental groups
According to figures from the German Federal Office of the Environment,
approximately two million tons of spent electronic equipment is generated each
year in Germany alone. Of these, some 50 to 60 percent comes from the field of
entertainment electronics and another 25 percent from household appliances. The
remainder comes from the area of data processing technologies or from other
technologies primarily used by industry, research facilities, and the business
sector. Some 300,000 tons are made up of spent computers and television sets
alone, of which it is estimated that only 25 percent are disposed of in an
ecologically sound manner.
This electronic scrap contains not only valuable raw materials but also a
wide range of toxic substances harmful to the environment. TES collects and
disassembles this spent equipment and then reprocesses and markets the valuable
waste materials salvaged from it. TES also separates and properly disposes of
the toxic substances.
52
<PAGE>
The management of TES believes that the recycling of used television sets
and computer monitors including CRT glass is in a growth industry. As a result,
TES has recently expanded its efforts in this area. Recently, TES purchased
machinery designed to dismantle CRTs. In TES' CRT recycling operation, used CRTs
are shipped to TES by its customers. Under the terms of the arrangements with
its customers, TES is paid a fee for recycling the used CRTs. The CRTs include
both funnel glass - the back of a television screen, which is relatively thin
and tubular in shape - and panel glass. After the funnel glass has been cut from
the front portion of the tube and cleaned, it can be sold back to the original
manufacturers and other companies to be "up-cycled," i.e., reincorporated into a
CRT.
At this time the panel glass can not be recycled and must be incinerated.
TES must pay a fee to dispose of the panel glass. Management expects, however,
to be able eventually to either sell the panel glass to companies that recycle
glass or, at a minimum, to have these companies haul the panel glass away at no
cost to TES. Even if TES must pay to have the panel glass taken away, the CRT
recycling is a profitable business for the company because of the fees TES is
paid by its customers to recycle the CRTs. The ability to sell the panel glass
will help increase TES' profits from this operation.
TES hopes to increase its market share in the recycling of CRT glass and
believes this can be achieved as the market for its products and services is
made aware that such recycling will provide a less costly and more
environmentally responsible means of disposing of waste CRT glass when compared
to the alternative methods currently utilized to dispose of CRT glass. Further,
management believes that manufacturers of CRT glass will shift their purchases
of CRT glass to the recycled product as they learn of the savings that can be
achieved when compared to CRT glass manufactured from raw, rather than recycled,
ingredients. In addition, management believes that the electronics industry may
be a source of other waste streams that may be recycled. Management believes
that TES' CRT glass recycling and materials reuse capability will position TES
to process large volume end-of-life television and computer waste since current
regulations in Germany exclude them from landfills.
TES also recycles computer systems. TES resells many of the used computer
parts that are generated from this recycling activity, including plastic, gold,
copper, aluminum, steel, and other raw materials. Management believes that this
is possible because the most cost effective source for spare parts is generally
recycled parts, and for out-of-production parts, it is frequently the only
source. Conversely, the best use for recycled parts is to resell them for use in
the installed base as either spares or low-cost additions to existing systems.
Similarly, recycled parts are also often both less expensive and more readily
available than repaired parts.
TES is currently operational in the types and methods of recycling of the
waste products described above. However, the industry is young and not as yet
fully developed. The management of TES anticipates that it has positioned itself
to take advantage of the growth in this industry as its market's customer base
sees the savings that recycled products can produce and as the impact and cost
of increasing national legislation is felt.
Recycling Process
Material to be recycled is transported by TES from its customers location
by truck. The cost for such transportation is borne by the customer. The first
step in the processing of recycled material at TES' location involves the
inspection of the material received by TES to assure that it complies with
53
<PAGE>
requirements set forth in TES' agreements. This process will be conducted on a
visual basis by TES personnel. Assuming that the material is in compliance with
TES' agreements, the material will be sorted for processing on TES' recycling
line. Nonconforming shipments will be rejected and returned to the supplier.
This process will be undertaken to protect TES from receiving materials that it
is not equipped to handle either on the basis of the economics or safety
involved with handling of the material.
After the material has been sorted, it will then be stored until it is
delivered to the recycling line. Material on the recycling line will be
disassembled, and spare computer parts, integrated circuit boards, and other
parts of the electronic products that can be resold will be sorted and cleaned.
Other material will be sorted for sale (if appropriate), cleaned and (if
appropriate) ground and crushed. As the final result of the process, as much as
possible of the residual materials are reused in an environmentally sound way.
They are recovered, sorted, and returned to the cycle of raw materials. To
prevent the processing techniques from emitting toxic by-products, TES employs
mechanical processes exclusively, i.e. no chemicals are used by TES in the
disassembly process.
Those materials that cannot be recycled are discarded. The materials which
TES must discard are hazardous waste, CRT glass and fire-retardant plastics from
computers. TES contracts with others to discard such materials. The costs to
dispose of such material are borne directly by the customer. The cost to discard
such materials is included in the cost of operations of TES' financial
statements. These costs have declined on a per unit basis as the volume of
production of TES has increased.
TES disassembles the following kinds of electronic scrap for recycling:
o cathode ray tubes
o computers and peripherals of any kind PCs and monitors
o other office equipment
o household appliances of all sizes
o television sets, radios, VCRs etc.
o telecommunication equipment (e.g., telephones)
o electrical tools
o standby power generation units
o industrial control units
o measurement and control devices
o laboratory and medical equipment
o visual recording and reproduction equipment
o composite plastics and metals
o circuit boards
o magnetic and video tapes
To obtain fully sorted raw materials from worn-out electronic equipment,
the first thing that must be done is to disassemble the scrap by hand. During
this process components with toxic substances such as condensers or lithium
batteries are removed and sent to separate disposal plants.
54
<PAGE>
At this preliminary disassembly stage the scrap is broken down into the
following categories:
o plastics
o ferrous metals
o nonferrous metals
o cathode ray tubes
o cables
o circuit boards
o toxic substances
If the preliminary disassembly stage fails to yield fully sorted materials,
further processing is required. In the next stages the material is further
broken down through non-chemical and non-thermal processes. The mixture of
materials thus obtained is completely sorted by means of magnets, eddy currents,
wind, sifting, or similar techniques.
These processes yield, among other things, the following types of
materials:
o iron
o aluminum
o copper
o glass
o plastics
o ceramics
o composite metal granulates
The fully separated metals and glass are sent to various smelting plants as
secondary raw materials. Similarly, those fully sorted plastics that have not
been treated with flame-proofing are sent away for reuse. Plastics which are not
fully separated or which contain bromine flame-proofing are disposed in
accordance with environmental regulations, as are all other toxic substances.
Precious metal granulates are sent to separation plants for further processing.
All the methods TES employs represent state-of-the-art technologies and
have been streamlined for a smooth interaction of their ecological and economic
aspects. Further, TES' methods are designed to assure compliance with all legal
and government regulations, with the paths of reprocessing and disposal
completely documented.
CRTs are removed from the television sets and computer monitors, and then
processed by the CRT recycling line. TES employs a specially designed saw to
separate the panel glass from the funnel glass. After the pieces of CRT glass
are sorted by type of glass and by size, the glass is cleaned and coatings on
the glass are removed prior to sale or other disposition of the glass.
Job Training
In Germany all trades are governed by strict educational standards. This
means that anyone who wants to work as a plumber, carpenter, baker, cook, etc.
must complete a training program for that trade and work for a number of years
under the supervision of a "Meister" in order to gain practical training.
Without this training and experience, one cannot be employed in a trade.
55
<PAGE>
Germany currently has the highest unemployment rates it has had since the
end of World War II. The unification of the former East Germany with West
Germany has created especially high unemployment rates among young people in the
former East German states. The German federal and state governments are
therefore anxious to create job opportunities for these long-term unemployed
youths and are providing subsidies for companies that create jobs.
TES Oecon Institute is developing a job training center. The center is
intended to provide training for long-term unemployed youths and disadvantaged
people. The Oecon Institute is located within the Landsberg facility. It intends
to offer various new technical job classifications in environmental protection
areas, such as the position title "Electronic Recycling Technician." TES Oecon
Institute will offer courses required by certain governmental agencies for
environmental managers of other companies, as well as seminars and workshops
covering special environmental issues such as environmental law issues,
certification and audits, management systems, software program training, and
ecological input-output analysis.
With its job training program the Oecon Institute will provide the
opportunity for the long-term unemployed and other disadvantaged groups to find
an entrance into the work force. Through the training offered by TES, the newly
trained employees will be prepared for new challenges.
The job title "electronic recycling technician" is timely for the new
market structures because the need for qualified personnel for proper disposal
technologies will significantly increase in the coming years. The practical
training for electronic recycling technician will take place in the Institute's
own workshop and in partner companies throughout Germany.
The new profession, electronic recycling technician, has been defined by
the rules and regulations of the Federal Ministry for Youth and Research and
students who successfully complete the training will receive certification from
the responsible industry chambers of commerce. The job training facility will
receive daily subsidies for each student as required by law.
Management anticipates that the job training center will be very successful
because there is an increasing demand for qualified technicians. In addition,
the government must make even greater efforts to reduce Germany's high
unemployment. There are a number of state subsidies and job creation programs
which offer job training schools a sure and long-term financial basis. Potential
sources for subsidies include, among others, the Social Welfare Offices, Youth
and Social Service Agencies, and Unemployment Agencies. TES expects it will be
dependent to some extent upon various government subsidies for the new job
training program. Further, along with the job training, the Institute will offer
a number of revenue producing seminars and workshops covering special
environmental issues, environmental law issues, and the certification and
auditing of environmental operations and locations. A close working relationship
with TUEV-Suddeutschland, a product testing and certification organization in
Germany similar to that of UL Laboratories in the United States will allow TES
access to qualified teaching and training personnel.
56
<PAGE>
Competition
Management believes that the electronic recycling services industry is
fragmented with widespread competition from a variety of small independent
suppliers and several major suppliers in Germany. Management believes that
competition for recycling and waste disposal customers is based on price and the
ability to offer convenient locations for shipping of waste and recycling
products. Through their subsidiaries, RWE, VEBA, VIAG, are TES' major
competitors in Germany.
Government Regulation
Germany has adopted some of the strictest laws in the world relating to the
recycling and disposal of chemicals, waste, appliances, computers, television
sets, and other electronic products. The business of recycling and waste
disposal is subject to various governmental laws on both a federal and state
basis in Germany. Further, the regulations are becoming increasingly complex and
recycling and disposal more strictly regulated. These laws and regulations
include landfill disposal restrictions, hazardous waste management requirements,
and air quality standards, as well as special permit and license conditions for
recycling and disposal of waste and outdated or used products.
TES' recycling centers, including the Landsberg facility as well as various
centers with which TES may contract to provide services, are subject to various
federal, state, and local laws and regulations and licensing requirements
relating to the collection, processing, and recycling of chemicals, waste,
appliances, computers, television sets, and other electronic products.
Requirements for registrations, permits, and licenses vary depending upon the
locale in which the recycling center is located. TES' centers are registered
with the German government as hazardous waste generators and are licensed, where
required, by appropriate state and local authorities. TES has agreements with
approved and licensed hazardous waste companies for transportation and disposal
of PCBs from its recycling center.
Management believes that further government regulation of the recycling
industry could have a positive effect on TES' business; however, there can be no
assurance what course future regulation may take. Under some circumstances,
further regulation could materially increase the costs of TES' operations and
have an adverse effect on TES' business. In addition, as is the case with all
companies handling hazardous materials, under some circumstances, TES may be
subject to contingent liability.
