FORM 10-KSB/A
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ______________
Commission file number 0-23779
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
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(Name of small business issuer in its charter)
Colorado 98-0149351
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
C/O TES Com GmbH, 25 Impler Strasse
Munchen, 81371, Germany
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(Address of principal executive office)
Issuer's Telephone Number 011 49 89 720 15 100
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $603,682
As of March 31, 2000, the aggregate market value for the 5,783,075 shares
of the common stock, no par value per share, held by non-affiliates was
approximately $2,168,653.
The number of shares of common stock of the registrant outstanding as of March
31, 2000, were 16,638,075.
Documents incorporated by reference None
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis
or Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I
Throughout this document, we express monetary amounts in German Deutsche
Marks and United States Dollars. Unless specified otherwise, monetary amounts
expressed in German Deutsche Marks have been translated into, and
correspondingly expressed in, United States Dollars based upon the Noon Buying
Rate of the Federal Reserve Bank of New York on December 31 of the applicable
year. These translations are made solely for the convenience of the reader and
are not necessarily expressed in monetary amounts that would have resulted had
the exchange rate on the date of the actual transaction been used.
Item 1. Description of Business
General Information
Technical Environment Solutions, Inc. (the "Company" or "TES") was
incorporated under the laws of Colorado in June 1994, and is a non-operating
holding company. The Company's operations are conducted entirely in Germany. The
Company has three wholly-owned subsidiaries through which it conducts operations
- - TES Oecon AG ("TES Oecon"), TES Com GmbH ("TES Com") and Environmental
Technologies and Software Solutions, Inc. ("ENTECS"). ENTECS is a non-operating
holding company and its operations are conducted entirely in Germany by its
wholly owned German subsidiary, ENTECS Umwelttechnik GmbH ("ENTECS GmbH").
TES Oecon was formed in July 1997 under the laws of Germany and commenced
operations in October 1997. TES Com was formed under the laws of Germany in May
1992 under the name Technical Environment Solutions GmbH and changed its name to
TES Com GmbH in August 1999 as a result of its merger with ENTECS Software und
Umweltmanagement GmbH, a subsidiary of ENTECS, in which TES Com was the
surviving corporation. ENTECS was formed under the laws of Colorado in May 1997
and became a wholly-owned subsidiary of the Company pursuant to a merger
effected in August 1999. ENTECS GmbH was formed in July 1997 under the laws of
Germany. Unless the context otherwise requires, references to the "Company"
include its direct and indirect subsidiaries.
From 1994 to 1997, the Company was 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. In
1997, the Company commenced recycling activities at its own facility in
Landsberg a. Lech, Germany, which is southwest of Munich. Recently, the Company
restructured and expanded its EDP-electronics business to become more of a
full-service provider to its customers by adding electronic services and used
equipment sales, both direct and over the Internet, to its business. In
addition, as a result of the Company's merger with ENTECS, the Company now
engages in the distribution of software programs for managing environmental
protection obligations, as well as in the development and marketing of patented
technologies for treating refuse and processing raw materials in an ecologically
sensitive manner.
Through TES Oecon, the Company is engaged in the following:
o electronic services - procurement, maintenance, upgrading and
re-equipping computers and peripheral appliances;
o electronic recycling - certified disassembly and recycling of white,
brown and grey goods; and
o used EDP trading - sale of second hand appliances and components both
to ultimate users and to traders for resale (direct or via the
Internet).
Through TES Com, the Company offers numerous tested second hand and new
computer devices, components and accessories, as well as specifically selected
information, to the computer user via the address Computerteile.com. Management
plans to expand to an Internet-warehouse that will offer specific software
solutions and new types of patented or recycled products and services, in
addition to the above-listed products.
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Through ENTECS, the Company is active in the business areas of production
of wood fibre products as an alternative to conventional peat, briquetting of
dust, metal refuses or fibers and composting of sewage and organic refuse.
Electronic Services
Technological innovations constantly shorten the useful life of applied
hardware. In order to remain competitive, companies must replace old computers
with computers from the new generation. In addition, as companies grow they
require information techniques to fulfill new demands quickly, flexibly and
securely; therefore, the networks used by companies are increasingly becoming
larger and more complex.
The Company assists its customers with their hardware requirements by
offering equipment and system procurement and maintenance, as well as upgrading
and re-equipping of computers and peripheral appliances. Every appliance is
subjected to a detailed functions check, brought up to current technical
standards and made fit for re-marketing. If desired, the Company will organize
and process sales to a customer's employees. If an appliance cannot be re-used
as a whole system, the individual functional components will be extracted and
tested in accordance with the current quality requirements. Defective appliances
and components are evaluated in the Company's certified expert disposal works.
The Company makes 100% data protection a top priority.
In order to further improve the Company's competitive position, management
intends to expand the Company's electronic services business to encompass a full
Information Technology service profile ranging from system design to
implementation to technical service, including network and server maintenance,
installation and exchange services and help desk services using remote
connectors.
Electronic Recycling
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% comes from the field of
entertainment electronics and another 25% 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% 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.
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, called "Kreislaufwirtschafts-und
Abfallgesetz," was effective in 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 these 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.
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, management of the
Company anticipates even stricter laws regarding recycling of electronic
products such as televisions, computers, computer monitors, radios, telephones
and virtually every other type of electronic product. Management expects 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 the Company.
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The Company offers its customers a complete service which disassembles,
removes, re-utilizes, re-processes and markets and sells the recycled materials
to others. The Company's 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. The Company provides its employees with the training
necessary to operate automated systems utilized to disassemble and process the
materials to be recycled.
All necessary legal, official, trading and refuse authorisations have been
granted. The Company is certified by the TUV Suddeutschland as an expert
disposal works in accordance with ss. 52 of the recycling and refuse law
(KrW-AbfG). The Comapny's 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 that the waste has been locally disposed.
The Company also utilizes its manufacturing equipment to convert glass from
cathode ray tubes, commonly referred to as CRTs, computer components and other
manufacturing by-products and industrial wastes into manufacturing raw materials
that may be resold. In the Company's CRT recycling operation, used CRTs are
shipped to the Company by its customers. Under the terms of the arrangements
with its customers, the Company is paid a fee for recycling the used CRTs. The
CRTs include both funnel glass - the back of a television screen 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.
The Company also recycles computer systems. It 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.
Management intends to use a wide variety of collection points as the
Company grows in the future in order to provide full geographic coverage of
Germany's waste disposal needs. At this time, the Company can cover the southern
portions of Germany with its own collection center, the Landsberg facility. The
Company has not yet expanded into northern Germany because the cost of shipping
the electronic scrap to Landsberg, which is in Bavaria, makes such expansion
economically unfeasible.
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The Company's 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 the Company will be successful in enhancing its recycling
capabilities or meeting customer requirements adequately. The Company's delay or
failure to develop or acquire technological improvements or to adapt to
technological change would have a material adverse effect on the Company's
business, results of operations and financial condition.
Used EDP Trading
The market for second-hand devices is still young. According to
International Data Corporation ("IDC"), a market research institute, the world
market for used systems in 1997 was valued at approximately US$3.5 billion.
According to IDC, the availability of second-hand goods is expected to increase
in the coming years. The demand is also expected to increase; however, prices
have decreased. IDC estimates an annual market increase of 14% in the next five
years. This would be approximately twice the speed at which the disposal market
is expected to increase.
The Company's electronic and recycling businesses guarantee a steady,
growing stream of functional components (drives, ventillators, etc.) and devices
and/or systems (computers, notebooks, monitors, printers, etc.). Management
intends to develop the Company's used EDP retail business utilizing this stream
of goods. Before the Company sells any product as a used device, a detailed
functions check is carried out and, if necessary, the device is brought up to
current technical standards. If a device cannot be used as a complete system,
the individual components are extracted and subjected to current quality checks
before they are marketed.
