<PAGE> 1
As filed with the Securities and Exchange Commission on September 2, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------
SANTI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2335973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14901 QUORUM DRIVE, SUITE 200
DALLAS, TEXAS 75240
(Address of principal executive offices)
(972) 858-6025
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
Not applicable Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Class
--------------
Common Stock, $.0001 par value
================================================================================
<PAGE> 2
ITEM 1. BUSINESS
SUMMARY
SanTi Group, Inc. ("SanTi" or the "Company"), engages in the following
businesses relating to the nonhazardous liquid waste ("NLW") industry: grease
trap pumping and repair services; septic services (including designing, pumping,
installation and maintenance), sewer and drain cleaning services; high pressure
water jetting services; portable toilet servicing; bulk liquid waste
transportation; biosolids management; on-site biotreatment systems and liquid
waste processing and disposal. SanTi's customers include restaurants, hospitals,
military bases, office buildings, apartments, schools, municipalities,
industrial businesses and single family residences. All references to SanTi or
the Company include its operating subsidiaries unless the context indicates
otherwise.
SanTi intends to expand its presence in the NLW industry through internal
growth and acquisitions of local service providers throughout the United States.
The acquisitions will be made primarily with cash, shares of the Company's
common stock or a combination of cash and shares of the Company's common stock.
The Company believes that these acquisitions, by consolidating smaller local
service providers, will create synergies and improve efficiencies in the area of
NLW management.
THE NLW INDUSTRY
The Company estimates that the portable toilet, septic tank and grease trap
business segment of the U.S. domestic NLW industry generates approximately $20
billion in revenues annually. There are approximately 25,000 service providers
currently in the NLW industry and, of these service providers, approximately 75%
generate less than $500,000 of annual revenues. The Company believes the NLW
industry will continue to grow based on increased waste from a growing
population and general economic conditions that are driving new building demand
and the need for NLW services.
Because the NLW industry is so highly fragmented, management believes the
industry has the potential for significant cost savings by the economies of
scale that may be realized in consolidation. These costs savings would include
efficiencies as a result of common billing, the coordination of advertising, the
elimination of duplicative professional and technical support providers, the
standardization and upgrading of equipment and the improvement of employee
training. SanTi intends to determine lines of the NLW business in which an
acquired service provider is not currently engaged and assist the service
provider in expanding into those areas. There can be no assurance, however, that
SanTi will be able to profitability consolidate service providers within the NLW
industry.
THE BUSINESS
SanTi currently engages in each of the NLW businesses described above.
SanTi's operating subsidiaries include: Bone-Dry Enterprises, Inc.; SanTi Group
of Florida, Inc.; SanTi Group of Pennsylvania, Inc.; and SanTi Group of New
York, Inc. Each subsidiary of SanTi intends to acquire additional assets from
local service providers and act as an operating division of SanTi in the area in
which it is located. These local operating divisions operate under various
tradenames, as described below.
Bone-Dry Enterprises, Inc. ( "Georgia Group"). The Georgia Group is engaged
in NLW collection and hauling operations in the state of Georgia. The Georgia
Group operates under the following tradenames: Andrews Environmental, Bone-Dry
Enterprises ("Bone-Dry") and Quality Plumbing and Septic.
SanTi Group of Florida, Inc. ("Florida Group"). The Florida Group is engaged
in NLW collection and hauling operations in the state of Florida. The Florida
Group operates under the following tradenames: Brownie Environmental Services,
Grease-Tec and A Rapid Rooter Sewer and Drain.
-2-
<PAGE> 3
SanTi Group of Pennsylvania, Inc. ("Pennsylvania Group"). The Pennsylvania
Group is engaged in NLW collection and hauling operations in the state of
Pennsylvania. The Pennsylvania Group has one wholly owned subsidiary, Nutrecon,
Inc., which holds the operating permits and the leases for a facility acquired
from Ferrero Wastewater Management, Inc., in Ambler, Pennsylvania. The
Pennsylvania Group operates under the following tradenames: Ferrero Wastewater
Management and Eldredge Wastewater Management.
SanTi Group of New York, Inc. ("New York Group"). The New York Group is
engaged in NLW collection and hauling operations in the state of New York. The
New York Group operates under the following tradenames: RGM Liquid Waste Removal
and Devito Environmental.
The Company receives fees to collect, process and dispose of nonhazardous
liquid wastes. Collection fees charged to customers vary per gallon by waste
stream according to constituents of the waste, expenses associated with
processing the waste and competitive factors. Grease trap waste from restaurant
and other food processing and preparation facilities are transported to SanTi's
facilities in vacuum trucks, trailers and other transportable containers. SanTi
operates a fleet of vehicles to collect waste directly from generators and
receives waste from independent transporters servicing additional waste
generators. Using a variety of physical, chemical, thermal and other biological
techniques, the waste is broken down into constituent components. Water
extracted from the waste is pretreated and then discharged into the municipal
sanitary sewer system or applied to leased grasslands. Solid materials are dried
and disposed of in a solid waste landfill. At some locations where the Company
does not have pretreatment facilities, the waste is transported to private
pretreatment facilities, or, where permitted by local regulations, directly to
municipal or private wastewater treatment facilities.
SanTi also engages in the business of biosolids management through the reuse
of organic materials. SanTi provides transportation, treatment, site monitoring,
and land application to private companies. SanTi's vehicles pick up and
transport biosolids to various sites. SanTi also provides professional
management and consulting services for treatment of biosolids and the monitoring
and application onto leased grasslands of treated biosolids.
The Company benefits from federal, state and local regulations prohibiting
the disposal of grease trap waste and other waste in municipal collection and
treatment systems. Although restaurants, food manufacturing and preparation
facilities and other industrial operations have produced such waste for many
years, regulations governing the management of NLW, and the enforcement of such
regulations, are becoming increasingly stringent. These requirements have
increased the value of SanTi's services to its customers in recent years. As
federal, state and local regulations governing the disposal of NLW increase,
SanTi believes the amount of NLW products delivered to third parties for
processing and disposal will continue to increase.
SanTi will target the acquisition and integration of local service providers
in the NLW industry that SanTi believes will be profitable additions to the
Company. SanTi intends to focus on the integration of entities acquired and to
increase profits and productivity through operational and efficiency
improvements, standardization of procedures, equipment standards and procurement
procedures.
SanTi intends to establish local operating facilities or service centers
throughout the United States, with initial service centers established in major
population centers. Acquired local service providers in these areas will be
converted to service centers. A service center manager at each location will be
responsible for the service center's overall performance. The manager will be
supported by supervisors responsible for one or more lines of business. The
manager will also be supported by maintenance managers responsible for the
maintenance and repair of all equipment. The service center managers will report
to district managers, who will typically have responsibility for eight to twelve
service center managers. The district managers will have general management
responsibility for their geographical areas.