Employees
TES has 14 full time employees, including Gerd Behrens, two
management-administrative persons, and 11 line workers employed in its recycling
business. Further, TES employs one person as a secretary/administrative
assistant on a part-time basis. In addition, TES has contracted with three
independent contractors who are engaged in the marketing of TES' recycling
services.
57
<PAGE>
Description of Property
TES currently leases office space for its main corporate offices at 25
Impler Strasse, 81371, Munich at a monthly rental of approximately 5,552.75 DM.
The lease expires on December 31, 2004. Management of TES believes that the
existing facilities are adequate at this time for TES' operations. In addition,
TES leases two buildings for its recycling operations at Landsberg a. Lech,
Germany at a monthly rental of approximately 18,700 DM. The lease on these
buildings expires on December 31, 2001. Under the terms of this lease, TES also
has an option to purchase the buildings for 2,200,000 DM if the option is
exercised prior to December 31, 2000. Thereafter the price increases by 77,000
DM per year. The facility in Landsberg is sufficiently large that TES expects
that it will also be able to conduct its job training at that same facility.
BUSINESS OF ENTECS
ENTECS was incorporated under the laws of Colorado in May 1997. It is a
non-operating holding company. ENTECS' operations are conducted entirely in
Germany by two wholly-owned German subsidiaries, ENTECS Umwelttechnik GmbH and
ENTECS Software und Umweltmanagement GmbH. ENTECS is involved in the
environmental protection industry, which is expected to grow rapidly due to
increasing investments being made in the area by both private enterprises and
public institutions. The environmental protection industry is also expected to
continually create new jobs because of the dynamic growth in the area.
ENTECS' stated corporate purpose is the development and marketing of future
oriented environmental patents, innovations, and technologies as well as
software solutions for the environmental market. ENTECS is achieving this goal
by working closely with patent owners and engineers with special technical
know-how in the industry.
ENTECS holds the exclusive licensing rights to a new recycling system for
the capture and re-use of cement waste and waste water that is generated by
cement mixing plants. The system known as the "BRS-Compact" is in the process of
being patented both as a technology and as a process. ENTECS has acquired the
exclusive licensing rights to the BRS-Compact from the patent holder, Mr.
Juergen Bozenhardt, for all of Europe and a right of first refusal for the
Americas and Asia.
ENTECS has also acquired a license for two patents for the development of a
recycling machine based on double worm system for recycling metal dust and other
materials. The double worm system is based upon the principle of counter
rotating screws that are designed to handle a wide variety of materials. The
twin screws can be modified and assembled in accordance with end-producer
requirements. For example, if the base waste materials to be recycled have a
high water content, a parallel separation of the liquid and solid components can
be achieved. The patent will include both the process based on the worm system
for recycling metal dust and other materials and the finished products of the
recycling machine. The patent process is registered with the European Patent
Office under number 038 3227 and number 038 3229.
58
<PAGE>
ENTECS is active in the business areas of concrete recycling, production of
artificial peat products, and software solutions for environmental management.
The following is a description of these industry segments:
The Concrete Recycling System (BRS Compact)
The ready-mixed concrete industry produces significant quantities of waste
concrete and mortar in the production process and when the concrete mixer trucks
are cleaned out each day. This waste concrete and cleaning process produces a
large quantity of waste water that is very high in alkaline (pH value 12.9 -
13.9). Hence the waste water cannot be disposed of via the public sewer systems
in most European Union countries because of environmental regulations.
The new concrete recycling system makes it possible for concrete plants to
recycle the waste concrete by washing the sand and gravel so it can be reused.
The waste water generated by the process is also reused in the cement mixing
plant. Not only are the waste products reused but also public land fill space is
saved because until now the cement waste had to be disposed of as "special"
waste material. This process eliminates all waste from the process. In addition
to the cost savings on material, the water recycling reduces the cost of fresh
water used in the process and sewage charges. The BRS Compact system includes
all unique features of ENTECS' competitor's systems as well as other features
which ENTECS' competitor's systems do not include. Management believes that this
new concrete recycling system is currently the only one of its kind world-wide,
which allows for completely waste-free concrete production and has the following
advantages:
o No production of alkaline waste water = Cost savings for fresh water
and waste water disposal;
o Complete recycling of concrete components (sand and gravel) = Cost
savings for raw materials and landfill use;
o Residue-free production of fresh concrete = No need for waste concrete
storage and disposal; and
o Process patent is pending
The target market for the BRS Compact is in particular the ready-mix
industry and concrete fabrication operations. In Germany alone there are
approximately 2,600 ready-mix companies according to the Federation of German
Ready-Mix Industries. Further, there are approximately 8,000 ready-mix companies
in the remaining European Union member countries.
The patent holder of the BRS Compact System, Mr. Juergen Bozenhardt, has a
consulting agreement with ENTECS GmbH. He has made demand under that agreement
for 177,000 DM which he claims is owed for unpaid consulting fees. Mr.
Bozenhardt has not yet filed a claim with any court or administrative agency in
Germany. ENTECS believes that it owes Mr. Bozenhardt no more than 20,000 DM for
consulting fees. Further, ENTECS believes that it has a cause of action against
Mr. Bozenhardt for breach of their contractual agreement as well as a breach of
the license agreement for the BRS Compact System with Mr. Bozenhardt.
ENTECS has learned that the BRS Compact System licensed from Mr. Bozenhardt
has several design defects which prevent the machine from operating properly.
After a potential customer refused to accept the BRS system because of several
59
<PAGE>
breakdowns during its testing of the machine, ENTECS contacted an independent
engineering expert to test the BRS Compact System. The engineering consultant
advised ENTECS that there are design defects in the BRS Compact System which
will prevent it from working reliably unless corrected. ENTECS has requested
quotes to correct the design defects and anticipates that such defects will cost
between 100,000 DM and 150,000 DM to correct. ENTECS intends to correct the
design defects and continue to market the system to potential users.
After the discovery of the design defects, ENTECS notified Mr. Bozenhardt
that it was terminating the consulting contract between the parties.
Subsequently, Mr. Bozenhardt sent notice to ENTECS that he considered both the
consulting agreement and the license agreement for the BRS Compact System to be
terminated. ENTECS believes that it still holds the license to market the BRS
Compact System and intends to vigorously defends its rights under the license if
necessary. Further, ENTECS believes that once the design defects of the BRS
Compact System are corrected, it will be able to market the system to its
customers and to enter into sub-license agreements with others to also market
the system.
Wood Fiber/Artificial Peat
Peat cutting or harvesting has come under public criticism for ecological
and conservation reasons. Peat cutting will be completely prohibited by state
law in Bavarian and Hessian moors in the foreseeable future. Large scale peat
harvesting has already been largely discontinued because most of the land leases
for the peat harvesting expire over the next ten year period. Development of
artificial peat products is therefore necessary because of the reduction of peat
harvesting. The annual peat usage in Germany currently is approximately 6
million square meters, according to the 1994 database of "Torfstreuverbund", an
association of peat producers in Germany. The amount of peat harvested
historically will have to be artificially produced in the long term.
ENTECS' subsidiary ENTECS Umwelttechnik GmbH owns an artificial peat
production system. ENTECSS Umwelttechnik GmbH produced three grades of
high-quality all natural artificial peat products. The quality of the artificial
peat depends on the quality of the raw materials used in the process. The
artificial peat products have all of the qualities of peat. The artificial peat
products are marketed as TORBELLA(R)plus, TORBELLA(R)standard, and Tornova(R).
Torbella(R)and Tornova(R)are registered trademarks. ENTECS believes these
products provide the following advantages:
o Flawless natural product without chemical additives;
o Large water absorption capacity;
o Development of high-quality humus soil;
o Produced from waste wood;
o Unlimited uses; and
o Contributes to the conservation of the bio-top and the protection of
the peat deposits.
ENTECS presently owns a production facility for artificial peat located in
Bad Wurzach/Allgau. All materials, transportation facilities and technical
services for the production of artificial peat are maintained presently at this
one location. ENTECS management has been investigating the feasibility of adding
a second location to its artificial peat production capabilities. ENTECS'
management does not anticipate adding a second location, however, until after
the merger, if then.
60
<PAGE>
Target customers are garden soil manufacturers, garden supply stores,
and governmental units. Alternative uses for the products include the following:
o Good for use where peat normally is used (gardening and farming);
o Mulch material;
o Athletic fields;
o Pet and animal cages and stalls; and
o Special uses: biological filters for biological exhaust filtering or
as a binding material for soaking up chemical substances.
Software Solutions for Environmental Protection
Interest is increasing for an automated solution for businesses that need
to monitor their environmental protection obligations. This involves overall
management supervision of the organizational structure, areas of responsibility,
patterns of behavior, operational procedures, and processes and materials for
the establishment and implementation of firm wide environmental policy. Until
now, the software programs for management of environmental protection
obligations for small and medium-sized businesses have been too inflexible,
complex, and expensive. Therefore AkkU Umweltberatung GmbH, a Munich-based
company, developed an inexpensive and individually customizable software package
to assist small and medium-sized businesses to develop their own environmental
management systems. The software is known as the "Fabius 1.0 Software Module for
Effective Environmental Management." In cooperation with ENTECS Software und
Umweltmanagement GmbH the Fabius software was further developed to the current
version "Fabius 2.1" (collectively with the Fabius 1.0 version, "Fabius"). The
Fabius software's copyright is owned by AkkU Umweltberatung GmbH. ENTECSS
Software und Umweltmanagement GmbH has acquired an exclusive distribution
license for Fabius.
Fabius has been on the market in varying industry branches and with firms
of varying size since 1996. Some of the well-known users of the software are
Allianz AG, Dr. Oetker KG, Tetra Pak GmbH, and Tesa-Werke. Fabius was rated by
the Fraunhofer Institute for Management and Organization (Fraunhofer IAO,
Stuttgart, April 1998) as one of the most used environmental protection software
solutions for businesses.
ENTECS Legal Proceedings
ENTECS is involved in a dispute with a former independent contractor.
ENTECS has received a demand for payment under its agreement for independent
contractor services with Juergen Bozenhardt, the patent holder of the BRS
Compact concrete recycling system, which ENTECS has licensed from Mr.
Bozenhardt. Neither Mr. Bozenhardt nor ENTECS have filed a claim with any court
or administrative agency at this time. See "Business of ENTECS -The Concrete
Recycling System (BRS Compact)" for further discussion of this dispute.
61
<PAGE>
MATERIAL CONTRACTS BETWEEN TES AND ENTECS
TES previously entered into a license agreement which it subsequently sold
to ENTECS. This license is for the exclusive rights to produce and to sell the
BRS-Compact concrete recycling system. The license pertains to all areas of the
world except for the United States of America and Asia. TES obtained a first
right of refusal for rights to produce and sell the BRS-Compact system in the
United States of America and Asia. This license was acquired from Mr. Juergen
Bozenhardt in March 1997 and subsequently sold to ENTECS in September 1997. The
license grants the holder of the license the right to use the technology for
fifteen years and grants the licensee the first right of refusal to purchase the
technology for up to two years after the termination of the license.
Under the terms of the license agreement, ENTECS has paid the licensor
625,000 DM to acquire the rights under the license. Of this amount, 250,000 DM
was paid by TES to Mr. Bozenhardt, the licensor, on behalf of ENTECS and was
treated as a due to affiliate payable by ENTECS at December 31, 1997. The full
amount of the due to affiliate payable was repaid in 1998.
In addition to the license fee described above, ENTECS, as licensee, is
required to pay to Mr. Bozenhardt a royalty of 6% of all net sales of the
product sold by ENTECS.