Management intends to market primarily to beginners and PC newcomers, low
income private customers, institutions with a high requirement of work station
computers and small budgets (e.g. schools and government agencies) and companies
with different branches nationally and internationally, primarily in Eastern
Europe.
The Company has commenced sales, primarily to Eastern Europe, and is
negotiating with large customers. Management intends to develop this business
segment through developing relationships with manufacturers and brokers as
trading partners and selling over the Internet under the name
"Computerteile.com."
Internet Marketing of Used Computer Devices and Software.
According to the British market research company "Fletcher Research," in
the year 2004, 121 million Western Europeans will have an Internet connection.
According to a survey by the market research company TNS-Emnid, in 1999 more
than 10 million Germans had Internet access. According to a study by the
economic magazine "Capital," by 2001 approximately 32 million German citizens
over 14 years old and 69% of all German companies will be using the Internet,
and by the year 2003 there should be 40 million Germans on-line. The number of
German on-line shoppers is expected to increase from 9 million to 18 million by
2001 and to 35 million by 2003.
Due to the increasing numbers of computer-users, management believes that
there will be a chance for second hand computers and systems as a less expensive
alternative to new equipment for entering the online-world. Therefore the
Company maintains an e-commerce platform which offers over the Internet under
the domain name "Computerteile.com." numerous tested second hand and new
computer devices, components and accessories (eg. printer-accessories for laser
or ink-printers) from the stock of TES Oecon, as well as user-oriented customer
information (eg. instructions for PC users, expert tips, download-links to
producers, etc.) and discussion forums to intensify customer bonding.
The business is marketed through banner advertising and banner exchange,
registration with search engines and in shipping indexes and advertising in
journals with high circulation. Management hopes to increase shopper visits
through cooperation and partner programs with other Internet shop and mall
providers and by carrying out time-limited special actions (e.g. making bonus
articles available). Management believes that the use of this unique Internet
address (Computerteile.com) to facilitate finding web offers has decisive
advantages by describing what the user is seeking.
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Management plans to expand to an Internet-warehouse that will offer
specific software solutions and new types of patented or recycled products and
services, in addition to the above-listed products. Under the umbrella of the
warehouse, management plans to construct and promote individual theme shops in
which similar or related products from different manufacturers will be bundled
and presented. These theme shops are tailored for their target audiences and are
aimed at either individual consumers or business customers. Initially,
management intends to offer additional specific software products, for example
for operational environmental protection.
Software Solutions for Environmental Protection.
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Management believes that 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. Especially for small and medium-sized businesses, these
software tools have been too inflexible, complex and expensive. Therefore the
former ENTECS Software und Umweltmanagement GmbH acquired an exclusive
distribution license for the "Fabius 2.1 Software Module for Effective
Environmental Management," developed by AkkU Umweltberatung GmbH, a Munich-based
company. Individually adjustable modules, connected data tables, graphical
results, a complete online handbook and MS Windows standards make Fabius a
flexible and cost effective solution which can be employed without any large
scale training being necessary. This license was transferred to TES Com as a
result of the merger of ENTECS Software und Umweltmanagement GmbH with and into
TES Com.
Wood Fiber
Peat cutting or harvesting has come under public criticism for ecological
and conservation reasons. Management expects that 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 wood fibre products as a natural
alternative 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. Management believes that the amount of peat harvested
historically will have to be artificially produced in the long term.
ENTECS' subsidiary - ENTECS Umwelttechnik GmbH - owns a wood fibre
production system 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 Umwelttechnik GmbH produces
three grades of high quality all natural artificial peat products. The quality
of the products depends on the quality of the raw materials used in the process.
The wood fibre products have all of the qualities of peat - confirmed by
numerous tests and sample taking - and are marketed as Torbella(R)plus,
Torbella(R)standard and Tornova(R). Torbella(R)and Tornova(R)are registered
trademarks. Management believes these products provide the following advantages:
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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
o contributes to the conservation of the bio-top and the protection of
the peat deposits.
ENTECS has entered into a cooperation agreement with a wood fibre
manufacturer in the newly formed German states and has, through this, clearly
expanded its sales area and production capacities.
Target customers are garden soil manufacturers, garden supply stores and
governmental units. ENTECS' wood fibre products have numerous potential
applications. They cover all application areas of peat in the garden and
landscaping area, and serve as dams, flows or mesh irrigation, as sack culture
(vegetables, cut flowers), to improve the soil, as a mulch material, for sports
grounds or for special uses like biological exhaust filtering or as a binding
material for soaking up chemical substances.
Briquetting
The Company holds an exclusive license to utilize the patent protected DSA
system which economically binds numerous types of particulate production refuse
(e.g. dust, metal refuse, fibers, paper refuse, etc.) into solid material.
Currently many of these types of production residues are treated as special
refuse and must, regardless of their high commercial value, be disposed of at
high cost. With the DSA system, refuse can be reused in production. The dust is
mixed in a double screw extruder and pressed into pellets or bars (compacted).
The pellets or bars are used as a secondary material in the smelting process and
as such, are incorporated into a later treatment. This consequent cycling is not
only a real economic recycling, rather it also helps to relieve the overloaded
specialist dumps.
Numerous uses exist for these recycling technologies. Until now, no
comparable process existed in Germany; therefore, the Company should have a
clear technological advantage and competitive edge in this area. In addition,
the customer benefits through saving a large part of his special refuse disposal
cost through the more cost efficient preparation.
Management intends to initially conduct this business with a mobile
installation which will make briquetting possible directly where the customer is
situated.
The Company has conducted initial tests for the paper and metal industries.
Management intends to commence offering this technology for metal dust from the
metal industry and for rejects from the paper industry during calendar year
2000.
Composting
The Company has obtained exclusive rights for Spain, Portugal, North
America and South America for the patent protected Orgaver(R)-System which is
already being used in numerous European countries. In contrast to many competing
products, under the Orgaver(R)-System, the material is split during the
intensive mixing process, thereby containing the emission of unpleasant odors to
the shortest time possible. In addition, the Orgaver(R)-System is the only
composting system which offers sewage preparation. Through its technical
conception, the system is superbly suited as a local or regional solution (e.g.
for holiday clubs or for large hotels). The Orgaver(R) and its compost products
are also a homogenous supplement to the wood fibre material already produced by
ENTECS.
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Discontinued Businesses
Job Training.
- -------------
The Company was developing a job-training center which was intended to
provide training for long-term unemployed youths and disadvantaged people in
various new technical job classifications in environmental protection areas,
such as the position title "electronic recycling technician." The center would
have been dependent on state subsidies and programs. Recently, due to changing
conditions in Germany, and especially in Bavaria where the center was to be
located, management has determined that the demand for this training and the
availability of potential trainees are not sufficient to support the proposed
business. Therefore, management decided not to pursue this line of business.
The Concrete Recycling System (BRS Compact).
- --------------------------------------------
In 1997, ENTECS obtained from Mr. Juergen Bozenhardt 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," was in the process of being patented both as a
technology and as a process. The granting of the patents was a condition to the
license; however, as of the date of this Annual Report, one of the patents has
been denied and the other is pending. In addition, ENTECS learned that the
BRS-Compact system licensed from Mr. Bozenhardt has several design defects that
prevent the machine from operating properly. After the first customer refused to
accept the BRS system because of several breakdowns during its testing of the
machine, ENTECS contacted an independent engineering expert to test and audit
the BRS-Compact system. The engineering consultant advised ENTECS that there are
design defects in the BRS-Compact system that will prevent it from working
reliably unless corrected.