-3-
<PAGE> 4
Predecessor Corporations
SanTi Group, Inc. ("SGI"), a privately-held corporation, was incorporated in
Delaware on August 19, 1997 for the purpose of engaging, through its operating
subsidiaries, in the following businesses related to the NLW industry: grease
trap pumping, septic tank services (including designing, pumping, installation,
and maintenance), sewer and drain cleaning services; high pressure jetting
services; portable toilet servicing; bulk liquid waste transportation; biosolids
management; on-site biotreatment systems and liquid waste processing and
disposal. In December 1997, SGI acquired the assets of Bone-Dry in a share
exchange in which each share of Bone-Dry was exchanged for 1.3 shares of SGI.
Bone-Dry was formed in March 1997 to acquire businesses in the NLW industry. SGI
and Bone-Dry were primarily controlled by Mr. Raymond M. Cash, Vice Chairman of
the Board of Directors of the Company, and entities controlled by Mr. Cash.
Following a stock split effected in the form of a 0.25 per share stock dividend
effective January 30, 1998 (the "Stock Dividend"), SGI had approximately
8,088,379 shares of common stock, $.0001 par value per share (the "SGI Stock"),
issued and outstanding as of the date of the merger of SGI into Microlytics,
Inc., as described below. In addition to the issued and outstanding shares, SGI
had a total of 131,250 shares subject to employee options. Of these options,
3,750 were vested as of August 28, 1998.
Microlytics, Inc. ("Micro") was incorporated in Delaware in 1985 for the
purposes of engaging in the business of developing, manufacturing and marketing
electronic reference products, including computer software programs which
provided linguistic and information compression technology, bilingual
dictionaries and thesaurus products. In 1989, Micro operated as a wholly owned
subsidiary of Selectronics, Inc. ("Selectronics"). In 1995, Selectronics changed
its name to Microlytics, Inc. In the early 1990's, Micro began experiencing
financial difficulties as a result of the highly competitive nature of the
computer software industry. On November 27, 1996, Micro filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Western District of New York (the "Court"). In July of
1997, substantially all of the intangible assets of Micro and its subsidiary
were sold to Metro One Telecommunications, Inc. In August of 1997, substantially
all of the tangible assets of Micro were also sold. The proceeds of these sales
were held in a segregated trust account by the debtor's counsel prior to the
Court's confirmation of Micro's plan of reorganization.
In April of 1998, Micro filed a Plan of Reorganization (the "Plan") that was
approved by its shareholders, the creditor's committee and the Court. Pursuant
to the Plan, Micro effected a 1 for 400 reverse stock split, distributed the
proceeds from asset liquidations to its creditors, and distributed shares and
warrants to its creditors and shareholders. The Plan provided for this reverse
stock split prior to the merger of SGI and Micro, as described below. Pursuant
to the Plan, any shareholder of Micro as of April 30, 1998 who, as a result of
the 1 for 400 reverse stock split, held less than 100 shares, had his or her
shares rounded up to 100 shares. As of July 20, 1998, after the 1 for 400
reverse stock split and rounding of shares, 1,027,066 shares of Micro common
stock were issued and outstanding. Also under the Plan, Micro issued warrants
for 500,000 shares of Micro common stock, exercisable at $5.80 per share.
The Merger
On May 13, 1998, SGI was merged with and into Micro under an agreement and
plan of merger, with Micro surviving and changing its name to SanTi Group, Inc.
("the Merger"). The Merger was subject to the approval of the Court. On the
effective date of the Merger, each issued and outstanding share of SGI Stock was
converted into one share of common stock of Micro (now SanTi), (the "Common
Stock"). These exchange ratios were determined after the 1 for 400 reverse
split of Common Stock pursuant to the Plan. This exchange resulted in the
receipt by SGI shareholders of approximately 8,088,379 shares of Common Stock,
representing approximately 86.2% of the shares of Common Stock issued and
outstanding on the effective date of the Merger. As of August 28, 1998, after
the issuance of shares pursuant to the Plan, the Merger, the reverse split, and
the exercise of warrants to acquire 304,746 shares of Common Stock, SanTi had
9,526,599 shares of Common Stock outstanding. All options to acquire shares of
SGI Stock were also converted into options to receive shares of Common Stock. As
of August 28, 1998, options to acquire 3,750 were vested and 22,500 vest over
the next two years. SanTi succeeded to all of the assets, liabilities and NLW
business of SGI.
-4-
<PAGE> 5
Acquisitions
SanTi intends to expand its business in the NLW industry through internal
growth and the acquisition of local NLW service providers throughout the United
States. These acquisitions will be made with cash, shares of Common Stock, or a
combination of cash and shares of Common Stock. SanTi's acquisition strategy has
been developed with the goal of increasing the efficiency and profitability of
acquisition targets through operational and marketing synergies with SanTi's
existing business operations. SanTi will provide professional management to
these acquired entities to eliminate duplicative processes and procedures among
the acquired businesses. The services that SanTi intends to provide to the
acquired entities include: sales management, accounts receivable and accounts
payable management, debt collection, financial reporting, tax management,
advertising, purchasing, legal, health and safety, environmental, human
resources, training and capital. Customer service representatives will also be
provided. These services are intended to allow the local managers to focus on
the growth of regional business.
Between March 1997 and July 1998, SanTi (or Bone-Dry) completed several
acquisitions of NLW local service providers. These acquisitions geographically
extended SanTi's processing operations to New York, Philadelphia and Miami, and
increased its market penetration in Georgia. The total cost of the acquisitions,
including contingent consideration, was $21,374,120 in cash, $2,257,350 in notes
to sellers and 565,000 shares of Common Stock. In addition, SanTi entered into
one-year agreements with certain key managers that include severance payments if
terminated before expiration.
Andrews Environmental, Inc. ("Andrews"). In March 1997, Bone-Dry acquired a
portion of the assets of Andrews, operating as Andrews' grease disposal business
for $475,000 in cash and $257,350 in notes. Andrews was in the business of
commercial and governmental grease extraction, collection, and transportation
services in the state of Georgia. In December 1997, Bone-Dry acquired the
remaining assets of Andrews for $660,000 in cash and 21,400 shares of Common
Stock. Contingent consideration of 13,600 shares of Common Stock is payable
within 90 days of the first anniversary of the date of the purchase, net of
offsets for losses, as defined in the purchase agreement. These assets included
customer accounts, trucks and containers to be used in the NLW and septic waste
collection, transportation, management and disposal business. Andrews
specializes in the area of NLW and disposal in Georgia.