ENTECS has also acquired an exclusive license covering two European patents
from Data Consult, a company owned by Mr. Gerd Behrens, President of TES and
ENTECS. The two patents (Nos. EPO 383227 and EPO 383229) relate to the
technology and process to bind particle wastes such as dust, metal scrap,
fibers, waste paper and other similar matter into solids as well as a process
for processing oil sludge containing iron. The date of the license is May 15,
1997 and it terminates with the expiration of the patents, which under German
law is typically twenty years from the date of the patent registration. Patent
No. 383227 was issued on May 12, 1993 and patent no. 383229 was issued on May 6,
1992. The license to these patents was acquired by Mr. Behrens from a company
controlled by Mr. Dieter Gastinger, an officer and director and a stockholder of
ENTECS. The license for this technology applies to all countries of the European
Union in which the patents are valid. In areas outside the European Union,
ENTECS is prohibited from using the licensed processes or from selling the
products produced by the licensed processes if there is no patent protection in
those areas. The license fee to acquire the licenses was 650,000 DM, of which
250,000 DM was paid by TES and was accounted for by ENTECS as due to affiliate
at December 31, 1998. ENTECS has not yet put the technology or process into
production and has not yet generated any revenue from this license.
62
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TES
The following table sets forth information with respect to the ownership of
TES' common stock by all officers, directors and director nominees,
individually, all officers, directors and director nominees as a group, all
beneficial owners of more than ten percent of the common stock as of December
31, 1998, and by two of TES' consultants. Except as otherwise indicated, the
following stockholders have sole voting and investment power with respect to the
shares.
<TABLE>
<CAPTION>
Name and Address Number of Percent of Number of Shares Percent of Class
Of Owner Shares Class after Merger after Merger
-------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
Gerd Behrens 2,760,000(1) 52.8% 6,225,000 54.8%
25 Impler Strasse,
81371, Munich
Germany
Frank Behrens 600,000(2) 11.5% 1,986,000 17.5%
25 Impler Strasse
81371, Munich
Germany
Jutta Behrens 2,760,000(1) 52.8% 6,225,000 54.8%
25 Impler Strasse
81371, Munich
Germany
Karsten Behrens 850,000(2) 16.3% 2,236,000 19.7%
25 Impler Strasse
81371, Munich
Germany
Yvonne Marquard 240,000(3) 4.2% 863,700 7.6%
25 Impler Strasse
81371, Munich
Germany
Dieter Gastinger -0- -0- 693,000 6.1%
25 Impler Strasse
81371, Munich
Germany
All officers, directors
and nominees as a group
(4 persons) 3,360,000(4) 64.3% 8,904,000 78.4%
63
</TABLE>
<PAGE>
- ------------------
(1) Gerd and Jutta Behrens are husband and wife, and each own shares
separately. Gerd Behren individually owns 1,500,000 shares and Jutta
Behrens individually owns 1,260,000 shares. As husband and wife each of
them may be considered the beneficial owner of the shares held by the
other.
(2) Frank Behrens and Karsten Behrens are brothers and are the sons of Gerd and
Jutta Behrens. Gerd and Jutta Behrens disclaim beneficial ownership of the
shares held by their sons.
(3) Yvonne Marquard has served as a consultant to TES and has been paid
consulting or finder's fees for her efforts in assisting TES with its
financing efforts. Ms. Marquard is the wife of Michael Marquard, who is an
employee of TES. Michael Marquard may be deemed to be the beneficial owner
of these shares.
(4) Does not include shares held by Karsten Behrens, nor does it include shares
held by Yvonne Marquard, because neither are officers or directors of TES.
(5) Includes shares beneficially held by Mr. Gerd Behrens, Mr. Frank Behrens
and by Mr. Dieter Gastinger, who is expected to be nominated to the board
of directors subsequent to the Merger.
There are no outstanding options, warrants, or rights to purchase
securities from TES.
64
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF TES
Officers, Directors and Key Consultants
The officers and directors of TES and key consultants are as follows:
<TABLE>
<CAPTION>
Officers and Directors(1)
- -------------------------
Tenure as Officer
Name Age Position(s) or Director
---- --- ----------- -----------
<S> <C> <C> <C>
Gerd Behrens 61 Chairman of the June 21, 1994
Board and President to Present
Frank Behrens 32 Secretary March 3, 1995
and a director to Present
Jutta Behrens 60 Treasurer March 3, 1995
and a director to Present
Key Consultants(1)
- ------------------
Karsten Behrens 31 Consultant October 1, 1996
to Present
Yvonne Marquard 29 Consultant February 1, 1997
to Present
Director Nominees(2)
- --------------------
Dieter Gastinger 55 Director Nominee As of Date of Merger
</TABLE>
(1) All individuals will remain in the same titles and positions indicated
subsequent to the merger.
(2) The board of directors of TES has nominated Dieter Gastinger for election
to the TES board of directors upon consummation of the merger.
Gerd Behrens, Jutta Behrens, Frank Behrens, Karsten Behrens and Yvonne
Marquard may be deemed to be "promoters" and "parents" of TES within the meaning
of the rules and regulations promulgated under the Securities Act.
The directors of TES are elected to hold office until the next annual
meeting of stockholders and until their respective successors have been elected
and qualified. Officers of TES are elected annually by the board of directors
and hold office until their successors are duly elected and qualified. Gerd
Behrens and Jutta Behrens are married to each other, and they are the parents of
Frank Behrens and Karsten Behrens. Frank Behrens and Karsten Behrens are
brothers. There are no other family relationships between any director or
65
<PAGE>
executive officer and any other director or executive officer. Set forth below
is biographical information with respect to TES' founders and promoters and each
officer and director.
Gerd Behrens, founder and promoter, has been chairman of the board and
president of TES since inception. Mr. Behrens holds a Diploma as a Businessman
(Dipl. Kaufmann), which is roughly equivalent to a Bachelors Degree in Business
Administration in the United States. Mr. Behrens has over 35 years of experience
in business with a variety of firms and has served in a number of positions,
including senior management positions, since 1989. From 1989 until the founding
of TES, Mr. Behrens was the managing director of Data Consult, a firm located in
Munich, Germany, that purchased and sold used computers. Since the founding of
TES, Mr. Behrens has devoted substantially all of his time to its business and
affairs.
Frank Behrens has been secretary and a director of TES since March 3, 1995.
Mr. Behrens is a graduate of Ludwig-Maximillians University in Munich in
Geography and Economics. Mr. Behrens has served as a consultant to various
firms, including TES, since graduating from the University of Munich in 1995.
Mr. Behrens' consulting services have related primarily to urban planning and
development and the development of environmental management systems and
organization structures and certain software tools for these systems. Mr.
Behrens provided TES with assistance in the writing and drafting of its business
plan and offering materials that were used to raise funds from German investors
and with the development of environmental management systems and organization
structures and certain software tools for these systems.
Jutta Behrens has been treasurer and a director of TES since March 3, 1995.
Mrs. Behrens is a qualified industrial accountant and has since 1970 owned and
operated her own firm which provides accounting services to businesses and
individuals in Germany.
Karsten Behrens has been a consultant to TES and has acted as its legal
counsel since October 1, 1996. Mr. Behrens is a graduate of Ludwig-Maximillians
University in Munich in law. Mr. Behrens has completed the necessary
post-graduate employment requirements and passed the necessary examinations to
be licensed as a lawyer in Germany. He has provided TES with legal services and
with other management and consulting services. His principal consulting
activities were focused upon providing TES with assistance in the writing and
drafting of its business plan and offering materials that were used to raise
funds from German investors and in assisting TES with various legal matters.
Yvonne Marquard has been a consultant to TES since February 1, 1997. Ms.
Marquard assisted TES and ENTECS with the placement of its common stock in
Germany. Ms. Marquard founded her own firm--Yvonne Marquard Unternehmensberatung
in 1997 to provide financial consulting services to various businesses. Prior to
founding her own firm Ms. Marquard was employed by AURUM Vermoegensanlagen GmbH,
a German financial services firm.
Dieter Gastinger will be a director of TES upon completion of the merger
and has been a director of ENTECS since its inception. Mr. Gastinger has over 35
years of experience in business. For the past ten years he has been the owner of
a firm offering environmental services and recycling technologies. Prior to
starting his environmental recycling business, Mr. Gastinger was CFO for a
renting service firm and managing director of a leasing firm in Germany.
66
<PAGE>
Executive Compensation
The following table summarizes all compensation paid to the officers and
directors of TES, and to Karsten Behrens as a consultant, for services rendered
to TES during the last three fiscal years.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------- ------------
Other Number of
Name and Fiscal Salary/ Annual Options
Principal Position Year Consulting Fees Compensation Awarded
- ------------------ ---- --------------- ------------ -------
<S> <C> <C> <C> <C>
Gerd Behrens, 1998 15,500 DM -0- -0-
president 1997 57,600 DM -0- -0-
and director 1996 10,000 DM -0- -0-
1995 24,000 DM -0- -0-
Jutta Behrens, 1998 -0- -0- -0-
treasurer 1997 -0- -0- -0-
and director 1996 -0- -0- -0-
1995 -0- -0- -0-
Frank Behrens, 1998 -0- -0- -0-
secretary 1997 40,250 DM -0- -0-
and director 1996 -0- -0- -0-
1995 -0- -0- -0-
Karsten Behrens, 1998 12,255 DM -0- -0-
consultant 1997 98,650 DM -0- -0-
1996 3,150 DM -0- -0-
1995 2,930 DM -0- -0-
</TABLE>
The exchange rate for DM to US dollars at April 28, 1999 was 1.8385 DM for
each U.S. Dollar. No advances have been made or are contemplated by TES to any
of its officers or directors.
Employment and Consulting Agreements
TES GmbH, a wholly owned subsidiary of TES, has entered into an employment
agreement with Gerd Behrens under which Mr. Behrens will be paid approximately
6,500 DM per month. Mr. Behrens has deferred payment of this compensation until
TES has funds available to pay Mr. Behrens. Further, TES has a consulting
agreement with Jutta Behrens' accounting firm under which Mrs. Behrens' firm is
paid 500 DM per month in exchange for providing the services of Jutta Behrens to
TES. Also, TES has a consulting agreement with Frank Behrens' personal
consulting firm, under which the firm will be paid 30 DM per hour for providing
the services of Frank Behrens to TES. Karsten Behrens serves on the board of
directors of TES Oecon AG, and as such there is a consulting agreement with
Karsten Behrens' personal consulting firm under which his firm is paid an hourly
67
<PAGE>
fee of 50 DM per hour for services as needed. Gerd Behrens devotes his full time
and attention to the business and affairs of TES and its subsidiaries. Frank
Behrens is expected to devote approximately 30 hours per month on average to the
business and affairs of TES, with the expectation that as TES requires more of
Mr. Behrens' time and efforts he will devote more time to TES with an
appropriate increase in his compensation arrangements. Jutta Behrens is expected
to devote such time as is necessary to maintain TES' accounting records on a
current basis. It is not anticipated that Mrs. Behrens will devote additional
time to TES, and as TES' needs for accounting and bookkeeping increase,
management believes that TES will hire accounting and bookkeeping personnel
directly to meet those needs. It is also anticipated that Mrs. Behrens will
remain as the treasurer until such time as TES' business requires a full-time
person, at which time it is expected that TES will replace Mrs. Behrens with a
qualified person. Karsten Behrens is expected to devote approximately 10 hours
per month on average to the business and affairs of TES, with the expectation
that as TES requires more of Mr. Behrens' time and efforts he will devote more
time to TES with an appropriate increase in his compensation arrangements. TES
and ENTECS have each entered into a consulting agreement with Yvonne Marquard in
which she is paid a consulting or finder's fee based upon the difference between
20% of the gross proceeds raised and the amount of commission or fees actually
paid to brokers or finders for the sale of the Company's securities. Ms.