As a result of the design defects in the BRS-Compact system and the lawsuit
discussed under "Item 3, Legal Proceedings," below, management cannot proceed
with this business at this time.
Competition
Electronic Services
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The Company's major competitor in the electronic services industry is
Omnico GmbH. Omnico offers different services for the second hand PC, such as
upgrading and repair services, and used EDP trading with resellers and via the
Internet; however, Omnico doesn't recycle like the Company does. In the used EDP
trading sector there are several medium sized, mostly regional trading companies
and foreign resellers from Eastern Europe (both individuals and companies).
Electronic Recycling
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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. Rethmann Entsorgungs AG & Co, Telvest Recycling GmbH, von Roll MBB
Recycling GmbH and Hetzel Elektronik-Recycling GmbH are the Company's' major
competitors in southern Germany.
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Wood Fibre
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There are three major, directly competitive products to the ENTECS products
on the market - namely, "Cultifibre" (produced by an international working soil
company), "Toresa" (the current market-leader in Switzerland, produced by a
Swiss company active primarily in northern Germany) and "Fibrosana" (produced by
a locally-oriented and working soil company in the newly formed German states).
Composting
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The Company has two main competitors in the composting industry with
comparable products - Backhus Kompostiertechnik GmbH and Doppstadt Calbe GmbH.
However, neither of these companies offers complete systems like the Orgaver(R)
- - System.
Briquetting
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Since the technology which the Company uses is patented, management is not
aware of any direct competitors in this business segment. However there might be
alternative technical solutions that management has not analysed yet.
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.
The Company's recycling centers, including the Landsberg facility, as well
as various centers with which the Company may contract to provide services, are
subject to various federal, state and local laws and regulations and licensing
requirements. These laws and regulations relate 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. The
Company's centers are registered with the German government as hazardous waste
generators and are licensed, where required, by appropriate state and local
authorities.
Any of these permits or approvals may be subject to denial, revocation or
modification under various circumstances. Failure to comply with the conditions
of these permits, approvals, registrations, authorizations or exemptions may
adversely affect the operation of the Company's business and may subject the
Company to federal, state or locally-imposed penalties. The Company's 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, the Company or its customers
may be required to obtain additional operating permits, registrations,
certifications, exemptions or approvals. There can be no assurance that the
Company or its customers will meet all of the applicable regulatory
requirements. The Company also 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 the Company's business. The level of
enforcement, for example, by federal, state and local environmental protection
agencies, could positively affect demand for the Company's services. However,
there can be no assurance what course future regulation may take. Under some
circumstances, further regulation could materially increase the costs of the
Company's operations and have an adverse effect on its business.
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Employees
The Company has 15 full time employees, including Gerd Behrens, and four
freelance workers in production, sales and marketing.
Factors That May Affect Future Results
Expansion into New Businesses. Although the Company has been in business
since 1994, its operations initially consisted mainly of the marketing and sale
of recycling services to larger companies, and substantially all of its revenues
have been derived from the sale of recycling services. The Company recently
expanded into several new business segments. There can be no assurance that the
Company will be able to successfully develop, market and conduct its various
businesses. There can be no assurance that, even after the expenditure of
substantial funds and efforts, the Company will ever achieve or maintain an
adequate level of business or profitability. The failure to successfully
develop, market, sell and conduct any of its operations will have a material
adverse effect on the Company's financial condition and results of operations.
Need for Additional Financing. The Company's business is capital intensive.
Management believes that the Company's current cash reserves, together with cash
generated from operations, will enable it to fund its operations until at least
the end of 2000. If the Company is not profitable prior to such time or if its
activities do not generate sufficient cash-flow to fund its operations and
activities, the Company will require additional financing. The Company has no
commitments for any future financing and there can be no assurance that the
Company 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 the
Company's stockholders and any debt financings may contain restrictive covenants
and additional debt service requirements, which could adversely affect the
Company's operating results. If the Company is unable to obtain necessary
financing, it will be required to significantly curtail its activities or cease
operations.
Dependence on Key Employees. The Company's success depends to a significant
extent upon a number of key management and technical personnel, the loss of one
or more of whom could have a material adverse effect on the Company's results of
operations. Further, management believes that the Company's 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 the
Company will be successful in attracting and retaining the personnel it requires
to develop and market its various businesses in a successful manner.
Control by Management. The officers and directors of the Company own
approximately 53.9% of the outstanding shares of the Company's 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 the Company, including certain significant corporate actions such as
acquisitions, the sale or purchase of assets and the issuance and sale of the
Company's securities.
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Dependence upon Environmental Regulation. 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 the Company. 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, the Company's ability to procure such by-products and wastes and
the demand for the Company's services could be adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Any changes in these regulations which increase
compliance standards may require the Company to change or improve its processes.
Regulatory Status of Operations. The Company 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 the Company's
business and may subject the Company to federal, state or locally-imposed
penalties. The Company's 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, the Company or its customers may be required to obtain additional
operating permits, registrations, certifications, exemptions or approvals. There
can be no assurance that the Company or its customers will meet all of the
applicable regulatory requirements.
Potential Environmental Liability. The Company's recycling 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 remediation of the release and/or potential
personal injury associated with the release. Additionally, the Company is
potentially subject to regulatory liability for the generation, transportation,
treatment, storage or disposal of hazardous waste 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.
The Company may also be exposed to certain environmental risks resulting
from the actions of the suppliers of the products that it recycles and other
suppliers of industrial wastes. Although the Company 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 the Company conducts and plans to conduct its operations prudently with
respect to environmental regulations and plans to structure its relationships
with customers and contractors in a manner so as to minimize its exposure to
environmental liabilities, the Company's business, financial condition and
results of operations could be materially adversely affected by an environmental
claim that is not covered or only partially covered by insurance or other
available remedy.
Ability to Respond to Technological Change. The Company's future success
will depend significantly on its ability to enhance its recycling capabilities
and other businesses in a manner which keeps pace with technological
developments and evolving industry standards. There can be no assurance that the
Company will be successful in enhancing its recycling capabilities or meeting
customer requirements adequately. The Company's delay or failure to develop or
acquire technological improvements or to adapt to technological change would
have a material adverse effect on the Company's business, results of operations
and financial condition.
Competition. The market for the Company's services and recycled products is
competitive and subject to rapid change. There can be no assurance that
competitors will not develop alternative methodologies that: (i) are superior to
the Company's methodologies; or that (ii) 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
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quality of recycled products or material. To the extent that the prices of new
products or material are competitive with the prices offered by the Company,
sales of the Company's recycled products may be adversely affected. Accordingly,
there can be no assurance that the Company will be able to compete successfully
with its present or potential competition, or that competition will not have a
material adverse effect on the Company's results of operations and financial
condition.
Dividends and Dividend Policy. The Company 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. As a holding company, the Company holds no
significant tangible assets other than its investments in and advances and loans
to its wholly-owned subsidiaries. The Company's ability to make cash dividend
payments to holders of the common stock is dependent upon the receipt of
sufficient funds from its subsidiaries.
Limited Trading Market. There is only a limited market for the Company's
common stock, and there can be no assurance that an active trading market will
develop or be sustained in the future. The Company does not presently meet the
requirements for inclusion in either the Nasdaq SmallCap Market or the Nasdaq
National Market, and the Company may never meet the requirements for inclusion
on either of those two markets. Trading in the common stock is being conducted
in the over-the-counter market in the NASD's "Electronic Bulletin Board." As a
result of trading on the Bulletin Board, it may be more difficult to obtain
quotations of the market price of the Company's securities. Consequently, the
liquidity of the securities may be impaired, not only in the number of
securities which could be bought and sold but also through delays in the timing
of the transactions, reduction in security analysts' and the news media's
coverage of the Company and lower prices for the Company's securities than might
otherwise be attained.