Atlanta Grease Trap ("Atlanta Grease"). In August 1997, Bone-Dry acquired
the assets of Atlanta Grease, for approximately $360,000 in cash. Atlanta Grease
was in the business of commercial and governmental grease extraction, collection
and transportation services in Georgia. The assets acquired included customer
accounts, software, and certain physical assets to be used in the NLW and septic
waste collection, transportation, management and disposal business.
Ferrero Wastewater Management, Inc. ("Ferrero"). In January 1998, the
Pennsylvania Group acquired the assets of Ferrero for $2,240,100 in cash and
90,000 shares of Common Stock. Contingent consideration of $248,900 in cash and
10,000 shares of Common Stock is payable 270 days after the date of purchase,
net of offsets for losses, as defined in the purchase agreement. These assets
included customer accounts, trucks and containers to be used in the business of
NLW and septic waste collection, transportation and management and disposal in
the Ambler, Pennsylvania area. In connection with this asset purchase, the
Pennsylvania Group agreed to assume certain liabilities of Ferrero, excluding
any liability for environmental, health and safety requirements and any taxes
arising out of the asset purchase. All third party liabilities were paid by
Ferrero prior to the closing.
A Rapid Rooter Sewer and Drain Service, Inc. ("A Rapid"). In February 1998,
the Florida Group acquired the assets of A Rapid for $3,300,000 in cash, payment
of existing debt totaling approximately $690,120 and 100,000 shares of Common
Stock. These assets included customer accounts, trucks, containers and other
assets used in the NLW collection and disposal business. A Rapid operates
primarily in the Miami/Dade, Broward and Palm Beach, Florida areas. In
connection with this asset purchase, the Florida Group agreed to assume certain
liabilities of A Rapid, excluding any liability for environmental, health and
safety requirements and any taxes arising out of the asset purchase. All third
party liabilities were paid by A Rapid prior to the closing.
-5-
<PAGE> 6
Quality Plumbing & Septic ("Quality"). In February 1998, the Georgia Group
acquired the assets of Quality for $2,000,000 in cash. Contingent consideration
of $250,000 in cash was paid in June 1998 and 10,000 shares of Common Stock will
be issued. These assets included customer accounts, trucks and containers and
other assets to be used in the NLW collection and disposal business in the
Lithia Springs, Georgia area. In connection with this asset purchase, the
Georgia Group agreed to assume certain liabilities of Quality, excluding any
liability for environmental, health and safety requirements and any taxes
arising out of the asset purchase. All third party liabilities were paid by
Quality prior to the closing.
Seagraves, Inc. ("Seagraves") and Grease-Tec, Inc. ("Grease-Tec"). The
Florida Group acquired the assets of Seagraves and Grease-Tec in March 1998 for
$3,250,000 in cash, a promissory note in the amount of $2,000,000 and 60,000
shares of Common Stock. A security interest in the assets of Seagraves and
Grease-Tec was granted to the sellers to secure the promissory note. These
assets included customer accounts, trucks, containers and other assets used in
the NLW collection and disposal business in the Orange County, Florida area.
Seagraves also operated under the names Brownie Environmental Services, Brownie
Sewer & Drain Cleaning Services and Brownie Septic Tank Contractors. In
connection with this asset purchase, the Florida Group agreed to assume certain
liabilities of Seagraves, excluding any environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Seagraves and Grease-Tec prior to the closing.
R.G.M. Liquid Waste Removal Corporation and Affiliates. ("RGM"). In May
1998, the New York Group acquired certain assets of RGM and its Affiliates for
$4,500,000 in cash and 105,000 shares of Common Stock. Contingent consideration
of $1,000,000 and 55,000 shares of Common Stock is payable one year after the
date of purchase, net of offsets for losses, as defined in the purchase
agreement. These assets included contract rights, customer accounts, trucks and
containers and other assets to be used in the NLW collection and disposal
business in the New York metropolitan area. In connection with this asset
purchase, the New York Group agreed to assume certain liabilities of RGM and its
affiliates, excluding any liability for environmental, health and safety
requirements and any taxes arising out of the asset purchase. RGM's affiliates
include: Devito Environmental Corporation ("Devito"), Advanced Transfer
Technology, Inc. ("ATT") and Envirotec Leasing and Rental Corporation
("Envirotec"). All third party liabilities were paid by RGM prior to the
closing.
Eldredge Wastewater Management, Inc. ("Eldredge"). In May 1998, the
Pennsylvania Group acquired certain assets of Eldredge for $2,040,000 in cash
and 85,000 shares of Common Stock. Contingent consideration of $360,000 in cash
and 15,000 shares of Common Stock is payable 13 months after the date of
purchase, net of offsets for losses, as defined in the purchase agreement.
Eldredge was engaged in the collection and disposal of wastewater from
commercial, industrial and residential facilities related to food processing,
preparation and elimination and municipal liquid and sludge wastes. These assets
included customer accounts, trucks and containers and other assets to be used in
the NLW collection and disposal business in the Lancaster, Montgomery, Bucks and
Chester Counties of Pennsylvania and Sussex and New Castle, Delaware. In
connection with this asset purchase, the Pennsylvania Group agreed to assume
certain liabilities of Eldredge, excluding any environmental, health and safety
requirements and any taxes arising out of the asset purchase. All third party
liabilities were paid by Eldredge prior to the closing.
In connection with each acquisition, SanTi may have assumed or succeeded to
certain liabilities of the acquired businesses, which may include environmental
liabilities except as described above. SanTi has obtained representations from
the sellers of the acquired businesses that no undisclosed liabilities exist and
certain rights to indemnification from the sellers for any liabilities. There
can be no assurance, however, that undisclosed liabilities do not exist or that
SanTi will receive full or partial compensation pursuant to its rights to
indemnification.
-6-
<PAGE> 7
In addition to internal growth, the growth of SanTi, to a significant
extent, will depend on its continued acquisition of NLW service providers. SanTi
expects competition to exist in the industry to acquire these candidates, which
may limit the number of acquisition opportunities and may lead to higher
acquisition prices. Acquisitions of these entities entail various risks,
including failure of the acquired service providers to achieve expected results,
diversion of management's attention, failure to retain key personnel of the
acquired service providers and risks associated with unanticipated events and
liabilities. All of these risks may have an adverse effect on the ability of
SanTi to acquire additional acquisition candidates and on its business condition
and results of operations. Any complementary businesses that are acquired also
may not be successfully integrated.