Marquard was paid by ENTECS approximately 162,800 DM under the terms of this
agreement in 1998. Ms. Marquard is the wife of Michael Marquard, who is an
employee of TES.
The employment and consulting agreements between TES and Gerd Behrens,
Jutta Behrens, Frank Behrens, and Karsten Behrens also contain an agreement to
maintain confidentiality of trade secrets and other materials.
Directors
Other than in accordance with to their employment or consulting
arrangements, the members of the board of directors are not compensated for
their services as directors; however, they are reimbursed for all reasonable
expenses incurred in connection with those services.
Option Plans
Except as described below, TES has no retirement, pension, profit sharing,
stock option, or insurance or medical reimbursement plans or programs covering
its officers and directors, and does not contemplate implementing any such plans
at this time.
The board of directors of TES has adopted a stock option plan which
provides for the grant of options to purchase an aggregate of not more than
500,000 shares of TES' common stock. The purpose of the stock option plan is to
make options available to directors, management, key employees, consultants, and
technical advisers of TES in order to provide them with a more direct stake in
the future of the company and to provide them with additional rewards and
incentives for contributing to TES' success.
The stock option plan will be administered by a committee appointed by the
board of directors which determines the persons to be granted options under the
plan, the number of shares subject to each option, the term of the option, the
manner in which the option may be exercised, and the exercise price of each
68
<PAGE>
option, subject to the requirement that no option may be exercisable more than
10 years after the date of grant. The committee will have the power to establish
such other terms and conditions for options granted under the stock option plan
as they determine are necessary and appropriate. No option granted under the
plan shall be transferable otherwise than by will or the laws of descent and
distribution. The exercise price of stock options granted under the plan will be
established by the board of directors in their sole discretion and may be less
than the fair market value of the underlying shares on the date of grant as
determined by the committee. The exercise price may be paid in cash or in common
stock or a combination of cash and common stock.
As of the date of this proxy statement/prospectus, no options have been
granted under the stock option plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the founding of TES, Gerd Behrens acquired 4,500,000
shares of its common stock. Subsequent to the founding and prior to the time
that TES raised any funds from outside directors, Mr. Behrens sold his wife,
Jutta Behrens, and his sons, Karsten and Frank Behrens, 2,760,000 of these
shares and sold Yvonne Marquard 240,000 of these shares. Mr. Behrens paid
approximately 90,870 DM for his original 4,500,000 shares. The shares discussed
in this paragraph have been adjusted to reflect a stock dividend issued in
December, 1998.
In addition, Jutta Behrens has loaned TES approximately 141,250 DM. The
initial loan was made on March 20, 1996, in the amount of 80,000 DM for a
five-year term and bears interest at 9.25% per year. The second loan was made on
September 10, 1996, in the amount of approximately 50,000 DM for a four year
term and bears interest at 8% per year. The third loan was made on December 31,
1996, in the amount of approximately 11,200 DM for a four year term and bears
interest at 8% per year. Further, Gerd Behrens loaned TES approximately 100,000
DM in connection with the capitalization of TES Oecon AG, which was interest
free until January 1, 1998. Subsequent to January 1, 1998, the loan bears
interest at a rate of 6% per annum. The loan is due on December 31, 2001,
subject to a right for TES to extend the loan for an additional 5 years if
necessary for economic reasons.
TES' president and major stockholder is also president and the major
stockholder of ENTECS. TES paid a deposit of DM 250,000 for the rights to use
the BRS concrete recycling system and subsequently transferred the rights to
ENTECS in exchange for a short term note. The advance was paid in full during
1998. Additionally, ENTECS made advances to TES aggregating DM 370,200 during
the year ended December 31, 1998. The advances bear interest at 6% per annum and
are due after ten years.
During 1997, TES made working capital advances to ENTECS of DM 50,000 and
paid DM 86,250 of costs associated with the operations of ENTECS. The working
capital advance accrued interest at 8% per annum. ENTECS repaid the working
capital advance with payments of DM 23,000 in 1997 and DM 27,000 plus accrued
interest in January 1998.
69
<PAGE>
In connection with TES' financing efforts in Germany, TES entered into an
agreement with Yvonne Marquard under which Ms. Marquard was paid a consulting or
finder's fee based upon the difference between 20% of the gross proceeds raised
and the amount of commission or fees actually paid to brokers or finders for the
sale of TES' securities. Ms. Marquard was paid approximately 86,533 DM under the
terms of this agreement. Ms. Marquard is the wife of Michael Marquard, who is an
employee of TES.
TES also paid Frank Behrens consulting fees equal to 40,250 DM in
connection with the writing and drafting of TES' business plan and offering
materials that were used to raise funds from German investors and with the
development of environmental management systems and organization structures and
certain software tools for these systems.
TES paid Karsten Behrens consulting fees equal to approximately 98,650 DM
in connection with his performance of legal services for TES and the writing and
drafting of TES' business plan and offering materials that were used to raise
funds from German investors.
TES has a consulting agreement with Jutta Behrens' accounting firm under
which her firms is paid 500 DM per month in exchange for providing the services
of Jutta Behrens to TES. Also, TES has a consulting agreement with Frank
Behrens' personal consulting firm, under which the firm will be paid 30 DM per
hour for providing the services of Frank Behrens to TES. TES also has a
consulting agreement with Karsten Behrens. Karsten Behrens is paid an hourly fee
of 50 DM for his services as needed. Compensation under this agreement is
disclosed in the executive compensation table in the section captioned
"Directors and Executive Officers of TES."
The management of TES believes that the above transactions were on terms no
less favorable than could be obtained from unaffiliated third parties. TES does
not presently have any policies regarding future affiliated transactions.
Except as otherwise disclosed herein, there have been no related party
transactions or any other transactions or relationships required to be disclosed
pursuant to Item 404 of Regulation S-B.
70
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ENTECS
The following table sets forth information with respect to the ownership of
ENTEC's common stock by all officers and directors, individually, all officers
and directors as a group and all beneficial owners of more than ten percent of
the common stock as of December 31, 1998. Except as otherwise indicated, the
following stockholders have sole voting and investment power with respect to the
shares.
Name and address Number of Percent of
of owner Shares Class
-------- ------ -----
Gerd Behrens 500,000 30.5%
25 Impler Strasse,
81371, Munich
Germany
Frank Behrens 200,000 (1) 12.2%
25 Impler Strasse
81371, Munich
Germany
Dieter Gastinger 100,000 6.1%
25 Impler Strasse
81371, Munich
Germany
Yvonne Marquard 90,000 5.5%
25 Impler Strasse
81371, Munich
Germany
Karsten Behrens 200,000 12.2%
25 Impler Strasse
81371, Munich
Germany
All officers and directors
as a group (4 persons) 890,000 54.3%
- -----------------------
(1) Frank Behrens and Karsten Behrens are brothers and are the sons of Gerd and
Jutta Behrens. Gerd and Jutta Behrens disclaim beneficial ownership of the
shares held by their sons.
There are no outstanding options, warrants, or rights to purchase securities
from ENTECS.
71
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF ENTECS
Officers, Directors and Key Consultants
The officers, directors and key consultants of ENTECS are as follows:
Officers and Directors
- ----------------------
Tenure as Officer
Name Age Position(s) or Director
---- --- ----------- -----------
Gerd Behrens 61 President and May, 1997
a Director to Present
Frank Behrens 32 Secretary May, 1997
and a Director to Present
Yvonne Marquard 29 Director May, 1997
to Present
Dieter Gastinger 55 Director May, 1997
to Present
Key Consultants
Karsten Behrens 31 Consultant May, 1997
to Present
Gerd Behrens, Jutta Behrens, Frank Behrens, Karsten Behrens and Yvonne
Marquard may be deemed to be "promoters" and "parents" of ENTECS within the
meaning of the rules and regulations promulgated under the Securities Act.
The directors of ENTECS are elected to hold office until the next annual
meeting of stockholders and until their respective successors have been elected
and qualified. Officers of ENTECS are elected annually by the board of directors
and hold office until their successors are duly elected and qualified. Gerd
Behrens is the father of Frank Behrens and Karsten Behrens. Frank Behrens and
Karsten Behrens are brothers. There are no other family relationships between
any director or executive officer and any other director or executive officer.
Set forth below is biographical information with respect to ENTECS' founders and
promoters and each officer and director.
Gerd Behrens, founder and promoter, has been a director and president of
ENTECS since inception. Mr. Behrens holds a Diploma as a Businessman (Dipl.
Kaufmann), which is roughly equivalent to a Bachelors Degree in Business
Administration in the United States. Mr. Behrens has over 35 years of experience
in business with a variety of firms and has served in a number of positions,
including senior management positions, since 1989. From 1989 until the founding
of ENTECS, Mr. Behrens was the managing director of Data Consult, a firm located
in Munich, Germany, that purchased and sold used computers. Since the founding
of TES and ENTECS, Mr. Behrens has devoted substantially all of his time to the
business and affairs of such companies.
72
<PAGE>
Frank Behrens has been secretary and a director of ENTECS since May, 1997.
Mr. Behrens is a graduate of Ludwig-Maximillians University in Munich in
Geography and Economics. Mr. Behrens has served as a consultant to various
firms, including TES, since graduating from the University of Munich in 1995.
Mr. Behrens' consulting services have related primarily to urban planning and
development and the development of environmental management systems and
organization structures and certain software tools for these systems. Mr.
Behrens provided TES and ENTECS in the writing and drafting of its business plan
and offering materials that were used to raise funds from German investors and
with the development of environmental management systems and organization
structures and certain software tools for these systems.
Yvonne Marquard has been a director of ENTECS since May, 1997. Ms. Marquard
assisted ENTECS with the placement of its common stock in Germany. Ms. Marquard
founded her own firm--Yvonne Marquard Unternehmensberatung in 1997 to provide
financial consulting services to various businesses. Prior to founding her own
firm Ms. Marquard was employed by AURUM Vermoegensanlagen GmbH, a German
financial services firm.
Karsten Behrens has been the Managing Director to ENTECS Umweltmanagment
since July, 1997. Mr. Behrens is a graduate of Ludwig-Maximillians University in
Munich in law. Mr. Behrens has completed the necessary post-graduate employment
requirements and passed the necessary examinations to be licensed as a lawyer in
Germany.
Dieter Gastinger has been a director of ENTECS since its inception. Mr.
Gastinger has over 35 years of experience in business. For the past ten years he
has been the owner of a firm offering environmental services and recycling
technologies. Prior to starting his environmental recycling business, Mr.
Gastinger was CFO for a renting service firm and managing director of a leasing
firm in Germany.
73
<PAGE>
Executive Compensation
The following table summarizes all compensation paid to the officers and
directors of ENTECS for services rendered to ENTECS since its inception in 1997.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------- ------------
Other Number of
Name and Fiscal Salary/ Annual Options
Principal Position Year Consulting Fees Compensation Awarded
- ------------------ ---- --------------- ------------ -------
<S> <C> <C> <C> <C>
Gerd Behrens, 1998 -0- -0- -0-
President 1997 -0- -0- -0-
and Director
Frank Behrens, 1998 77,500 DM -0- -0-
Secretary 1997 -0- -0- -0-
and Director
Karsten Behrens, 1998 52,500 DM -0- -0-
Consultant 1997 -0- -0- -0-
Dieter Gastinger, 1998 52,850 DM -0- -0-
Managing Director 1997 -0- -0- -0-
of Umweltmanage-
ment
Yvonne Marquard, 1998 62,809 DM -0- -0-
Director and 1997 -0- -0- -0-
Consultant
</TABLE>
No advances have been made or are contemplated by ENTECS to any of its
officers or directors.