Possible Inability to List Securities on Nasdaq and Potential Effect upon
Trading. The Nasdaq Stock Market, which administers Nasdaq, has recently made
changes in the criteria for Nasdaq eligibility. In order to be included in
Nasdaq's SmallCap Market, a company must satisfy the requirements described
below. A company must meet one or more of the following three requirements: (i)
net tangible assets of $4 million ($2 million for continued inclusion), (ii)
have a market capitalization of $50 million ($35 million for continued
inclusion), or (iii) have net income (in the latest fiscal year or 2 of the last
3 fiscal years) of $750,000 ($500,000 for continued inclusion). In addition, a
company must also satisfy the following requirements: (i) one million shares in
the public float (500,000 for continued inclusion), (ii) $5 million of market
value of the public float ($1 million for continued inclusion), (iii) a minimum
bid price of $4 ($1 for continued inclusion), (iv) three market makers (two for
continued inclusion), (v) 300 (round lot) shareholders, (vi) an operating
history of one year or market capitalization of $50 million, and (vii) certain
corporate governance standards. The Company does not presently meet the
requirements for inclusion in either the Nasdaq SmallCap Market or the Nasdaq
National Market, and may never meet the requirements for inclusion in either of
those two markets. Trading in the Company's securities is conducted in the
over-the-counter market on the NASD's "Electronic Bulletin Board." Therefore, it
is more difficult to obtain quotations of the market price of the Company's
securities. Consequently, the liquidity of the Company's 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 the Company and lower prices for the
Company's securities than might otherwise be attained
Risks of Classification as a "Penny Stock." The Company's securities come
within the definition of "penny stock" contained in Rule 3a51-1 under the
Securities Exchange Act of 1934 (the "Exchange Act"). Rule 15g-9 under the
Exchange Act imposes additional sales practice requirements on broker-dealers
that sell securities which come under the "penny stock" definition to persons
other than established customers and "accredited investors" (generally,
individuals with net worths 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. Consequently, such rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of the Company's shareholders to sell any of their securities in the
secondary market.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
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rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the 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. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
Possible Volatility of Stock Price. The market price of the Company's
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 the Company 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.
Shares Eligible for Future Sale. As of December 31, 1999, the Company had
not reserved any shares of common stock for issuance upon exercise of stock
options which may be granted pursuant to its stock option plan ("Plan Options").
Sales of common stock underlying the Plan Options may adversely affect the price
of the common stock. In addition, the existence of such options and warrants may
adversely affect the terms on which the Company may obtain additional equity
capital in the future. Further, all of the Company's common stock, other than
the 11,483,374 shares issued in the TES/ENTECS merger, has been sold in
"off-shore" transactions, including 233,476 shares that were sold between
February and July of 1997, and which under certain circumstances have been
eligible for resale into the United States after those shares had been held for
one year. Shares held by the officers and directors of the Company may only be
sold in compliance with Rule 144 adopted under the Securities Act of 1933, as
amended. The sale or resale of these shares could have a depressive effect upon
the trading price of the common stock, if a market for the shares develops.
Important Factors Related to Forward-Looking Statements and Associated
Risks. This Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the development
and conduct of the Company's various businesses, and the future economic
performance of the Company. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties.
These forward-looking statements are based on assumptions that the Company will
be able to develop its various businesses, that competitive conditions within
the various industries in which the Company competes will not change materially
or adversely, that demand for the Company's services and products will remain
strong, that the Company will retain key management personnel, that the
Company's forecasts will accurately anticipate market demand and that there will
be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that 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 elsewhere under other
risk factors, the business and operation of the Company are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
Item 2. Description of Property
The Company currently leases office space for the Company's main corporate
offices at 25 Impler Strasse, 81371, Munich, Germany, at a monthly rental of
approximately 5,575 DM. The lease expires on December 31, 2004. Management of
the Company believes that the existing facilities are adequate at this time for
the Company's operations. In addition, the Company leases two buildings for its
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recycling operations at Landsberg a. Lech, Germany, at a monthly rental of
approximately 20,250 DM. The leases on these buildings expire on December 31,
2001. Under the terms of these leases, the Company also has an option to
purchase one of 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 the Company expects that it
will also be able to conduct its job training at that same facility.
Item 3. Legal Proceedings
Mr. Juergen Bozenhardt, the licensor of the BRS-Compact concrete recycling
system, has filed a lawsuit against the Company based on the alleged breach of a
consulting contract between him and the Company. Mr. Bozenhardt alleges that the
Company owes him approximately 280,000 DM under the agreement. Management of the
Company maintains that, as a result of the design defects in the BRS-Compact
concrete recycling system and Mr. Bozenhardt's failure to obtain the two patents
required under the BRS-Compact license, Mr. Bozenhardt owes the Company
approximately 575,000 DM and has counterclaimed for that amount. Management
intends to vigorously defend the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting of its shareholders duly called and held on July 30,
1999, the shareholders of ENTECS approved (i) an agreement and plan of merger
between TES, TES Acquisition Corp., a wholly owned subsidiary of the Company
("TES Acquisition"), and ENTECS, and (ii) the merger of TES Acquisition with and
into ENTECS. As a result of the merger, ENTECS became a wholly owned subsidiary
of the Company and each outstanding share of ENTECS common stock, no par value,
was converted into the right to receive seven shares of the Company's common
stock. The merger was consummated effective August 10, 1999.
No matters were submitted by the Company to a vote of its shareholders
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this report.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
Until recently, there was no public market for the Company's common stock.
At the present time, there is only a limited market for the common stock. There
can be no assurance that an active trading market will develop or be sustained
in the future for the Company's securities. The Company does not presently meet
the requirements for inclusion in either the Nasdaq SmallCap Market or the
Nasdaq National Market. Trading in the common stock is being conducted in the
over-the-counter market in the NASD's "Electronic Bulletin Board." The Company
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 the Company's securities. Consequently, the
liquidity of the Company's 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 the Company, and lower prices for the Company's securities than
might otherwise be attained.
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The Company's securities also 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 the Company's securities and may adversely affect the
ability of the Company's stockholders to sell any of their securities in the
secondary market.
The Company's board of directors has adopted a stock option plan under
which it could issue up to 500,000 shares of common stock. No options have been
granted under the stock option plan at this time. However, future sales of
shares that might be issued in the future on exercise of any options granted
under the stock option plan could have a depressive effect on the trading price
of the common stock. In addition, the existence of options may adversely affect
the terms on which the Company may obtain additional equity capital in the
future. The market price of the Company's 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 the Company or its
competitors and other events or factors. Further, the stocks of many companies
have experienced extreme price and volume fluctuations that have often been
unrelated to the companies' operating performance.
The table set forth below presents the range, on a quarterly basis, of high
and low bid prices per share of the Company's common stock as reported by
Nasdaq. The quotations represent prices between dealers and do not include
retail markup, markdown or commissions and may not necessarily represent actual
transactions. The Company's common stock began trading in the over-the-counter
market during the fourth quarter ended December 31, 1998. The first quotation
for the Company's common stock was reported in the NASD's Electronic Bulletin
Board on October 23, 1998. Therefore, the high and low bid reported below for
the quarter ended December 31, 1998 do not represent a full quarter of activity.
Quarter Ended High Low
------------- ---- ---
December 31, 1998 $3.50 $0.75
March 31, 1999 $4.25 $1.75
June 30, 1999 $1.75 $1.75
September 30, 1999 $2.00 $1.75
December 31, 1999 $2.00 $0.25
March 31, 2000 $0.625 $0.25
The Company had approximately 192 shareholders of record as of March 31,
2000, which does not include shareholders whose shares are held in street or
nominee names.