Debt Financing
SanTi obtained a revolving line of credit on June 26, 1998 from Bank of
America National Trust and Savings Association ("Bank of America"), acting as an
agent for various lending institutions, including Bank of America (collectively,
the "Banks"). Under this credit agreement, each of the lending institutions
agrees to make loans to, and to issue or participate in the issuance of letters
of credit for the account of SanTi on a revolving basis during the term of the
agreement as requested by SanTi (the "Credit Agreement"). The total outstanding
revolving credit and the aggregate amount of all letters of credit outstanding
are not to exceed the commitment amount of $40,000,000. Various financial
covenants in the Credit Agreement restrict the Company's ability to draw on this
line of credit. A pledge agreement was executed concurrent with the Credit
Agreement, requiring SanTi to pledge all shares of stock owned by SanTi in each
of its subsidiaries (both current subsidiaries as well as any subsidiary formed
in the future), as security for the payment of all liabilities incurred under
the revolving line of credit. A security agreement provides for a continuing
security interest to the Banks in all of the subsidiaries' accounts receivable,
certified securities, chattel paper, computer hardware and software, contract
rights, deposit accounts, documents, general intangibles, goods, instruments,
intellectual property, money, commodities, uncertified securities and all
personal property. A stock purchase warrant was also granted to Bank of America
for the right to purchase 50,000 shares of SanTi common stock at a price of
$13.00 per share, expiring on June 26, 2003. SanTi anticipates that it will use
this line of credit, alone or in combination with shares of its Common Stock, to
acquire local NLW service providers, as well as for working capital.
Competition
SanTi competes with a significant number of other NLW service providers.
Competitors compete primarily on the basis of proximity to collection
operations, fees charged and quality of service. Future technological changes
and innovations may result in a reduction in the amount of NLW generated, or in
alternative methods of treatment and disposal being developed. SanTi also faces
competition from customers that may seek to enhance and develop their own
methods of disposal. Increased use of internal treatment and disposal methods
and other competitive factors may have a material adverse effect on SanTi's
business, results of operation and financial condition.
SanTi will be at a disadvantage in competing against service providers that
are better capitalized, have greater name recognition, have more background and
experience, have greater financial, technical, marketing and other resources and
skills, have better facilities and are able to provide services or products at a
lower cost than SanTi. Because the NLW industry is currently highly fragmented,
the acquisition of local NLW service providers is the only strategy by which
SanTi may be able to penetrate existing markets. As a result of these
competitive factors, there can be no assurance that SanTi's growth strategy will
be successful or that SanTi will be able to generate cash flow adequate for its
operations and to support future acquisitions and internal growth.
Employees
As of August 28, 1998, SanTi had 290 employees. It is anticipated that the
acquisition and integration of additional NLW service providers will add
employees as acquisitions are made but that the number of employees in acquired
businesses may be reduced as duplicate administrative processes are eliminated.
-7-
<PAGE> 8
Government Regulations
SanTi is subject to rules and regulations of various federal, state and
local governmental agencies. Environmental laws and regulations are, and will
continue to be, a principal factor affecting the marketability of the services
provided by SanTi. Any changes in these laws or regulations may affect the
operations of SanTi by imposing additional regulatory compliance costs on SanTi,
requiring the modification of or adversely affecting the market for SanTi's NLW
services. To the extent that demand for these services is based upon the need to
comply with these regulations, any modification to these regulations may
increase the cost of or decrease the demand for these services and adversely
affect SanTi's business condition and results of operations.
Additionally, if new environmental legislation or regulations are enacted
or existing legislation or regulations are amended or enforced differently,
SanTi may be required to obtain additional operating permits, registrations or
approvals. The process of obtaining a required permit, registration or approval
can be lengthy and expensive and the issuance of such permit or the obtaining of
such approval may be subject to public opposition. There can be no assurance
that SanTi will be able to meet the applicable regulatory requirements.
Resource Conservation and Recovery Act ("RCRA"). RCRA is the principal
federal statute governing hazardous and solid waste generation, treatment,
storage and disposal. RCRA and state hazardous waste management programs govern
the handling and disposal of "hazardous waste." The U.S. Environmental
Protection Agency ("EPA") has issued regulations pursuant to RCRA. States have
also promulgated regulations under comparable state statutes that govern
hazardous waste generators, transporters and owners and operators of hazardous
waste treatment, storage and disposal facilities. These regulations impose
detailed operating, inspection, training and emergency preparedness and response
standards and requirements for the financial responsibility, manifesting of
wastes, record keeping and reporting, as well as treatment standards for any
hazardous wastes intended for land disposal.
NLW is currently exempt from the requirements of RCRA. The repeal or
modification of the RCRA exemption covering NLW, or the modification of
applicable regulations or interpretations regarding the treatment or disposal of
NLW, may require SanTi to alter its method of treating and disposing of NLW.
SanTi's current methods do not comply with the methods prescribed by the EPA for
treatment and/or disposal of waste as defined by RCRA. These changes may result
in decreased demand for SanTi's services or increased costs to SanTi and could
have a material adverse effect on SanTi's business.
Comprehensive Environmental Response, Competition and Liability Act
("CERCLA"). CERCLA provides for immediate response and removal actions
coordinated by the EPA for releases of hazardous substances into the environment
and authorizes the government or private parties to respond to the release or
threatened release of hazardous substances. The government may also order
persons responsible for the release to perform any necessary cleanup. Liability
extends to the present owners and operators of waste disposal facilities from
which a release occurs, persons who owned or operated the facilities at the time
the substance was released, persons who arranged for the disposal or treatment
of hazardous substances and waste transporters who selected such facilities for
treatment or disposal of hazardous substances. CERCLA creates strict, joint and
several liability for all costs of removal and remediation, other necessary
response costs and damages for injury to natural resources.
As SanTi will be engaged in businesses that involve the treatment and
removal of nonhazardous liquid waste, SanTi should not be subject to CERCLA.
However, if SanTi were to acquire a business that has disposed of hazardous
waste or treated hazardous waste that falls within the parameters of CERCLA,
SanTi may be held jointly and severally liable for the costs of any damage or
required cleanup of the site.