Directors
Other than in accordance with to their employment or consulting
arrangements, the members of the board of directors are not compensated for
their services as directors; however, they are reimbursed for all reasonable
expenses incurred in connection with those services.
74
<PAGE>
DESCRIPTION OF TES CAPITAL STOCK
The authorized capital stock of TES consists of 20,000,000 shares of common
stock, of no par value. As of December 31, 1998, 5,224,830 shares of common
stock were outstanding. On November 18, 1998, the board of directors of TES
authorized a share dividend of the common stock of TES which caused to be issued
as of the same date, two (2) shares of common stock for each one (1) share of
common stock issued and outstanding. Management expects that approximately
16,580,473 shares of TES common stock will be outstanding after the merger.
Common Stock
Holders of common stock are entitled to one vote for each whole share on
all matters to be voted upon by stockholders, including the election of
directors. Holders of common stock do not have cumulative voting rights in the
election of directors. This means that holders of more than 50% of the shares
voting for the election of directors can elect all of the directors if they
choose to do so, and in such event, the holders of the remaining less than 50%
of the shares voting for the election of directors will not be able to elect any
person or persons to the board of directors. All shares of common stock are
equal to each other with respect to liquidation and dividend rights. No holder
of any shares of common stock has any preemptive rights to subscribe for or
purchase any additional, unissued shares of TES' common stock. Upon liquidation,
dissolution, or winding up of the company, each share of the common stock is
entitled to share ratably in the amount available for distribution to holders of
common stock. All shares of common stock outstanding are fully paid and
nonassessable, and the common stock is not subject to conversion or redemption.
75
<PAGE>
Transfer Agent and Registrar
Corporate Stock Transfer, Inc., 370 17th Street, Suite 2360, Denver,
Colorado 80202, has been retained to serve as the transfer agent and registrar
for TES' common stock.
LEGAL OPINIONS
Certain legal matters in connection with the merger are being passed upon
for TES by Schlueter & Associates, P.C Denver, Colorado and for ENTECS by Rossi
& Maricle, P.C., Denver, Colorado.
EXPERTS
The financial statements of TES at December 31, 1997 , and for each of the
two years in the period ended December 31, 1997, included in this proxy
statement/prospectus and the registration statement of which this proxy
statement/prospectus is part, have been audited by Scheifley & Associate, P.C.,
independent auditors, as set forth in their report appearing elsewhere in this
proxy statement/prospectus, and in the registration statement, and are included
in reliance upon that report given upon the authority of that firm as experts in
accounting and auditing.
The financial statements of ENTECS at December 31, 1997, and for each of
the two years in the period ended December 31, 1997, included in this proxy
statement/prospectus and the registration statement of which this proxy
statement/prospectus is part, have been audited by Scheifley & Associate, P.C.,
independent auditors, as set forth in their report appearing elsewhere in this
proxy statement/prospectus, and in the registration statement, and are included
in reliance upon that report given upon the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
TES is subject to the informational requirements of the Securities Exchange
Act of 1934 and it files reports, proxy statements, and other information with
the Securities and Exchange Commission in accordance with that law. You may
inspect and copy TES' reports, proxy statements, and other information at the
public reference facilities maintained by the Securities and Exchange Commission
at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
You may obtain copies of those materials at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. TES is
an electronic filer with the Commission, which maintains a web site containing
reports, proxy statements, and other information at the following location:
http://www.sec.gov.
This prospectus is part of a registration statement on Form S-4 filed by
TES with the Securities and Exchange Commission under the Securities Act of
1933. This prospectus omits certain of the information contained in the
registration statement. You may obtain further information about TES and the TES
common stock in the registration statement and the exhibits to the registration
statement. Any statements contained in this proxy statement/prospectus
concerning the provisions of any document are not necessarily complete, and, in
each instance, you may refer to the copy of the document filed with the
Commission. Each statement in this proxy statement/prospectus about a document
is qualified in its entirety by reference to the actual document.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TECHNICAL ENVIRONMENT SOLUTIONS, INC., Page
Independent Auditor's Report .................................... F-1
Consolidated Balance Sheet as of December 31, 1998 .............. F-2
Consolidated Statements of Operations for the two years
ended December 31, 1998 ...................................... F-3
Consolidated Statements of Stockholders' Equity for the
two years ended December 31, 1998 ............................ F-4
Consolidated Statements of Cash Flow for the two years
ended December 31, 1998 ...................................... F-5
Notes to Consolidated Financial Statements ...................... F-7
ENVIRONMENTAL TECHNOLOGIES AND SOFTWARE SOLUTIONS, INC.
Independent Auditor's Report .................................... F-15
Consolidated Balance Sheet as of December 31, 1998 .............. F-16
Consolidated Statement of Operations for the two years
ended December 31, 1998 ....................................... F-17
Consolidated Statement of Stockholders' Equity for the two years
ended December 31, 1998 ....................................... F-18
Consolidated Statement of Cash Flow for the two years
ended December 31, 1998 ....................................... F-19
Notes to Consolidated Financial Statements ...................... F-21
80
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Technical Environment Solutions, Inc.
We have audited the consolidated balance sheet of Technical Environment
Solutions, Inc. as of December 31, 1998 and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for each of the
two years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Technical
Environment Solutions, Inc. as of December 31, 1998, and the results of its
operations and cash flows for each of the two years then ended, in conformity
with generally accepted accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Denver, Colorado
March 26, 1999
F-1
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Balance Sheet
December 31, 1998
ASSETS
------
DM US $
Current assets:
Cash and cash equivalents 166,970 100,162
Accounts receivable, trade 68,662 41,189
Accounts receivable - other 34,699 20,815
Prepaid expenses 22,004 13,200
---------- ----------
Total current assets 292,335 175,366
Property and equipment, at cost, net of
accumulated depreciation of DM 102,469 162,642 97,566
Investments 10,000 5,999
Note receivable - related party 50,000 29,994
Other assets 300,000 179,964
---------- ----------
814,977 488,888
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable - banks 29,541 17,722
Notes payable - others 80,000 47,990
Accounts payable 102,536 61,508
Accounts payable and accrued
expenses - related parties 115,928 69,543
Accrued expenses 132,797 79,662
---------- ----------
Total current liabilities 460,802 276,426
Loans from shareholders 230,000 137,972
Advances from affiliated company 288,669 173,167
Stockholders' equity:
Common stock, no par value,
20,000,000 shares authorized,
5,224,830 shares issued and outstanding 2,260,155 1,355,822
Accumulated deficit (2,424,649) (1,454,499)
---------- ----------
(164,494) (98,677)
---------- ----------
814,977 488,888
========== ==========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31,
1997 1998 1998
DM DM US $
---------- ---------- ----------
<S> <C> <C> <C>
Sales 347,213 610,056 365,960
Sales to related party 80,609 -- --
---------- ---------- ----------
427,822 610,056 365,960
Cost of operations 179,690 202,174 121,280
---------- ---------- ----------
Gross profit 248,132 407,882 244,680
Other costs and expenses:
General and administrative 652,519 1,305,774 783,308
General and administrative - related parties 234,177 98,594 59,145
---------- ---------- ----------
(Loss) from operations (638,564) (996,486) (597,772)
Other income and (expense):
Interest income 19,190 19,668 11,798
Losses of unconsolidates Subsidiary -- (49,000) (29,394)
Interest expense - related party (18,100) (24,418) (14,648)
Interest expense (28,618) (16,577) (9,944)
---------- ---------- ----------
(27,528) (70,327) (42,188)
(Loss) before income taxes (666,092) (1,066,813) (639,960)
Provision for income taxes -- -- --
---------- ---------- ----------
Net (loss) (666,092) (1,066,813) (639,960)
========== ========== ==========
Earnings (loss) per share:
Basic and diluted (loss) per share (0.40) (0.61) (0.37)
========== ========== ==========
Weighted average shares outstanding 5,028,813 5,224,830 5,224,830
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
Common Stock Accumulated
Shares Amount Deficit Total
DM DM DM
<S> <C> <C> <C> <C>
Balance, December 31, 1996 4,524,402 121,360 (691,744) (570,384)
Sale of stock for cash 700,428 2,675,310 2,675,310
less expenses of offering -- (536,515) (536,515)
Net loss for the year -- -- (666,092) (666,092)
---------- ---------- ---------- ----------
Balance, December 31, 1997 5,224,830 2,260,155 (1,357,836) 902,319
Net loss for the year -- -- (1,066,813) (1,066,813)
---------- ---------- ---------- ----------
Balance, December 31, 1998 5,224,830 2,260,155 (2,424,649) (164,494)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1998 1998
DM DM US $
-------- ---------- --------
<S> <C> <C> <C>
Net (loss) (666,092) (1,066,813) (639,960)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation 12,521 44,047 26,423
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 56,190 (68,662) (41,189)
(Increase) decrease in prepaid expenses (32,269) 14,350 8,608
(Increase) decrease in other assets (37,935) 40,344 24,202
Increase (decrease) in accounts payable and
accrued expenses including related parties 91,045 142,817 85,673
---------- ---------- ----------
Total adjustments 89,552 172,896 103,717
---------- ---------- ----------
Net cash (used in) operating activities (576,540) (893,917) (536,243)
---------- ---------- ----------
Cash flows from investing activities:
Advance to affiliate (363,250) -- --
Repayment of affiliate advance -- 250,000 149,970
Long-term lease deposit (300,000) -- --
Increase in note receivable (50,000) -- --
Purchase of fixed assets (109,624) (88,323) (52,983)
---------- ----------
Net cash provided by (used in) investing activities (822,874) 161,677 96,987
---------- ---------- ----------
Cash flows from financing activities:
Advances from affiliated company -- 370,200 222,076
Proceeds from sale of common stock 2,138,795 -- --
Decrease in deferred financing fees 19,145 -- --
Repayment of notes payable - bank (22,766) (168,257) (100,934)
Repayment of stockholder advances (6,900) (4,300) (2,579)
Repayment of convertible notes (20,000) (10,000) (5,999)
---------- ---------- ----------
Net cash provided by
financing activities 2,108,274 187,643 112,563
---------- ---------- ----------
Increase (decrease) in cash 708,860 (544,597) (326,693)
Cash and cash equivalents,
beginning of period 2,707 711,567 426,855
---------- ----------
Cash and cash equivalents,
end of period 711,567 166,970 100,162
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1998 1998
DM DM US $
Supplemental cash flow information:
Cash paid for interest -- 33,219 19,927
Cash paid for income taxes -- -- --
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Technical Environment Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Summary of significant accounting policies.
Technical Environment Solutions, Inc. and subsidiaries (the "Company) is in the
business of recycling surplus and obsolete electronic equipment. The Company's
operations to date have been carried out solely within Germany by its wholly
owned subsidiaries Technical Environment Solutions GmbH, (TES GmbH)and TES Oecon
AG, formed in 1997 These operations consist of dismantling and disposing of
electronic equipment secured from customers. The Company has used independent
recycling companies to complete the disposal process, however, during 1997, the
Company secured plant facilities necessary to begin certain processing functions
on its own. TES Oecon AG, a wholly owned subsidiary, plans to establish a
technical school for training electronic recycling workers for itself and
others. During February 1998, the Company acquired a 49% ownership interest in
T-Cycle Computer Service and Verwertungs GmbH, a German company engaged in
dismantling and disposing of surplus electronic equipment in Germany.