Holders of the Company's common stock are entitled to receive dividends as
may be declared by the board of directors out of legally available funds. No
dividends have been declared to date by the Company, nor does management
anticipate declaring and paying cash dividends in the foreseeable future. At the
present time, the Company has a net deficit and is prohibited from paying
dividends under Colorado law.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations. The financial statement items for the year ended December 31,
1998 in the table below and under "Year Ended December 31, 1999 Compared to Year
Ended December 31, 1998" have been restated to include the operations of ENTECS.
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Fiscal year ended
December 31,
--------------------------------
1997 1998 1999
DM DM DM
-- -- --
Sales 100.0% 100.0% 100.0%
Cost of Operations 39.6 33.1 57.1
Gross Profit 60.4 66.9 42.9
General and administrative 195.3 230.2 296.3
Income (loss) from operations (134.9) (163.3) (253.3)
Interest income 4.2 3.2 2.2
Losses of Unconsolidated Subsidiary -- (8.0) --
Interest expense (10.3) (6.7) (6.1)
Net income (140.9) (174.8) (257.2)
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales for the year ended December 31, 1999, were 1,177,179 DM, an increase
of 497,754 DM, or 73.3%, as compared to the year ended December 31, 1998. This
increase in sales resulted principally from sales to new customers and the
Company's expansion into new businesses, such as used EDP trading. In addition,
whereas in 1998 ENTECS GmbH was still engaged in testing, opened a new
production location and had only small orders for production, this subsidiary
obtained its first one-year production contract and was fully operational in
1999.
Cost of operations for the year ended December 31, 1999 were 671,592 DM, an
increase of 455,414 DM, or 210.7%, as compared to the year ended December 31,
1998. This increase in cost of operations resulted principally from construction
and repair costs for the BRS-System due to design defects and the cost of raw
materals, supplies and merchandise purchased by ENTECS Umwelttechnik GmbH for
the production of wood fibre and by TES Oecon AG for the used EDP trading.
General and administrative expenses for the year ended December 31, 1999
were 3,487,895 DM, an increase of 633,040 DM, or 22.2%, as compared to the year
ended December 31, 1998. This increase in general and administrative expenses
was primarily due to the following:
o Increased payroll and payroll related expenses for employees in the
Landsberg facility in combination with a reduction in the state
subsidies which the Company receives for each new position created in
the recycling component of the Company's business. These subsidies are
treated as an offset to general and administrative expenses. The
subsidies which the Company receives from the state end after each new
employee's first complete year of employment. Thereafter, the Company
must bear the full cost of such employee's salary and benefits.
o Rent for additional storage ground at the Landsberg facility due to
increased operating activity.
o Legal and accounting expenses related to the merger of the Company
with ENTECS.
o Extraordinary depreciation of the BRS-licence.
As a result of the above factors, the operating loss for the year ended
December 31, 1999 was 2,982,308 DM, an increase in the operating loss of 590,700
DM, or 24.7%, as compared to the year ended December 31, 1998.
Interest income increased by 88.8% for the year ended December 31, 1999 as
compared to the previous year. Interest income was 26,109 DM for the year ended
December 31, 1999 and was 13,831 DM for the year ended December 31, 1998.
Interest expenses for the year ended December 31, 1999 were 71,899 DM, an
increase of 53,156 DM, or 283.6%, compared to the previous year. This increase
was a result of increased borrowings by the Company.
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As a result of the above factors, the net loss for the year ended December
31, 1999 was 3,028,098 DM, an increase of 582,578 DM, or 23.8%, as compared to
the year ended December 31, 1998.
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 the
Companies 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 were 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 comprised of principally disposal costs and transportation costs. These
categories of cost increased proportionately with the increased production
volume contributing to the increase in Sales. However, the Company was able to
achieve reduced unit costs in these categories as a result of the increased unit
volume.
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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, despite a 9.0% decrease in general and administrative
expenses of related parties. This increase in general and administrative
expenses was due to increased lease costs resulting from the leasing and opening
of the Landsberg facility and to staffing and labor expenses related to the
increased production volume in the Company's recycling business. The Company
also incurred increased general and administrative expenses as a result of
increased marketing activities and additional professional services resulting
from the Company's merger plans with ENTECS.
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 the Company paying off a loan of 180,000 DM in early 1998.
The Company incurred a loss of 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 of its unconsolidated subsidiary is a result of the
Company 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. The Company 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.
Liquidity and Capital Resources
The Company is currently experiencing a liquidity crisis and must raise
additional funds. Further, the Company has not generated sufficient cash-flow to
fund its operations and activities. The Company traditionally relied principally
upon internally generated funds and loans from its principal shareholder and his
wife to finance its operations and growth. During 1998 and 1999, ENTECS raised
2,599,557 DM and 1,773,259 DM, respectively, through the sale of its common
stock in Germany to German citizens. In addition, during 1999, the Company sold
200,000 DM of convertible debentures to a related party. The debentures are
convertible into common stock of the Company at US $0.25 per share and bear
interest at 3.5% per annum. At December 31, 1999 the Company had negative
working capital of 617,135 DM and cash had decreased to 428,328 DM. Further, the
Company has an accumulated deficit of 7,176,079 DM at December 31, 1999.
Management intends to raise additional funds as necessary through further
private or public offerings of its stock and through bank loans or loans from
private investors, if necessary, although there can be no assurance that the
Company will be able to obtain such financing. The Company has future minimum
lease obligations totaling 815,000 DM through 2004.
Year 2000 Compliance
The Year 2000 Problem referred to existing computer programs' ability to
appropriately distinguish the year 2000 from the year 1900 when processing
transactions. Prior to January 1, 2000, management of the Company had been
advised that all software programs that the Company was using had been
programmed for Year 2000. As of this date, the Company has not experienced any
difficulties in year 2000 compliance. No contingency plans have had to be
initiated and no additional costs have been incurred.
In addition, the Company's software is programmed to accept the New
European currency - the EURO.
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Item 7. Financial Statements
The response to this item is submitted as a separate section of this report
beginning on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has not had any reported or material disagreement with its
accountants on any matter of accounting principles, practices or financial
statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The officers and directors of the Company are as follows:
Officers and Directors
Tenure as Officer
Name Age Position(s) or Director
---- --- ----------- -----------
Gerd Behrens 62 Chairman of the June 21, 1994
Board and President to Present
Frank Behrens 33 Secretary-Treasurer March 3, 1995
and a Director to Present
Dieter Gastinger 56 Senior Vice President August 10, 1999
and a Director to Present
Gerd Behrens and Frank Behrens may be deemed to be "promoters" and
"parents" of the Company within the meaning of the Rules and Regulations
promulgated under the Securities Act.
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company 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. 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 the Company's founders and promoters and each officer and director.
Gerd Behrens, founder and promoter, has been Chairman of the Board and
President of the Company 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 36 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 the Company, 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 the Company, Mr. Behrens has devoted
substantially all of his time to the business and affairs of the Company.
Frank Behrens has been Secretary and a director of the Company 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 the Company, since graduating in 1995. Mr. Behrens' consulting
services have related primarily to environmental management and controlling
systems. Mr. Behrens provided the Company with assistance in the writing and
drafting of its business plan and offering materials that were used to raise
funds from German investors.