-8-
<PAGE> 9
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data for the period from inception (March 19, 1997) to
December 31, 1997 are derived from the audited financial statements of the
Company, and the selected financial data for the years ended December 31, 1995
and 1996 and for the period from January 1, 1997 to December 21, 1997 are
derived from the audited financial statements of the Predecessor, Andrews
Environmental Services, Inc. The selected financial data for the six month
period ended June 30, 1998 are derived from the unaudited financial statements
of the Company. The selected financial data for the years ended December 31,
1993 and 1994 and for the three month period ended March 31, 1997 are derived
from the unaudited financial statements of the Predecessor. As a result of
acquisitions occurring in 1997 and 1998, the Company's historical financial
statements are not representative of the financial results expected for future
periods. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements of the Company and Predecessor and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------------------------------------- -----------------------------------
PERIOD
PERIOD FROM FROM
PERIOD FROM SIX INCEPTION INCEPTION SIX
JANUARY 1, MONTHS (MARCH 19, (MARCH 19, MONTHS
YEAR ENDED DECEMBER 31, 1997 TO ENDED 1997) TO 1997) TO ENDED
---------------------------------------------- DECEMBER JUNE 30, DECEMBER JUNE 30, JUNE
1993 1994 1995 1996 21, 1997 1997 31, 1997 1997 30, 1998
---------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues $1,260,344 $1,327,348 $1,499,392 $1,832,043 $1,218,268 $638,994 $ 737,858 $ 245,142 $ 9,947,494
Operating Expenses:
Cost of Operations 329,101 573,516 615,069 785,996 625,892 307,005 406,638 85,057 7,260,146
General and
Administrative 763,420 597,569 754,580 757,655 646,273 324,542 521,372 66,622 3,756,248
Depreciation and
Amortization 158,605 115,397 94,948 122,296 121,496 71,229 127,338 51,606 517,904
---------- ---------- ---------- ---------- ---------- -------- ---------- --------- ----------
Total Operating
expenses 1,251,126 1,286,392 1,464,597 1,665,947 1,393,661 702,776 1,055,348 203,285 11,534,298
---------- ---------- ---------- ---------- ---------- -------- ---------- --------- ----------
Income (Loss) from
Operations 9,218 40,956 34,795 166,096 (175,393) (63,782) (317,490) 41,857 (1,586,804)
Interest Expense 40,407 42,453 45,475 70,868 22,077 16,760 104,494 42,942 274,042
Other Expense
(Income) 0 1,575 7,404 (2,500) (204,124) (195,794) 0 0 0
---------- ---------- ---------- ---------- ---------- -------- ---------- --------- ----------
Income(Loss)
Before Income
Taxes (31,189) (3,072) (18,084) 97,728 6,654 115,252 (421,984) (1,085) (1,860,846)
Income Tax Provision
(Benefit) 0 3,565 (3,304) 39,094 4,334 44,026 (163,632) (423) (318,536)
---------- ---------- ---------- ---------- ---------- -------- ---------- --------- ----------
Net Income (Loss) $ (31,189) $ (6,637) $ (14,780) $ 58,634 $ 2,320 $ 71,226 $ (258,352) $ (662) $(1,542,310)
========== ========== ========== ========== ========== ======== ========== ========= ==========
Net Income (Loss)
per share - Basic
and Diluted N/A N/A N/A N/A N/A N/A $ (0.13) N/A $ (0.21)
========== ========== ========== ========== ========== ======== ========== ========= ==========
Weighted average
shares outstanding -
Basic and Diluted N/A N/A N/A N/A N/A N/A 1,940,536 N/A 7,312,848
========== ========== ========== ========== ========== ======== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
AT DECEMBER 31,
---------------------------------------------- AT DECEMBER AT JUNE
1993 1994 1995 1996 31, 1997 1998
---------------------------------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) $ 3,630 $63,686 $(104,623) $(130,188) $(1,153,561) $1,743,768
Intangible assets 0 0 0 0 1,473,489 18,605,187
Total assets 484,464 814,102 855,192 1,102,047 2,614,143 33,397,853
Long-term debt,
including current
portion 316,532 457,237 437,735 539,859 303,955 10,720,990
Retained earnings
(deficit) 55,280 226,587 211,807 270,441 (258,352) (1,800,662)
Total shareholders'
equity 55,780 227,087 212,307 270,941 812,453 18,110,268
</TABLE>
-9-
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains trend information and other forward
looking statements that involve a number of risks and uncertainties. SanTi's
actual future results could differ materially from its historical results of
operations and those discussed in the forward looking statements. Certain of the
risks and uncertainties are set forth below. The following should be read in
conjunction with the Company's financial statements and the notes thereto
included elsewhere herein.
Overview
SanTi engages in businesses relating to the NLW industry. These businesses
include grease trap pumping, septic tank services (including designing, pumping,
installation and maintenance), sewer and drain cleaning services; high pressure
jetting services, portable toilet servicing; bulk liquid waste transportation;
on-site biotreatment systems; biosolids management; and liquid waste processing
and disposal. The customers of SanTi include restaurants, hospitals, military
bases, office buildings, apartments, schools, municipalities, industrial
businesses and single family residences.
SanTi intends to expand its business in the NLW industry through internal
growth and the acquisition of local service providers throughout the United
States. These acquisitions will be made with cash, shares of Common Stock or a
combination of cash and Common Stock. SanTi's strategy is to increase the
efficiency and profitability of each of the acquisition targets through
operational and marketing synergies with SanTi's existing business operations.
The NLW industry serves a basic need - the collection, treatment and
disposal of food and septic waste. Demand for NLW services is driven primarily
by population and the general level of economic activity. Increasing regulation
at the federal, state and local level, as well as increased awareness of and
demand for, a safer and cleaner environment, are creating the need for a more
professional and environmentally responsible NLW industry.
Trends
In addition to the factors discussed above, the following are important
factors which could cause actual results or events to differ materially from
those contained in any forward looking statement made by or on behalf of SanTi.
AVAILABILITY OF ACQUISITION FINANCING. The ability of SanTi to acquire local NLW
service providers at economically attractive prices, integrate their operations
into SanTi, and then grow their operations profitably, will determine the
success of SanTi. SanTi's ability to acquire these providers will depend on the
availability of capital. The consideration for these acquisitions will be cash,
Common Stock or a combination of Common Stock and cash. If the Common Stock does
not retain a sufficient value or potential acquisition candidates are unwilling
to accept Common Stock as consideration, SanTi will be required to use its cash
resources to purchase these providers. If the current capital resources are
exhausted, SanTi may not be able to access additional financing and may be
limited in its ability to continue its acquisition strategy.
OPERATING STRATEGY. SanTi's ability to increase revenues of its existing
operations and its acquired service providers will be affected by various
factors, including: customer demand for NLW treatment and disposal services by
SanTi, SanTi's ability to expand the range of services offered to customers and
SanTi's ability to develop national and regional accounts for its services and
other marketing programs necessary to attract new customers and attract and
retain necessary personnel. There can be no assurance that SanTi's operating
strategy will be successful or that SanTi will be able to generate cash flows
adequate to support its operations and internal growth.