The Company was incorporated in Colorado on June 21, 1994.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the German Commercial
Code, which represents generally accepted accounting principles in Germany
("German GAAP"). Generally, accepted accounting principles in Germany vary in
certain significant respects from U.S. GAAP. Accordingly, the Company has
recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of and for the year ended December 31, 1998 have been
translated into United States dollars. ("U.S. $") at the rate of DM 1.667 per
U.S. $1.00 the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998. The translations should not be construed as a representation
that the amounts shown could have been, or could be, converted into U.S. dollars
at that or any other rate.
F-7
<PAGE>
Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly-liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents and
accounts receivable and payable. The carrying amounts of such financial
instruments approximate fair value because of the short maturity of these
instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for using
the straight line method over estimated useful lives of five to seven years for
equipment and the remaining lease term for leasehold improvements. Depreciation
expense amounted to DM 44,047 and DM 12,521 for the years ended December 31,
1998 and 1997, respectively.
Revenue recognition
Revenue is recorded when services are performed. Sales amounts included in the
foregoing Consolidated Statement of Operations consist of gross contract amounts
paid to the Company by its customers for the removal of recyclable materials.
Advertising
Advertising expenses are charged to expense upon first showing. The Company
incurred advertising expense of DM 9,000 and DM 109,865 during the years ended
December 31, 1998 and 1997 respectively.
Net loss per share
Basic Earnings per Share ("EPS") is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common stock
shares outstanding during the year plus potential dilutive instruments such as
stock options and warrants. The effect of stock options on diluted EPS is
determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price during
the period.
F-8
<PAGE>
The basic loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding for the period. Loss
per share is unchanged on a diluted basis since the assumed exercise of common
stock equivalents would have an anti-dilutive effect due to the existence of
operating losses.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenue and expenses during the periods presented. Actual results could
differ from those estimates making it reasonably possible that a change in these
estimates could occur in the near term.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of 1996.
Upon adoption of FAS 123, the Company when required will continue to measure
compensation expense for any stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and will provide pro forma disclosures of the effect on net income
and earnings per share as if the fair value-based method prescribed by FAS 123
had been applied in measuring compensation expense.
Recent Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for all
items that are to be recognized under accounting standards as components of
comprehensive income to be reported in the financial statements. The statement
is effective for all periods beginning after December 15, 1997 and
reclassification financial statements for earlier periods will be required for
comparative purposes. To date, the Company has not engaged in transactions which
would result in any significant difference between its reported net loss and
comprehensive net loss as defined in the statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be capitalized
and when these costs should be expensed as incurred.
Effective January 1, 1998, the Company adopted SOP 98-1. Costs capitalized by
the Company during the year ended December 31, 1998 in accordance with these
guidelines were not significant.
F-9
<PAGE>
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position. To date, the Company has operated in one
business segment only.
Effective December 31, 1998, the Company adopted the provisions of SFAS No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits ("SFAS
132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Post-retirement Benefits Other Than Pensions. The overall objective of SFAS 132
is to improve and standardize disclosures about pensions and other
post-retirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations or
financial position. The Company has not initiated benefit plans to date which
would require disclosure under the statement.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company has not yet
determined what the effect of SFAS 133 will be on earnings and the financial
position of the Company, however it believes that it has not to date engaged in
significant transactions encompassed by the statement.
Note 2. Investments
During July 1995, the Company invested DM 10,000 in Okologik AG, a German
company engaged in the production and conservation of energy by alternative
means. The Company's 1,334 shares represent less than 2% of total shares
outstanding. As yet, no market exists for the stock and the Company has
accounted for its investment at cost.
F-10
<PAGE>
Note 3. Notes payable and long-term debt
Notes payable - banks at December 31, 1998 consists of a bank line of credit
having a balance at December 31, 1998 of DM 29,541. The line of credit bears
interest at 10.75% per annum and had DM 20,459 additional credit available at
that date. The Company also had a term loan with the bank having a remaining
principal balance due at December 31, 1997 of DM 180,050. The term loan was paid
in full on February 28, 1998.
During 1995, the Company sold DM 210,000 of convertible debentures to thirteen
individual investors in Germany. The debentures bear interest at 10.75% per
annum and are due in March 1999. The debentures were to be convertible into
shares of the Company's common stock, however, none were converted. During 1996,
DM 100,000 plus accrued interest was repaid to certain of the investors. An
additional DM 20,000 plus accrued interest was repaid in 1997. During January
1998, an additional DM 10,000 was repaid.
Note 4. Income taxes.
At December 31, 1997 the Company had approximately DM 2,396,000 of unused net
operating loss deductions in Germany that may be carried forward indefinitely.
A valuation allowance of DM 1,198,000 was provided at December 31, 1998 for net
operating loss carryforwards which more likely than not will not be utilized in
the foreseeable future. The valuation reserve increased by approximately DM
533,000 and DM 320,000 during the years ended December 31, 1998 and 1997,
respectively.
Note 5. Commitments and contingencies
The Company is obligated for non-cancelable operating lease payments with
initial terms exceeding one year relating to office space and warehouse space.
The lease agreements require future minimum lease payments as follows:
Year Ending December 31, Amount
1999 268,260
2000 272,220
2001 287,820
2002 147,420
2003 90,840
--------
1,066,560
In connection with the lease, the Company paid a DM 300,000 refundable deposit
to guarantee performance of the lease and to secure a purchase option for the
building. The lease contract includes a purchase option whereby the Company may
acquire the property for DM 2,200,000 if the option is exercised before December
31, 2000. The deposit is included in other assets in the accompanying balance
sheet. The deposit may be fully offset against the purchase price of the
building, however should the purchase option expire unexercised, the deposit
will be reduced by DM 90,000.
F-11
<PAGE>
The Company has accrued DM 22,500 of additional rent during the year ended
December 31, 1998 and will continue making annual accruals through the end of
the option period to provide for the possible impairment of the deposit amount.
Rent expense in 1998 and 1997 was DM 270,420 and DM 49,020, respectively.
The Company has entered into employment contract with its president which
provides for an annual salary of DM 96,000 per year through June 1999.
Note 6. Related party transactions
A shareholder of the Company who is also wife of the Company's president made
loans aggregating DM 130,000 to the Company during the year ended December 31,
1996. The loans bear interest at between 8% and 9.25% per annum and are due DM
80,000 in 2000 and DM 50,000 in 2001 plus accrued interest.
Additionally, during 1993, the shareholder advanced DM 25,000 to the Company of
which DM 6,900 was repaid in each of the years 1995 through 1997 with the
balance of DM 4,300 repaid during 1998.
Additionally, during 1996, the Company's president and major shareholder
advanced DM 100,000 to the Company's German subsidiary. The amount bears
interest at 6% per annum beginning January 1, 1998 and the interest is due at
the end of each calendar year. The loan principle is due in full on December 31,
2001.
The Company's president and major shareholder is president and a shareholder of
ENTECS, Inc. a Colorado corporation formed in May 1997 to exploit patent rights
to a concrete recycling system and related equipment. The Company paid a deposit
of DM 250,000 for the rights to use the concrete system and subsequently
transferred the rights to ENTECS in exchange for a short term note. The advance
was paid in full during 1998. Additionally, ENTECS made advances to the Company
aggregating DM 370,200 during the year ended December 31, 1998. The advances
bear interest at 6% per annum and are due after ten years.
Additionally, during 1997, the Company made working capital advances to ENTECS
of DM 50,000 and paid DM 86,250 of costs associated with the operations of
ENTECS. The working capital advance bears interest at 8% per annum and was
repaid DM 23,000 in 1997 and DM 27,000 plus accrued interest of $1,682 in
January 1998.
The balance of the long term notes due ENTECS net of the amounts due from ENTECS
amounted to DM 288,669 at December 31, 1998 and comprises the balance of
advances from affiliated company included in the accompanying balance sheet.
F-12
<PAGE>
During the year ended December 31, 1997, the Company advanced DM 50,000 to a
German entity called Arbeit fur Alle e.V. (AFA). The note bears interest at 8%
per annum and was originally due in installments of DM 10,000 at the end of each
calendar year beginning in 1998. The payments have been extended to begin in
1999. Certain officer/shareholders of the Company have a direct ownership
interest in AFA. Interest accrued as of December 31, 1998 with respect to the
loan amounted to DM 6,600.
During the year ended December 31, 1998 the Company paid an aggregate of DM
98,594 to two officer/shareholders for consulting services provided to the
Company.
Note 7. Stockholders' equity
During the periods covered by these financial statements the Company issued
securities in reliance upon an exemption from registration with the Securities
and Exchange Commission. Although the Company believes that the sales did not
involve a public offering and that it did comply with the exemptions from
registration, it could be liable for rescission of said sales if such exemption
was found not to apply. The Company has not received a request for rescission of
shares nor does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken
On December 31, 1998 the Company effected a stock dividend whereby each holder
of the Company's outstanding common stock received an additional two shares for
each share held. The Company has accounted for the dividend as a three share for
one share forward stock split and consequently, all share and per share data in
the foregoing financial statements and notes thereto have been restated to
reflect the dividend.
During 1997, the Company commenced a private sale of its common stock to a
limited group of investors in Germany. The Company sold 700,428 shares of its
common stock for gross proceeds of DM 2,675,310 and incurred direct expenses of
the offering amounting to DM 536,515.
The Company has established a stock option plan for directors, management, key
employees, consultants and technical advisers whereby an aggregate of 500,000
options to purchase common stock of the Company may be granted. The grant price
of the options will be equal to the market price for the Company's common stock
at the date the options are granted. No options have been granted under the plan
through the date of these financial statements.
Note. 8. Concentrations and information about major customers
During 1998 and 1997, all of the Company's revenue from recycling operations was
derived from sales within Germany. During 1998, the Company had one major
customer, Nutzel/Logosys GmbH which accounted for 10% of its sales. During 1997,
the Company had four major customers, Allianz Versicherungs AG, Bayerische
Landesbank, Hewlett Packard GmbH and Philips GmbH whose purchases from the
Company each accounted for greater than 10% of the Company's sales.
No amounts were due from these customers at December 31, 1998.
F-13
<PAGE>
Note 9. Operations of unconsolidated subsidiary
During February 1998, the Company acquired a 49% ownership interest in T-Cycle
Computer Service and Verwertungs GmbH, a German company engaged in dismantling
and disposing of surplus electronic equipment in Germany. The Company paid
DM49,000 for its investment in T-Cycle and has accounted for the investment
using the equity method of accounting. Accordingly, the Company has recognized
its share of the losses of T-Cycle for the period ended December 31, 1998, which
amounted to DM 49,000, as a reduction of its investment in the company. T-Cycle
has filed for protection under German bankruptcy laws. The Company does not
believe that it is contingently liable for any outstanding debts of T-Cycle.
Note 10. Correction of prior year financial statement
The financial statements for the year ended December 31, 1997 have been
corrected to reflect an adjustment to the commission earned by the Company on
the sale of the BRS license technology to ENTECS. The commission has been
reduced by DM 26,087 of German value added tax (VAT) associated with the
transaction. The adjustment increased the net loss for 1997 by DM 26,087 or DM
.0 per share.
Note 11. Proposed merger.
On October 30, 1998 TES and ENTECS entered into a definitive agreement and plan
of merger (the "Agreement") providing for the merger of ENTECS with and into
TES. Under the terms of the Agreement, which was approved by the Board of
Directors of both TES and ENTECS, the holder of ENTECS Common Stock will receive
5.7 shares of TES Common Stock for each of its outstanding shares. The Company
plans to account for the merger as a reorganization of companies under common
control. The accounting for the merger is expected to be similar to that of a
pooling of interests.