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Dieter Gastinger has been Senior Vice President and a director of the
Company since consummation of the merger between the Company and ENTECS in
August 1999. He has been a director of ENTECS since September 1997. For the past
ten years Mr. Gastinger has been the owner of UWAS Umweltservice GmbH, 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.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, generally
requires the Company's directors and executive officers and persons who own more
than 10% of a registered class of the Company's equity securities ("10% owners")
to file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Directors and executive officers and 10% owners are required by
Securities and Exchange Commission regulation to furnish the Company with copies
of all Section 16(a) forms they file. Gerd Behrens, Jutta Behrens, Frank Behrens
and Karsten Behrens failed to timely file Forms 4 or Forms 5 reporting the
increases in their shareholdings which resulted from the merger between TES
Acquisition and ENTECS. In addition, Karsten Behrens failed to timely file Forms
4 or a Form 5 to report dispositions of the Company's common stock. To the
Company's knowledge, based solely on review of copies of such reports furnished
to the Company and verbal representations that no other reports were required to
be filed during the fiscal year ended December 31, 1999, the Company's
directors, executive officers and 10% owners were not required to file any other
Section 16(a) reports.
Item 10. Executive Compensation
The following table summarizes all compensation paid to the officers and
directors of the Company for services rendered to the Company during the last
three fiscal years. Gerd Behrens' salary for 1998 includes 95,500 DM from TES
(80,000 DM of which he elected to defer until the time that the Company has
funds available to pay him) and 57,600 DM from ENTECS (all of which he elected
to defer until the time that the Company has funds available to pay him). This
unpaid salary has been included as an accrued expense of related parties in the
balance sheet of the Company as of December 31, 1998. He also has elected to
defer payment of his salary for 1999. Frank Behrens' salary for 1998 was paid to
him by ENTECS. Dieter Gastinger's salary for 1998 and 1999 was paid to him by
ENTECS.
-21-
<PAGE>
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------- ------------
Salary/Consulting Fees Number of
Name and ---------------------- Other Annual Options
Principal Position Year DM US$ Compensation Awarded
- ------------------ ---- -- --- ------------ -------
<S> <C> <C> <C> <C> <C>
Gerd Behrens, 1999 48,000 24,615 -0- -0-
President 1998 153,100 91,841 -0- -0-
and Director 1997 57,600 32,141 -0- -0-
Frank Behrens, 1999 51,100 26,205 -0- -0-
Secretary-Treasurer 1998 77,500 46,490 -0- -0-
and Director 1997 40,250 22,460 -0- -0-
Dieter Gastinger, 1999 53,750 27,564 -0- -0-
Director 1998 52,850 31,704 -0- -0-
1997 -0- -0- -0- -0-
Jutta Behrens, 1999 6,000 3,076 -0- -0-
Treasurer and Director 1998 -0- -0- -0- -0-
prior to August 1999 1997 -0- -0- -0- -0-
</TABLE>
Employment and Consulting Agreements
The Company has entered into an employment agreement with Gerd Behrens
under which Mr. Behrens will be paid approximately 8,000 DM (US $4,762) per
month; however, since July 1, 1999 his salary is at a monthly rate of 660 DM.
Mr. Behrens has deferred payment of this compensation until the Company has
funds available to pay him. The Company previously had a consulting agreement
with Frank Behrens to prepare a business plan and an investment memorandum for
which he was paid a flat rate. Gerd Behrens and Frank Behrens devote their full
time and attention to the Company and its subsidiaries.
Directors
Other than in accordance with 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, the Company 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
of these plans at this time.
The board of directors of the Company 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 the Company's common stock. The purpose of the stock
option plan is to make options available to directors, management, key
employees, consultants and technical advisers of the Company. A grant of stock
options to these individuals will provide them with a more direct stake in the
future of the Company and provide them with additional rewards and incentives
for contributing to the Company's success.
-22-
<PAGE>
A committee appointed by the board of directors administers the stock
option plan. This committee determines the following:
o the persons to be granted options under the plan
o the number of shares subject to each option
o the term of the option o the manner in which the option may be
exercised
o the exercise price of each 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 Annual Report, no options have been granted under
the stock option plan.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 31, 2000 with
respect to the ownership of the Company's common stock by all officers and
directors, individually, all officers and directors as a group and all
beneficial owners of more than 5% of the common stock. Except as otherwise
indicated, the following shareholders have sole voting and investment power with
respect to the shares.
Gerd and Jutta Behrens are husband and wife, and each own shares
separately. Gerd Behrens individually owns 1,500,000 shares and Jutta Behrens
individually owns 1,260,000 shares. Under SEC rules, as husband and wife, each
of them may be considered the beneficial owner of the shares held by the other.
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.
Name and address Number of Percent of
of owner shares class
-------- ------ -----
Gerd Behrens 6,260,000 37.6%
C/O TES Com GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Frank Behrens 2,000,000 12.0%
C/O TES Com GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Dieter Gastinger 700,000 4.2%
C/O ENTECS GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Jutta Behrens 6,260,000 37.6%
C/O TES Com GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Karsten Behrens 1,895,000 11.4%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
All officers and directors 8,960,000 53.9%
as a group (3 persons)(1)
- --------------------------
(1) Does not include 1,895,000 shares held by Karsten Behrens because he is
neither an officer nor a director of the Company. Includes 1,260,000 shares
held individually by Jutta Behrens because these may be considered to be
beneficially owned by her husband, Gerd Behrens.
There are no outstanding options, warrants or rights to purchase securities
from the Company.
-23-
<PAGE>
Item 12. Certain Relationships and Related Transactions.
In connection with the founding of the Company, Gerd Behrens acquired
4,500,000 shares of its common stock. Subsequent to the founding and prior to
the time that the Company 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. Mr. Behrens paid approximately 90,870 DM (US $54,089) 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.
Jutta Behrens, the wife of Gerd Behrens, has loaned the Company an
aggregate of 330,000 DM since 1996. The initial loan was made on March 20, 1996,
in the amount of 80,000 DM (US $51,992) for a four-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 (US $32,495) for a five-year term and bears interest
at 8% per year. In April 1999 Jutta Behrens loaned the Company 200,000 DM. The
loan had an initial term of one year and automatically extends for additional
one-year terms if not previously repaid. It bore interest at a rate of 4.15% per
annum until April 2000 at which time the rate of interest increased to 5.4% per
annum.
In connection with their financing efforts in Germany, TES and ENTECS
entered into consulting agreements with Yvonne Marquard, who was at that time a
director of ENTECS and a shareholder of TES. Ms. Marquard is the wife of Michael
Marquard, who was an employee of the Company. Under the agreements Mrs. 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 the companies' securities. Ms. Marquard did
not receive any payments from TES under its agreement in either 1998 or 1999;
however, ENTECS paid Mrs. Marquard approximately 146,525 DM (US$87,897) under
its agreement in 1998 and 45,000 DM (US$23,077) in 1999. In addition, TES paid
Ms. Marquard approximately 86,399 DM (US$51,829) in 1998 and 42,200 DM
(US$21,641) in 1999 for marketing-consultant services.
-24-
<PAGE>
The Company paid Karsten Behrens, a major shareholder in the Company,
consulting fees equal to approximately 12,255 DM (US$7,352) in 1998. These fees
were for the performance of legal services for the Company and the writing and
drafting of the Company's business plan and offering materials that were used to
raise funds from German investors.
In 1999, the Company sold 200,000 DM of convertible debentures to Yvonne
Marquard, a former director of ENTECS and shareholder of TES. The debentures
are convertible into common stock of the Company at US $0.25 per share and bear
interst at 3.5% per annum.
The management of the Company believes that the above transactions were on
terms no less favorable than could be obtained from unaffiliated third parties.
The Company 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.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
There are no exhibits filed with this Annual Report.