-10-
<PAGE> 11
GOVERNMENTAL REGULATIONS. As discussed previously, the NLW industry is subject
to numerous federal, state and local laws and regulations relating to
environmental concerns. Any changes in these laws or regulations may affect the
operation of SanTi by imposing additional regulatory compliance costs on SanTi,
requiring the modification of or adversely affecting the market for SanTi's NLW
treatment services. To the extent that demand for these services is based upon
the need to comply with these regulations, any modification to these regulations
may decrease the demand for these services and adversely affect SanTi's business
or results of operations.
Forward Looking Statements
Forward looking statements contained in this Form 10 involve risks and
uncertainties, including, without limitation, the following: (i) SanTi's
strategies, objectives, expectations and intentions are subject to change at any
time at the discretion of management and the Board of Directors, (ii) SanTi's
plans and results of operations will be affected by SanTi's ability to manage
its growth and access to capital, and (iii) SanTi's business is highly
competitive and the entrance of new competitors or the expansion of operations
by existing competitors in SanTi's markets could adversely affect SanTi's plans
and results of operations.
General
The Company derives the majority of its revenues from commercial and
residential septic services (including designing, pumping, installation and
maintenance) (approximately 59% of current revenues) and to a lesser extent
sewer and drain services (approximately 20% of current revenues). Collection
fees charged to customers vary per gallon by waste stream according to
constituents of the waste, expenses associated with processing the waste and
competitive factors. Cost of operations consist of fixed costs such as salaries
and benefits of vehicle operators and construction labor and variable costs such
as supplies, fuel and equipment rentals. General and administrative costs
consist primarily of compensation and related benefits for executives and
administrative staff, advertising, office rent, communications and professional
fees. Depreciation and amortization expense primarily relates to the
depreciation of capital assets, the amortization of excess cost over the fair
value of net assets acquired (goodwill) and other intangible assets. The
Company's policy is to amortize goodwill over a 40 year life.
From its inception on March 19, 1997 through August 28, 1998, the Company
has acquired nine businesses, all of which were accounted for using the purchase
method of accounting. Prior to their acquisition by the Company, the acquired
businesses were managed as independent private businesses, and their results of
operations reflect different tax structures (S corporations and C corporations),
which have influenced, among other things, their historical levels of owners'
compensation. Certain owners who continued employment with the Company agreed to
reductions in their compensation and benefits in connection with the acquisition
of their businesses by the Company.
In connection with each of its acquisitions, the Company attempts to
implement a number of cost saving measures, including possible reductions in
management levels and other personnel, the implementation of centralized
management and cost controls and the elimination of duplicate collection routes.
RESULTS OF OPERATIONS
On March 20, 1997, the Company purchased certain assets of Andrews
associated with the Andrews grease disposal business. On December 22, 1997, the
Company acquired the remaining assets and ongoing business of Andrews. For
financial reporting purposes Andrews is considered the predecessor to the
Company (the "Predecessor"). As a result of the Company's recent acquisitions
and the limited period of ownership of the acquired businesses, the Company
believes that the period-to-period comparisons and percentage relationships
within the periods set forth below are not meaningful.
-11-
<PAGE> 12
The following table sets forth the percentage of certain items in relation to
net revenue:
<TABLE>
<CAPTION>
Predecessor Successor
-------------------------------------------------------- ----------------------------------------
Period from
Six Inception Six
Year Period from months Period From (March 19, months
ended Year ended January 1, 1997 ended Inception to 1997) to ended
December 31, December 31, to December 21, June 30, December 31, June 30, June 30,
1995 1996 1997 1997 1997 1997 1998
--------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES 100% 100% 100% 100% 100% 100% 100%
EXPENSES
Cost of Operations 41 43 51 48 55 35 73
General and Administrative 50 41 53 51 71 27 38
Depreciation and Amortization 7 7 10 11 17 21 5
--- --- --- --- --- --- ---
TOTAL EXPENSES 98 91 114 110 143 83 116
--- --- --- --- --- --- ---
INCOME (LOSS) FROM OPERATIONS 2 9 (14) (10) (43) 17 (16)
--- --- --- --- --- --- ---
INTEREST EXPENSE 3 4 2 3 14 17 3
OTHER (INCOME) EXPENSE 0 0 (17) (31) 0 0 0
--- --- --- --- --- --- ---
INCOME (LOSS) BEFORE INCOME TAXES (1) 5 1 18 (57) 0 (19)
INCOME TAX PROVISION (BENEFIT) 0 2 1 7 (22) 0 (3)
--- --- --- --- --- --- ---
NET INCOME (LOSS) (1%) 3% 0% 11% (35%) 0% (16%)
=== === === === === === ===
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998
For the six months ended June 30, 1998, the Company reported a loss of
$1,542,310 on revenues of $9,947,494. A discussion from the date of inception
(March 19, 1997) to June 30, 1997 has not been presented because the data is
not meaningful.
The Company completed four acquisitions during the first quarter of 1998 and
two acquisitions during the second quarter of 1998. In January 1998, the Company
acquired Ferrero, located in Ambler, Pennsylvania. In February 1998, the
Company acquired A Rapid located in Pompano Beach, Florida, and Quality located
in Douglasville, Georgia. In March 1998, the Company acquired Seagraves located
in Orlando, Florida. In May 1998, the Company acquired RGM, located in Deer
Park, New York, and Eldridge, located in West Chester, Pennsylvania. All
acquisitions have been accounted for using purchase accounting and the results
of operations of the acquired businesses have been included in the Company's
consolidated financial statements from the date of each acquisition.
REVENUES: Revenues for the six months consist of revenues from each of the
businesses acquired in 1997 plus revenues from businesses acquired during the
first two quarters of 1998, from the date of each acquisition. The six completed
acquisitions contributed approximately $9.0 million or 91% of revenues for the
six months ended June 30, 1998.
COST OF OPERATIONS: The operating margin for the six months ended June 30, 1998
was 27%.
GENERAL AND ADMINISTRATIVE: General and administrative expense has been and is
projected to be a significant percentage of revenue in the Company's early
stages of growth. Management anticipates that as revenue increases through
acquisitions, general and administrative expenses will increase in total, but
decrease as a percentage of
-12-
<PAGE> 13
revenue. For the six months ended June 30, 1998, general and administrative
expense includes non-recurring expenses associated with the relocation of the
corporate headquarters to Dallas, Texas; expenses associated with registering
the Company as a reporting company with the Securities and Exchange Commission;
and costs associated with the establishment of the Company's management team.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization was $517,904 or
5% of revenues for the six months ended June 30, 1998.
LOSS FROM OPERATIONS: The loss from operations is primarily the result of the
high level of general and administrative expense.