F-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Environmental Technologies and Software Solutions, Inc.
We have audited the consolidated balance sheet of Environmental Technologies and
Software Solutions, Inc. as of December 31, 1998 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Environmental
Technologies and Software Solutions, Inc. as of December 31, 1998, and the
results of its operations and cash flows for each of the years in the two year
period then ended, in conformity with generally accepted accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Denver, Colorado
April 2, 1999
F-15
<PAGE>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Balance Sheet
December 31, 1998
ASSETS
------
DM US $
Current assets:
Cash and cash equivalents 393,080 235,801
Accounts receivable 2,230 1,338
Inventory 120,000 71,986
Prepaid expenses 56,152 33,684
---------- ----------
Total current assets 571,462 342,809
Property and equipment, at cost, net of
accumulated depreciation of DM 24,758 544,442 326,600
Due from affiliated company 288,669 173,166
License rights 1,123,126 673,741
---------- ----------
2,527,699 1,516,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 135,552 81,314
Due to related parties 225,000 134,974
Accrued expenses 76,884 46,120
Accrued expenses - related parties 212,769 127,636
---------- ----------
Total current liabilities 650,205 390,044
Stockholders' equity:
Common stock, no par value,
50,000,000 shares authorized,
1,465,182 shares issued and outstanding 3,600,826 2,160,064
Deficit accumulated during development stage (1,723,332) (1,033,793)
---------- ----------
1,877,494 1,126,271
---------- ----------
2,527,699 1,516,315
========== ==========
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statements of Operations
Years Ended December 31, 1997 and 1998
Inception
to
December 31,
1997 1998 1998 1998
DM DM US $ DM
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues -- 69,369 41,613 69,369
Other costs and expenses:
Cost of goods and services -- 14,004 8,401 14,004
General and administrative 256,114 1,231,359 738,668 1,487,473
General and administrative - related parties 87,500 217,656 130,567 305,156
---------- ---------- ---------- ---------
(Loss) from operations (343,614) (1,393,650) (836,023) (1,737,264)
Other income and (expense):
Interest income 783 11,066 6,638 11,849
Interest income - related parties 7,515 4,508 7,515
Interest expense - related parties (1,682) (1,009) (1,682)
Interest expense (1,794) (484) (290) (2,278)
---------- ---------- ---------- ---------
(1,011) 16,415 9,847 15,404
(Loss) before income taxes (344,625) (1,377,235) (826,176) (1,721,860)
Provision for income taxes -- (1,472) (883) (1,472)
---------- ---------- ---------- ----------
Net (loss) (344,625) (1,378,707) (827,059) (1,723,332)
========== ========== ========== ==========
Earnings (loss) per share:
Basic and diluted (loss) per share (0.33) (0.99) (0.60) (1.33)
========== ========== ========== ==========
Weighted average shares outstanding 1,033,751 1,387,134 1,387,134 1,298,376
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statement of Stockholders' Equity
Year Ended December 31, 1998 and 1997
Common Stock Accumulated
Shares Amount Deficit Total
DM DM DM
<S> <C> <C> <C> <C>
Balance at inception -- -- -- --
Shares issued at inception for service
in May 1997 at $.003 per share 1,090,000 3,685 3,685
Shares issued for services:
July 1997 at DM12.54 per share 800 10,035 10,035
August 1997 at DM12.54 per share 8,200 102,861 102,861
Sale of stock for cash:
June 1997 at DM12.07 per share 1,750 21,131 21,131
July 1997 at DM11.62 per share 43,290 503,164 503,164
August 1997 at DM12.00 per share 24,264 291,059 291,059
September 1997 at DM12.50 per share 25,100 313,719 313,719
October 1997 at DM12.09 per share 14,750 178,375 178,375
Less expenses of offering (422,759) (422,759)
Net loss for the year -- -- (344,625) (344,625)
---------- ---------- ---------- ----------
Balance, December 31, 1997 1,208,154 1,001,269 (344,625) 656,644
Sale of stock for cash:
January 1998 at DM12.31 per share 19,465 239,684 239,684
February 1998 at DM12.22 per share 40,170 490,851 490,851
March 1998 at DM12.18 per share 15,400 187,588 187,588
April 1998 at DM12.43 per share 13,970 173,668 173,668
May 1998 at DM12.23 per share 38,650 472,683 472,683
June 1998 at DM11.50 per share 107,143 1,231,242 1,231,242
July 1998 at DM12.72 per share 22,230 282,630 282,630
Less expenses of offering (478,789) (478,789)
Net loss for the year -- -- (1,378,707) (1,378,707)
---------- ---------- ---------- ----------
Balance, December 31, 1998 1,465,182 3,600,826 (1,723,332) 1,877,494
========== ========== ========== ==========
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statement of Cash Flows
Years Ended December 31, 1997 and 1998
Inception
to
December 31,
1997 1998 1998 1998
DM DM US $ DM
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Net (loss) (344,625) (1,378,707) (827,059) (1,723,332)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation and amortization 72,916 183,716 110,208 256,632
Interest added to affiliate loan 1,682 81,531 48,909 83,213
Loss on transfer of machinery -- 16,556 9,932 16,556
Expenses incurred by affiliate 53,763 -- -- 53,763
Expenses added to related party loans 87,500 -- -- 87,500
Common stock issued for services 116,581 -- -- 116,581
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (101,134) 98,904 59,331 (2,230)
(Increase) decrease in prepaid expenses -- (56,152) (33,684) (56,152)
(Increase) decrease in deposits (5,400) 5,400 3,239 --
Increase (decrease) in accounts payable and --
accrued expenses 555,041 (129,836) (77,886) 425,205
---------- ---------- ---------- ----------
Total adjustments 780,949 200,119 120,047 981,068
---------- ---------- ---------- ----------
Net cash (used in) operating activities 436,324 (1,178,588) (707,011) (742,264)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of license rights (568,750) (25,000) (14,997) (593,750)
Advance to affiliated company -- (370,200) (222,076) (370,200)
Purchase of fixed assets (553,042) (152,714) (91,610) (705,756)
---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities (1,121,792) (547,914) (328,683) (1,669,706)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from loan from affiliate 27,000 -- -- 27,000
Repayments to affiliated companies -- (418,695) (251,167) (418,695)
Repayments to related parties -- (287,500) (172,466) (287,500)
Proceeds from sale of common stock 884,688 2,599,557 1,559,422 3,484,245
---------- ---------- ---------- ----------
Net cash provided by
financing activities 911,688 1,893,362 1,135,790 2,805,050
---------- ---------- ---------- ----------
Increase (decrease) in cash 226,220 166,860 100,096 393,080
Cash and cash equivalents,
beginning of period -- 226,220 135,705 --
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period 226,220 393,080 235,801 393,080
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-19
<PAGE>
Enviornmental Technologies and Software Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1998
1997 1998 1997
DM DM US $
------- -------- -------
Supplemental cash flow information:
Cash paid for interest -- -- --
Cash paid for income taxes -- -- --
Non-cash investing and financing activities:
License rights acquired for debt 761,250 -- --
See accompanying notes to consolidated financial statements
F-20
<PAGE>
Environmental Technologies and Software Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Summary of significant accounting policies.
Environmental Technologies and Software Solutions, Inc. and subsidiariy (the
"Company) is in the business of recycling and disposal of waste materials,
development and construction of new technologies in the environmental area as
well as development, production and sale of software programs for environmental
and recycling solutions and to engage in any other lawful purpose and business.
The Company's operations to date have been carried out solely within Germany by
its wholly owned subsidiaries, ENTECS Umwelttechnik GmbH, (ENTECS GmbH) and
ENTECS Software and Umwelttechnik GmbH, (Software GmbH) formed in March 1998.
The Company was incorporated in Colorado on May 9, 1997. The Company has
recorded limited sales during the periods presented and is considered to be in
its development stage.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the German Commercial
Code, which represents generally accepted accounting principles in Germany
("German GAAP"). Generally, accepted accounting principles in Germany vary in
certain significant respects from U.S. GAAP. Accordingly, the Company has
recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of and for the year ended December 31, 1998 have been
translated into United States dollars. ("U.S. $") at the rate of DM 1.667 per
U.S. $1.00 the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998. The translations should not be construed as a representation
that the amounts shown could have been, or could be, converted into U.S. dollars
at that or any other rate.
Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
F-21
<PAGE>
Cash and cash equivalents
The Company considers all highly-liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents and
accounts receivable and payable. The carrying amounts of such financial
instruments approximate fair value because of the short maturity of these
instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for using
the straight line method over estimated useful lives of five to seven years for
equipment and the remaining lease term for leasehold improvements. No
depreciation expense has been recorded for the year ended December 31, 1997 on
the Company's machinery and equipment had not been placed in service.
Depreciation expense for the year ended December 31, 1998 amounted to DM 24,758.
Intangible assets
The Company has purchased certain licenses for the use of technology to be used
in its planned business activities (see Note 2). The licenses are amortized
using the straight line method over the term of the license beginning in 1997.
Amortization for the years ended December 31, 1998 and 1997 amounted to DM
158,958 and DM 72,916, respectively.
The Company makes reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Under SFAS No. 121,
an impairment loss would be recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. No such impairment losses have been identified by the
Company for the 1998 and 1997 fiscal years.
Revenue recognition
Revenue is recorded when goods are shipped or services are performed. Sales
returns and allowances are recorded after returned goods are received and
inspected. The Company expects to begin sales of its products in 1998 and plans
to provide currently for estimated product returns arising therefrom.
Advertising
Advertising expenses are charged to expense upon first showing. The Company
incurred DM 75,815 DM 1,173 of advertising expense during 1998 and 1997,
respectively.
F-22
<PAGE>
Net loss per share
Basic Earnings per Share ("EPS") is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common stock
shares outstanding during the year plus potential dilutive instruments such as
stock options and warrants. The effect of stock options on diluted EPS is
determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price during
the period.
The basic loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding for the period. Loss
per share is unchanged on a diluted basis since the assumed exercise of common
stock equivalents would have an anti-dilutive effect due to the existence of
operating losses.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenue and expenses during the periods presented. Actual results could
differ from those estimates making it reasonably possible that a change in these
estimates could occur in the near term.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of operations.
Upon adoption of FAS 123, the Company when required will continue to measure
compensation expense for any stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and will provide pro forma disclosures of the effect on net income
and earnings per share as if the fair value-based method prescribed by FAS 123
had been applied in measuring compensation expense.
F-23
<PAGE>
Recent Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for all
items that are to be recognized under accounting standards as components of
comprehensive income to be reported in the financial statements. The statement
is effective for all periods beginning after December 15, 1997 and
reclassification of financial statements of financial statements for earlier
periods will be required for comparative purposes.
To date, the Company has not engaged in transactions which would result in any
significant difference between its reported net loss and comprehensive net loss
as defined in the statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be capitalized
and when these costs should be expensed as incurred.
Effective January 1, 1998, the Company adopted SOP 98-1. Costs capitalized by
the Company during the year ended December 31, 1998 in accordance with these
guidelines were not significant.
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position. To date, the Company has operated in one
business segment only.
Effective December 31, 1998, the Company adopted the provisions of SFAS No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits ("SFAS
132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Post-retirement Benefits Other Than Pensions. The overall objective of SFAS 132
is to improve and standardize disclosures about pensions and other
post-retirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations or
financial position. The Company has not initiated benefit plans to date which
would require disclosure under the statement.