(b) Reports on Form 8-K
On September 27, 1999, the Company filed a report on Form 8-K reporting
under Item 2 thereof the merger of TES Acquisition Corp. with and into ENTECS
pursuant to which ENTECS became a wholly owned subsidiary of the Company. The
unaudited financial statements of ENTECS at June 30, 1999 and for the six months
ended June 30, 1999 and 1998, the audited financial statements of ENTECS at
December 31, 1998 and for the years ended December 31, 1998 and 1997 and
unaudited pro forma combined condensed financial information giving effect to
the merger were filed under Item 7 of that report on Form 8-K.
No reports on Form 8-K were filed by the Company during its fourth quarter
ended December 31, 1999.
-25-
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
(Registrant)
Date: May 12, 2000 By: /s/ Gerd Behrens
Gerd Behrens, President and a Director
Date: May 12, 2000 By: /s/ Frank Behrens
Frank Behrens, Secretary-Treasurer and a Director
Date: May 12, 2000 By: /s/ Dieter Gastinger
Dieter Gastinger, Director
-26-
<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, 1999 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, 1999, 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
April 13, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Balance Sheet
December 31, 1999
ASSETS
------
DM US $
<S> <C> <C>
Current assets:
Cash and cash equivalents 428,328 219,655
Accounts receivable, trade 95,172 48,806
Inventory 60,000 30,769
Prepaid expenses 17,608 9,030
---------- ----------
Total current assets 601,108 308,261
Property and equipment, at cost, net of
accumulated depreciation of DM 317,946 627,293 321,689
Investments 10,000 5,128
Note receivable - related party 50,000 25,641
Intangible assets, net of amortization of DM 482,739 247,558
Other assets 401,176 205,731
---------- ----------
2,172,316 1,114,008
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable - banks 39,198 20,103
Notes payable - others 200,000 102,564
Accounts payable 424,505 217,694
Accounts payable and accrued expenses - related parties 219,055 112,336
Accrued expenses 335,485 172,044
---------- ----------
Total current liabilities 1,218,243 624,740
Loans from shareholders 430,000 220,513
Stockholders' equity:
Common stock, no par value,
20,000,000 shares authorized,
16,638,075 shares issued and outstanding 7,700,152 3,948,796
Accumulated deficit (7,176,079) (3,680,041)
---------- ----------
524,073 268,755
---------- ----------
2,172,316 1,114,008
---------- ----------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31,
1998 1999 1999
DM DM US $
-- -- ----
Sales 679,425 1,177,179 603,682
Sales to related party 0 0 0
----------- ----------- -----------
679,425 1,177,179 603,682
Cost of operations 216,178 671,592 344,406
----------- ----------- -----------
Gross profit 463,247 505,587 259,275
Other costs and expenses:
General and administrative 2,756,261 3,398,146 1,742,639
General and administrative - related parties 98,594 89,749 46,025
----------- ----------- -----------
(Loss) from operations (2,391,608) (2,982,308) (1,529,389)
Other income and (expense):
Interest income 13,831 26,109 13,389
Losses of unconsolidates subsidiary (49,000) 0 0
Interest expense - related party (17,400) (23,280) (11,938)
Interest expense (1,343) (48,619) (24,933)
----------- ----------- -----------
(53,912) (45,790) (23,482)
(Loss) before income taxes (2,445,520) (3,028,098) (1,552,871)
Provision for income taxes 0 0 0
----------- ----------- -----------
Net (loss) (2,445,520) (3,028,098) (1,552,871)
----------- ----------- -----------
Earnings (loss) per share:
Basic and diluted (loss) per share (0.16) (0.18) (0.09)
----------- ----------- -----------
Weighted average shares outstanding 14,875,779 16,433,041 16,433,041
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1999 and 1998
Common Stock Accumulated
Shares Amount Deficit Total
DM DM DM
Balance, December 31, 1997 13,489,679 3,261,424 (1,702,461) 1,558,963
Sale of stock for cash 1,799,196 3,078,346 3,078,346
less expenses of offering (478,789) (478,789)
Net loss for the year 0 0 (2,445,520) (2,445,520)
----------- ----------- ----------- -----------
Balance, December 31, 1998 15,288,875 5,860,981 (4,147,981) 1,713,000
Sale of stock for cash 1,322,349 1,967,669 1,967,669
less expenses of offering (194,410) (194,410)
Conversion of debentures 26,851 65,912 65,912
Net loss for the year 0 0 (3,028,098) (3,028,098)
----------- ----------- ----------- -----------
Balance, December 31, 1999 16,638,075 7,700,152 (7,176,079) 524,073
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1998 1999 1999
DM DM US $
-- -- ----
Net (loss) (2,445,520) (3,028,098) (1,552,871)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation 178,005 809,725 415,244
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 70,128 (24,280) (12,451)
(Increase) decrease in inventory (120,000) 60,000 30,769
(Increase) decrease in prepaid expenses (41,802) 60,548 31,050
(Increase) decrease in other assets 45,744 (101,176) (51,885)
Increase (decrease) in accounts payable and
accrued expenses including related parties (564,069) (237,722) (121,909)
Total adjustments (431,994) 567,095 290,818
Net cash (used in) operating activities 92,877,514) (2,461,003) (1,262,053)
----------- ----------- -----------
Cash flows from investing activities:
Repayment of affiliate advance 250,000 250,000 128,205
Purchase of fixed assets (79,723) (89,547) (45,922)
----------- -----------
Net cash provided by (used in) investing activities 170,277 160,453 82,284
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 2,599,557 1,773,259 909,364
Repayment of notes payable - bank (168,257) 9,657 4,952
Proceeds from stockholder advances 0 200,000 102,564
Repayment of stockholder advances (91,800) 0 0
Proceeds from convertible notes 0 200,000 102,564
Repayment of convertible notes (10,000) (14,088) (7,225)
----------- ----------- -----------
Net cash provided by
financing activities 2,329,500 2,168,828 1,112,219
----------- ----------- -----------
Increase (decrease) in cash (377,737) (131,722) (65,550)
Cash and cash equivalents,
beginning of period 937,787 560,050 287,205
----------- ----------- -----------
Cash and cash equivalents,
end of period 560,050 428,328 219,655
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1998 1999 1999
DM DM US $
-- -- ----
Supplemental cash flow information:
Cash paid for interest 33,219 71,889 36,866
Cash paid for income taxes 0 0 0
Non-cash investing and financing activities:
License rights acquired for debt (1,364,236) 0 0
Conversion of debentures into common stock 0 65,912 33,801
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Technical Environment Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
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 was
incorporated in Colorado on June 21, 1994. 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. Historically, these operations consisted 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. 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.
On October 30, 1998 the Company and Environmental Technologies and Software
Solutions, Inc. (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 received seven shares of TES
common stock for each share held as of the closing date in August 1999. The
merger with ENTECS has been accounted for as a reorganization of companies under
common control. The accounting for the merger is similar to that of a pooling of
interests. The financial statements of TES for the year ended December 31, 1998
have been restated to give effect to the merger.
ENTECS' 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.
ENTEC was incorporated in Colorado on May 9, 1997.
In connection with the merger in August 1999, ENTECS Software GmbH was merged
into TES GmbH and TES GmbH's name was changed to TES Com GmbH.
Subsequent to the merger with ENTECS, the Company expanded its busienss by
adding electronic services and used equipment sales, both direct and over the
Internet, to its business. In addition, as a result to the merger, the Company
now engages in the distribution of software programs for managing environmental
protection obligations, the production of wood fiber products as an alternative
to conventional peat, briquetting of dust, metal refuses or fibers and
composting of sewage and organic refuse.
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.
F-7
<PAGE>
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of and for the year ended December 31, 1999 have been
translated into United States dollars. ("U.S. $") at the rate of DM 1.95 per
U.S. $1.00 the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1999. 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.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with 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 199,336 and DM 68,805 for the years ended December 31,
1999 and 1998, respectively.