INTEREST EXPENSE: Interest expense for the six months ended June 30, 1998
was $274,042. Interest was incurred at an average rate of approximately 7.7%
during the six months ended June 30, 1998.
INCOME TAX BENEFIT: An income tax benefit of 39% of pretax loss has been
computed in accordance with SFAS No. 109 "Accounting for Income Taxes." The tax
benefit has been offset by a valuation allowance of $384,367. Realization of the
net tax benefit is dependent on the Company generating sufficient taxable income
in future periods. Although realization is not assured, management believes it
is more likely than not that the Company will generate taxable income in future
periods to permit usage of the estimated net operating loss carry forward. To
date, all acquisitions have been taxable asset purchases in which the Company
obtained a full basis in acquired tangible and intangible assets. To the extent
the Company makes future nontaxable acquisitions, the Company's effective rate
may differ significantly from its statutory rate due to nondeductible goodwill
amortization.
PERIOD FROM INCEPTION (MARCH 19, 1997) TO DECEMBER 31, 1997
The financial statements of the Company for the period from inception
(March 19, 1997) to December 31, 1997 reflect a net loss of $258,352 on revenues
of $737,858.
The Company completed three acquisitions in 1997: the grease division of
Andrews in March 1997, Atlanta Grease Trap in August 1997 and the remaining
assets of Andrews in December 1997. All three acquisitions have been accounted
for using purchase accounting and the results of operations of the acquired
businesses have been included in the consolidated financial statements from the
date of each acquisition.
REVENUES: Revenues for period from inception (March 19, 1997) to December 31,
1997 consist of revenues from each of the businesses acquired from the date of
each acquisition.
COST OF OPERATIONS: The operating margin was 45%.
GENERAL AND ADMINISTRATIVE: General and administrative expense has been and is
projected to be a significant percentage of revenues in the early stages of the
Company's growth. It is anticipated that as revenues grow from future
acquisitions, that general and administrative expense as a percentage of revenue
will decline. The amounts reported for general and administrative expense
include a number of costs associated with establishing the Company and hiring
employees.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization was $127,338 or
17% revenues.
LOSS FROM OPERATIONS: The loss from operations is due primarily to the high
level of general and administrative expense as a percentage of revenue.
INTEREST EXPENSE: Interest expense of $104,494 was based on an average interest
rate of 13% over the period.
-13-
<PAGE> 14
INCOME TAX BENEFIT: An income tax benefit of 39% of pretax loss was recorded for
the period from inception (March 19, 1997) to December 31, 1997.
PERIOD FROM JANUARY 1, 1997 TO DECEMBER 21, 1997 COMPARED TO YEAR ENDED DECEMBER
31, 1996
REVENUES: Revenues decreased 34% to $1,218,268 in 1997 from $1,832,043 in 1996.
This decrease was primarily due to the sale of the Grease Business to SanTi in
March 1997.
COST OF OPERATIONS: Cost of operations decreased 20% to $625,892 in 1997 from
$785,996 in 1996. Cost of operations as a percentage of revenues increased to
51% in 1997 from 43% in 1996. The increase in cost of operations as a percentage
of revenues was due to the sale of the more profitable grease business in March
1997.
GENERAL AND ADMINISTRATIVE: General and administrative expense decreased to
$646,273 in 1997 from $757,655 in 1996, a decrease of 15%. The decrease in
general and administrative was a result of the sale of the grease business. As a
percentage of sales, general and administrative increased to 53% in 1997 from
41% in 1996. This increase occurred because certain general and administrative
expenses which supported both the grease business and the continuing business of
Andrews were relatively fixed in nature, and were not decreased as a result of
the sale of the grease business.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization remained relatively
constant, at approximately $122,000. The disposition of assets associated with
the grease business did not significantly effect depreciation, because the
majority of the assets sold had been fully depreciated.
LOSS (INCOME) FROM OPERATIONS: The loss from operations of $175,393 for 1997, as
compared to income from operations of $166,096 in 1996, was primarily due to the
loss of revenue from the sale of the grease business and the inability to reduce
expenses to the extent that revenue was diminished.
INTEREST EXPENSE: Interest expense decreased from $70,868 in 1996 to $22,077 in
1997, due to decreased capital expenditures in 1997, and the decrease in debt
and interest payments associated with certain assets sold in conjunction with
the grease business.
OTHER, NET: Other, net includes a gain on sale of assets of approximately
$240,000 recorded in connection with the sale of the grease business.
PROVISION FOR INCOME TAXES: The effective tax rate increased from 40% in 1996 to
65% in 1997 due to the low level of income in 1997 and the relatively fixed
nature of certain items which are not deductible for tax purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES: Revenues increased 22.2% to $1,832,043 in 1996 from $1,499,392 in
1995. The increase was due to internal growth of the business.
COST OF OPERATIONS: Cost of operations increased 28% to $785,996 in 1996 from
$615,069 in 1995. The increase was a result of the higher level of revenue. Cost
of operations as a percentage of revenues increased to 43% in 1996 from 41% in
1995. The percentage increase was driven by additional overtime labor incurred
to generate a portion of the additional revenue.
GENERAL AND ADMINISTRATIVE: General and administrative expense remained
relatively stable at $757,655 in 1996 and $754,580 in 1995. General and
administrative expenses have historically been a significant percentage of
revenues and relatively fixed in nature.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased to
$122,296 in 1996 from $94,948 in 1995. This is primarily due to acquisitions of
property and equipment during 1996 and 1995.
-14-
<PAGE> 15
INCOME FROM OPERATIONS: The increase of income from operations from 1995 to 1996
of $131,310 was primarily due to the growth of the business and Andrew's ability
to maintain general and administrative expenses at a relatively stable level.
INTEREST EXPENSE: Interest expense increased from $45,475 in 1995 to $70,868 in
1996, due to the financing of capital expenditures in 1996 and late 1995.
PROVISION (BENEFIT) FOR INCOME TAXES: The effective tax rate changed from a
benefit of (19)% in 1995 to a provision of 40.0% in 1996 due to the low level
of income in 1995 and the relatively fixed nature of certain items which are not
deductible for tax purposes.
SEASONALITY AND INFLATION
The Company's operations are affected by the weather. Rainy weather requires
more frequent septic and grease trap maintenance and snow cover or frozen
conditions prevent installation and need for servicing septic systems. Although
the Company experiences a certain degree of seasonality in its operations due to
weather, this seasonality is lessened through its operations in various
geographic areas.
The Company believes that inflation and changing prices have not had, and are
not expected to have, any material adverse effect on its results of operations
in the near future.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash of approximately $2.9 million and
working capital of $1.7 million.