F-24
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS 133 will be on
earnings and the financial position of the Company, however it believes that it
has not to date engaged in significant transactions encompassed by the
statement.
Note 2. Intangible assets
Intangible assets consist of two licenses for the use of recycling technology
and a software license. One of the licenses (Benton Recycling System (BRS)) has
been purchased from an affiliated company which had purchased the license during
March 1997 from an individual who, concurrently with the purchase by the Company
in September 1997, became a director of the Company. The license grants the
Company the right to use patented technology for the recycling of waste concrete
for a fifteen year period. The Company paid an aggregate of DM 625,000 for the
license of which DM 250,000 was due to the affiliated company at December 31,
1997. This amount was paid to the affiliated company during 1998. During 1998,
the Company accrued DM 155,168 for continuing consulting services provided by
the director. This amount is included in accrued expenses - related parties at
December 31, 1998.
Additionally, a royalty of 6% of net sales derived from the licensed technology
is specified in the purchase contract. The BRS patents consists of a registered
process and a patent for the construction of the corresponding machines which
are based on the BRS technology. This patent has been filed for European and
international rights however, it has not yet been registered.
The license excludes Asia and the United States of America, however in these
areas the Company has a first right of refusal for purchase of the technology.
F-25
<PAGE>
During the year ended December 31, 1998, due to operational problems experienced
with the machine, the Company suspended payment of consulting fees to the
director and the director has threatened litigation to enforce performance under
the contract. Should the litigation begin, the Company intends to file a
counterclaim for breach of the license agreement. At December 31, 1998, the
Company has accrued the full amount due under the license agreement. The Company
believes that its rights under the license agreement have not been impaired and
that modifications to the equipment design will not be significant and may be
effected by a qualified design engineer other than the director.
The second license (UWAS license, which covers two patents no. EPO 383227 and
EPO 383229) has been purchased from an affiliated company which had purchased
the license during 1997 from an unaffiliated German corporation. A significant
shareholder of the unaffiliated corporation, concurrently with the purchase by
the Company in September 1997, became a director of the Company. The Company
paid an aggregate of DM650,000 for the license of which DM 250,000 was due to
the affiliated company at December 31, 1998. The process patents for recycling
metal dust and other materials into solids were registered during May 1993 and
May 1992. The contract expires with the expiration of the patent which,
according to German law normally expires 20 years after registration.
The amortization for the licenses has been calculated on basis of useful lives
of 10 years for the process licenses and 2 years for the software license which
the Company has determined to be appropriate amortization periods for the
licenses using the straight line method. The total amortization for the years
ended December 31, 1998 and 1997 amounted to DM 158,958 and DM72,916,
respectively.
Note 3. Income taxes.
At December 31, 1998 the Company had approximately DM 1,700,000 of unused net
operating loss deductions in Germany that may be carried forward indefinitely.
A valuation allowance of DM 500,000 was provided at December 31, 1998 for net
operating loss carryforwards which more likely than not will not be utilized in
the foreseeable future.
F-26
<PAGE>
Note 4. Commitments and contingencies
The Company occupies its administrative offices pursuant to a short term lease
with TES, an affiliated company. Rent expense in 1998 and 1997 was DM 62,488 and
DM 7,200, respectively.
The Company has entered into employment contract with its general manager of
ENTECS GmbH which provides for an annual salary of DM 51,000 per year through
June 1999 and provides for a management bonus of 5% of pre tax profits of the
subsidiary.
Note 5. Related party transactions
The Company's president and major shareholder is president and a shareholder of
TES, Inc., a Colorado corporation formed in June 1994. TES, Inc. paid a deposit
of DM 250,000 and additional payments of DM 86,250 for the rights to use the
concrete recycling system and subsequently transferred the rights to the Company
in exchange for a short term note. During 1998 the note was paid in full.
Additionally, the Company made advances to TES aggregating DM 370,200 during the
year ended December 31, 1998. The advances bear interest at 6% per annum and are
due after ten years.
Additionally, during 1997, the Company received working capital advances from
TES of DM 50,000 and TES paid DM 53,763 of costs associated with the Company's
capital raising activities. The working capital advance bears interest at 8% per
annum and was repaid DM 23,000 in 1997 and DM 27,000 was repaid in January 1998.
The net balance of working capital advances, accrued interest and payment of the
Company's costs amounted less payments by TES of costs associated with the BRS
license in 1997 comprises the balance of amounts due affiliated company included
in the accompanying balance sheet of DM 288,669.
During the year ended December 31, 1997, the Company incurred costs associated
with its organization and financing activities amounting to DM 87,500. The costs
are for services provided by two of the Company's directors and significant
shareholders pursuant to contractual arrangements. This amount in included in
general and administrative costs - related parties and amounts due to related
parties in the foregoing financial statements.
Additionally, in 1998 and 1997, a significant shareholder and director received
DM 146,525 and DM 48,486, respectively in commissions related to the sale of the
Company's securities. This amount has been included in offering expenses in the
accompanying statement of stockholders' equity.
F-27
<PAGE>
The Company's president who is a director and significant shareholder receives a
monthly salary of DM 8,000 of which DM 57,600 was unpaid as of December 31,
1998. This amount is included in accrued expenses - related parties in the
accompanying balance sheet.
Note 6. Stockholders' equity
During the periods covered by these financial statements the Company issued
securities in reliance upon an exemption from registration with the Securities
and Exchange Commission. Although the Company believes that the sales did not
involve a public offering and that it did comply with the exemptions from
registration, it could be liable for rescission of said sales if such exemption
was found not to apply. The Company has not received a request for rescission of
shares nor does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken
At inception, the Company issued an aggregate of 1,090,000 shares of its common
stock to five German citizens for services provided in connection with the
formation of the Company valued at DM 3,685.
During July and August 1997, the Company issued an aggregate of 9,000 shares of
its common stock to two German citizens for services provided to the Company.
The shares were issued at DM 12.54 per share which is considered to be their
fair value based on the contemporaneous sale of the Company's shares for cash.
During June 1997, the Company commenced a private sale of its common stock to a
limited group of investors in Germany. The Company sold 109,154 shares of its
common stock for gross proceeds of DM 1,307,448 and incurred direct expenses of
the offering amounting to DM 422,759. The shares were offered at a price of
$7.00 US per share. During 1998 the Company continued the private sale of its
common stock and sold an additional 257,028 shares for gross proceeds of DM
3,078,346. Certain shares of the private offering were purchased by a German
stock brokerage firm at a discounted price net of the brokers agreed upon 17%
sales commission. The discount amounted to DM 91,813 and has been accounted for
as an additional expense of the offering. Direct expenses related to the 1998
stock sales amounted to DM 570,601 including the discount described above.
F-28
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 10 of TES' Articles of incorporation provides for the
indemnification of TES' officers and directors. Further, the officers and
directors are indemnified under various provisions of the Colorado Business Act,
which provides for the indemnification of officers and directors and other
persons against expenses, judgments, fines and amounts paid in settlement in
connection with threatened, pending or completed suits or proceedings against
such persons by reason of serving or having served as officers, directors or in
other capacities, except in relation to matters with respect to which such
persons shall be determined not to have acted in good faith and in the best
interests of TES. With respect to matters as to which TES' officers and
directors and others are determined to be liable for misconduct or negligence,
including gross negligence in the performance of their duties to TES, Colorado
law provides for indemnification only to the extent that the court in which the
action or suit is brought determines that such person is fairly and reasonably
entitled to indemnification for which the court deems proper.
In accordance with the laws of the State of Colorado, TES' bylaws authorize
indemnification of a director, officer, employee, or agent of TES for expenses
incurred in connection with any action, suit, or proceeding to which he or she
is named a party by reason of his or her having acted or served in such
capacity, except for liabilities arising from his or her own misconduct or
negligence in performance of his or her duty. In addition, even a director
officer, employee, or agent of TES who was found liable for misconduct or
negligence in the performance of his or her duty may obtain such indemnification
if, in view of all the circumstances in the case, a court of competent
jurisdiction determines such person is fairly and reasonably entitled to
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling TES
pursuant to the foregoing provisions, TES has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933, and is therefore
unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following is a complete list of Exhibits filed as part of
this registration statement and which are incorporated herein.
Exhibit
No. Document
- --- --------
3(i) Articles of Incorporation(1)
3(ii) Bylaws(1)
4(i) Form of Stock Certificate(1)
4(ii) Form of Convertible Debenture(1)
4(iii) Stock Option Plan(1)
5.1 Opinion of Schlueter & Associates, P.C. as to legality of TES
common stock(2)
5.2 Opinion of Rossi & Maricle, P.C. as to legality of ENTECS
common stock(2)
II-1
<PAGE>
8.1 Opinion of Schlueter & Associates, P.C. as to the tax
consequences of the proposed merger under the tax laws of
the United States(2)
10(i) Employment Contract of Gerd Behrens dated May 19, 1992(1)
10(ii) Lease for Impler Strasse office(1)
10(iii) Lease for building in Landsberg am Lech(1)
10(iv) Lease for building #2 (Halle) at Landsberg am Lech(1)
10(v) Agreement dated February 2, 1998 between TES Inc. and T-Cycle
GmbH(1)
23.1 Consent of James E. Scheifley & Associates, P.C. with respect
to TES(3)
23.2 Consent of James E. Scheifley & Associates, P.C. with respect
to ENTECS(2)
23.3 Consents of Schlueter & Associates, P.C. (included with
Exhibits 5.1 and 8.1)(2)
23.3 Consent of Rossi & Maricle, P.C.(included with Exhibit 5.2)(2)
-----------------------
(1) Incorporated by reference from the Registrant's registration statement
on Form 10-SB (SEC File No. 0-23779) previously filed with the
Commission
(2) To be filed by amendment
(3) Filed herewith
(b) Financial Statement Schedules. Schedules have been omitted since the
required information is not present, or not present in amounts sufficient to
require submission of the schedule, or because the information is included in
the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) Rule 512
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for the
other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the (Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
Exchange Commission such indemnification is against public policy as expressed
II-2
<PAGE>
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the State of Colorado on the 6th day
of May, 1999.
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
(Registrant)
By: /s/ Gerd Behrens
------------------------------------
Gerd Behrens, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the persons in the capacities and on
the dates indicated.
Date Title Signature
- ---- ----- ---------
May 6, 1999 President and director /s/ Gerd Behrens
(Principal Executive Officer) ---------------------
Gerd Behrens
May 6, 1999 Treasurer and director /s/ Jutta Behrens
(Principal Financial and ----------------------
Accounting Officer) Jutta Behrens
May 6, 1999 Secretary and director /s/ Frank Behrens
-----------------------
Frank Behrens
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 100,162
<SECURITIES> 0
<RECEIVABLES> 62,004
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 175,366
<PP&E> 97,566
<DEPRECIATION> 102,469
<TOTAL-ASSETS> 488,888
<CURRENT-LIABILITIES> 276,426
<BONDS> 0
0
0
<COMMON> 1,355,822
<OTHER-SE> 1,454,499
<TOTAL-LIABILITY-AND-EQUITY> 488,888
<SALES> 365,960
<TOTAL-REVENUES> 365,960
<CGS> 121,280
<TOTAL-COSTS> 121,280
<OTHER-EXPENSES> 842,453
<LOSS-PROVISION> 29,394
<INTEREST-EXPENSE> 12,794
<INCOME-PRETAX> (639,960)
<INCOME-TAX> 0
<INCOME-CONTINUING> (639,960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (639,960)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> 0
</TABLE>