Intangible assets
The Company has purchased certain licenses for the use of technology to be used
in its planned business activities (see Note 3). 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, 1999 and 1998 amounted to DM
127,500 and DM 158,958, 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. Impairment losses have been identified by the Company for
the 1999 fiscal year relating to the Company's BRS license as described in Note
3 amounting to DM 463,541.
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.
F-8
<PAGE>
Advertising
Advertising expenses are charged to expense upon first showing. The Company
incurred advertising expense of DM 51,337 and DM 84,815 during the years ended
December 31, 1999 and 1998 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.
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.
F-9
<PAGE>
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.
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.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 - Reporting on the Costs of Start-Up Activities. The
statement is effective for fiscal years beginning after December 15, 1998 and
requires that the cost of start-up activities, including organization costs be
expensed as incurred. The Company adopted the statement upon its inception,
however, the statement had no effect upon the financial statements of the
Company.
F-10
<PAGE>
Note 2. Business acquisition
On October 30, 1998 the Company and Environmental Technologies and Software
Solutions, Inc. (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 received 7 shares of TES
Common Stock for each of its outstanding shares at closing, which occurred on
August 10, 1999. Accordingly, the consolidated financial statements as of
December 31, 1999 give effect to the issuance of 11,483,374 TES common shares
and the merger with ENTECS has been accounted for as a reorganization of
companies under common control. The accounting for the merger is similar to that
of a pooling of interests. The financial statements for the year ended December
31, 1999 include the combined accounts of the merged companies from the
beginning of the year and the financial statements for the year ended December
31, 1998 have been restated to give effect to the merger.
Operations of the separate companies are as follows:
TES ENTECS TOTAL
(DM) (DM) (DM)
---- ---- ----
Six months ended
June 30, 1999
Revenues 337,749 152,635 490,384
Net (loss) (511,242) (474,912) (986,154)
Year ended
December 31, 1998
Revenues 610,056 69,369 679,425
Net (loss) (1,066,813) (1,378,707) (2,445,520)
Inter-company loans amounting to DM 640,200 and DM 288,669 at June 30, 1999 and
December 31, 1998 were eliminated in the combined financial statements of the
companies.
Inter-company interest amounting to DM 17,085 and DM 7,515 at June 30, 1999 and
December 31, 1998 was eliminated in the combined financial statements of the
companies.
Note 3. 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)) was
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. During 1998, the Company accrued DM 155,168 for continuing
consulting services provided by the director. During the year ended December 31,
1999 the Company was sued by the now former director for an aggregate of DM
280,000 for claimed services in connection with repairs to the machine.
F-11
<PAGE>
The Company has countered the suit as the machine has never functioned as
represented to the Company and patent ability of the machine and the related
process is in serious doubt. The Company has reversed the accrual of consulting
services from 1998 and has written off the entire carrying value of the machine.
See Note 1.
The second license (DAS 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. The process patents for a
briquetting system that binds certain particulate matter into solid material
have been registered during May 1993 and May 1992. The contract expires with the
expiration of the patent that, 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 that the Company has determined to be the
appropriate amortization period using the straight-line method. The total
amortization for the years ended December 31, 1999 and 1998 amounted to DM
127,500 and DM158,958, respectively.
Note 4. 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.
Note 5. Notes payable and long-term debt
Notes payable - banks at December 31, 1999 consists of a bank line of credit
having a balance at December 31, 1999 of DM 39,198. The line of credit bears
interest at 10.75% per annum and had DM 10,802 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 were due in March 1999. The debentures are convertible into shares of
the Company's common stock. 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. The remaining balance of the debentures at December 31, 1998 (DM 80,000)
was repaid in 1999 by cash payment (DM 13,550) and conversion to common stock
(DM 66,450).
During 1999, the Company sold DM 200,000 of convertible debentures to a related
party. The debentures are convertible into common stock of the Company at (US)
$.25 per share and bear interest at 3.5% per annum. Subsequent to December 31,
1999, the debenture holder requested repayment of the debenture in cash. No
provision has been made to recognize additional interest that may have arisen
had the debentures been converted into common stock at the discounted from
market price (approximately (US) $.25 per share at the debenture contract dates)
since it is more likely then not that the debentures will be repaid in cash.
F-12
<PAGE>
Note 6. Income taxes.
At December 31, 1998 the Company had approximately DM 7,176,000 of unused net
operating loss deductions in Germany that may be carried forward indefinitely.
A valuation allowance of DM 3,588,000 was provided at December 31, 1999 for net
operating loss carry forwards that more likely than not will not be utilized in
the foreseeable future. The valuation reserve increased by approximately DM
1,514,000 and DM 1,278,000 during the years ended December 31, 1999 and 1998,
respectively.
Note 7. 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
------------------------ ------
2000 288,420
2001 288,420
2002 147,420
2003 45,420
2004 45,420
---------
815,000
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.
The Company has accrued DM 22,500 of additional rent during each of the years
ended December 31, 1999 and 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 1999 and 1998 was DM 301,556 and DM 322,908, respectively.
The Company has entered into employment contract with its president that
provides for an annual salary of DM 7,920 per year. The contract remains in
effect until cancelled by either party.
F-13
<PAGE>
Note 8. 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.
During 1999, the wife of the Company's president, who is also a major
shareholder of the Company, advanced DM 200,000 to the Company's German
subsidiary. The loan bears interest at 4.15% per annum and is due in full on
April 15, 2000 unless extended.
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, 1999 with respect to the
loan amounted to DM 14,926.
During the years ended December 31, 1999 and 1998 the Company paid an aggregate
of DM 48,200 and DM 136,994, respectively to three officer/shareholders for
consulting and other services provided to the Company. At December 31, 1999 the
Company had outstanding balances for these services due to the
officer/shareholders aggregating DM 219,055.
Additionally, one of the officer shareholders was paid an aggregate of DM 45,000
and DM 146,525 in commissions related to the sale of the Company's common stock
in 1999 and 1998, respectively.
Note 9. Stockholders' equity
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 1998, the Company continued a private sale of its common stock to a
limited group of investors in Germany. The Company sold 1,799,196 shares of its
common stock for gross proceeds of DM 3,078,346 and incurred direct expenses of
the offering amounting to DM 478,789.
F-14
<PAGE>
During 1999, the Company continued a private sale of its common stock to a
limited group of investors in Germany. The Company sold 1,322,349 shares of its
common stock for gross proceeds of DM 2,132,079 and incurred direct expenses of
the offering amounting to DM 194,410.
Additionally during 1999, the Company converted an aggregate of DM 65,912 of
convertible debentures and accrued interest into 26,851 shares of common stock.
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. 10. Concentrations and information about major customers
During 1998 and 1999, 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 that accounted for 10% of its sales. There were no
major customers during the year ended December 31, 1999.
Note 11. 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.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of Technical Environment Solutions, Inc., for the
fiscal year ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CURRENCY> DM
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.95
<CASH> 428,328
<SECURITIES> 0
<RECEIVABLES> 95,172
<ALLOWANCES> 0
<INVENTORY> 60,000
<CURRENT-ASSETS> 601,108
<PP&E> 627,293
<DEPRECIATION> 317,946
<TOTAL-ASSETS> 2,172,316
<CURRENT-LIABILITIES> 1,218,243
<BONDS> 0
0
0
<COMMON> 7,700,152
<OTHER-SE> (7,176,079)
<TOTAL-LIABILITY-AND-EQUITY> 2,172,316
<SALES> 1,177,179
<TOTAL-REVENUES> 1,177,179
<CGS> 0
<TOTAL-COSTS> 671,592
<OTHER-EXPENSES> 3,487,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,899
<INCOME-PRETAX> (3,028,098)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,028,098)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