On June 26, 1998, the Company entered into the $40 million revolving Credit
Agreement with Bank of America, which was amended as of June 30, 1998. The
Company may also obtain up to $5 million in letters of credit, subject to
availability under the Credit Agreement. Interest is payable monthly at variable
rates, depending on the Company's Funded Debt to EBITDA (as defined in the
Credit Agreement), but is capped at Libor plus 2.25%. The Credit Agreement
expires June 26, 2001, is secured by a first lien on substantially all assets of
the Company and requires the Company to maintain certain financial covenants
beginning June 30, 1998. The financial ratio covenants are (i) Minimum Net Worth
($18.0 million), (ii) EBIT to Interest Coverage (1.5:1.0); (iii) Funded Debt to
EBITDA (4.0:1.0) and (iv) Debt to Capitalization (65%). As of June 30, 1998, the
Company was in compliance with these financial covenants. In connection with
entering into the Credit Agreement, two existing lines of credit (the "Prior
Credit Facilities") with availability of $16.6 million were repaid and
canceled.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing vehicles and equipment used in the operation
of its businesses. During the six months ended June 30, 1998, the Company made
$330,570 in capital expenditures. From March 19, 1997 (inception) through July
20, 1998, the Company acquired nine businesses for an aggregate consideration of
$19.8 million in cash, $2.3 million in seller notes and 471,400 shares of Common
Stock. In addition to the above amounts, the acquisition agreements include
contingent consideration totaling $1,608,900 in cash and 93,600 shares of Common
Stock. Funding of the cash portions of the purchase prices was provided by
borrowings under the Prior Credit Facilities and proceeds from private sales of
Common Stock. From March 19, 1997(inception) through June 30, 1998, the Company
received approximately $16.3 million in proceeds from private sales of Common
Stock. The Company believes that funds provided by operations, together with
cash on hand and funds available under the Credit Agreement, will be adequate to
meet the Company's anticipated capital expenditures for the remainder of 1998.
The Company intends to aggressively pursue internal growth and acquisition
opportunities. The timing, size or success of any acquisitions effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of cash on hand,
borrowings from the unborrowed portion of the Credit Agreement and the possible
public or private sale of debt and equity securities.
-15-
<PAGE> 16
YEAR 2000
The Company has conducted operations for less than two years and has only
recently grown large enough to require sophisticated computing systems. A
complete review of all of the Company's computing needs has recently been
undertaken. The Company has completed its review, including various Year 2000
compliant computer programs, and has selected Year 2000 compliant hardware and
software for its computing needs. The Company anticipates beginning
implementation of these new systems during the third quarter of 1998, which
implementation should ensure proper processing of transactions relating to the
Year 2000 and beyond. The Company expects the conversion of all systems to be
completed in the first quarter of 1999 and estimates the capital costs of the
new Year 2000 compliant hardware, systems and software to be approximately
$250,000.
The Year 2000 issue is expected to affect the systems of various entities
with which the Company interacts, including the Company's vendors and customers.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted or that a failure by another
company's systems to be Year 2000 compliant would not have a material adverse
effect on the Company.
-16-
<PAGE> 17
ITEM 3. PROPERTIES.
Neither SanTi nor any of its subsidiaries currently own any real property.
SanTi's corporate offices are located in Dallas, Texas, and are under a sublease
from VHA Southwest, Inc., for a current rate of $12,953.33 per month, expiring
July 31, 2003.
The following properties are currently leased by SanTi and its subsidiaries:
The following properties are leased by the Florida Group: (i) property leased
from William E. and Joan C. Rice for a term of two and one-half years,
commencing on February 13, 1998 at a rate of $4,000 per month; this lease is
guaranteed by SanTi (ii) property in Orlando, Florida, leased for $96,000
annually to be used for NLW business; the lease expires March 6, 2003 and is
guaranteed by SanTi.
The following properties are leased by the Georgia Group: (i) property in
Lithia Springs, Georgia; the lease expires August 16, 1998, is for a rate of
$2,500 per month and is used for NLW business (ii) property in Austell, Georgia
used for NLW business is leased under a sublease from BFI Services Group, Inc.
for a rate of $4,680 per month, terminating January 13, 2001(iii) property
located in Gwinnett County, Georgia, formerly used by Andrews to conduct its NLW
business; the rate of the sublease is $2,200 per month for a monthly term, with
automatic renewal until receipt of tenant's written notice of termination.
The following properties are leased by the New York Group: (i) property in
Deer Park, New York, leased for $11,500 per month for NLW business; the lease
expires May 31, 1999 (ii) property in Deer Park, New York, leased for $2,000 per
month for NLW business; the lease expires May 31, 1999.
The following properties are leased by the Pennsylvania Group: (i) property
in Ambler, Pennsylvania, leased to Nutrecon, Inc. by Ambler Realty for use by
the Pennsylvania Group for NLW business, expiring on December 21, 2000; the
lease is for a monthly rate of $6,000 (ii) sublease from Eldredge Associates,
Inc., for all real property formerly utilized by Eldredge Associates in
operation of its NLW business in West Chester, Pennsylvania, at a rate of $7,600
per month, terminating on May 7, 1999
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning the beneficial
ownership of the Common Stock as of August 28, 1998 by (i) each named executive
officer, (ii) each of the Company's directors, (iii) all executive officers and
directors as a group, and (iv) each person who beneficially owns more than 5% of
the Common Stock:
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
-------------------------
Name Number Percent
- ---- ------ -------
<S> <C> <C>
Raymond M. Cash (2) 3,642,500 38%
Cash Family Limited Partnership (3) 1,658,750 18%
Donald F. Moorehead, Jr.(4) 998,000 11%
Terry W. Patrick (5) 300,000 3%
Elroy "Gene" Roelke 25,000 *
William P. Hulligan 100,000 1%
Kenneth Peak 0 *
All directors and executive officers as
a group (6 persons) 5,065,500 53%
</TABLE>
* Less than one percent.
-17-
<PAGE> 18
(1) Includes shares of Common Stock that may be acquired upon the exercise of
stock options exercisable within 60 days. Each person named above has sole
voting and dispositive power with respect to the all shares listed opposite such
person's name, unless indicated otherwise. Unless otherwise indicated, each
stockholder's address is 14901 Quorum Drive, Suite 200, Dallas, Texas 75240.
(2) These shares are held in a voting trust of which Mr. Cash is trustee and has
sole voting power. Includes 1,251,534 shares held by Mr. Cash and 1,658,750
shares held by the Cash Family Limited Partnership which is controlled by an
entity controlled by Mr. Cash. Does not include 139,050 shares held by Mr.
Cash's wife, for which shares Mr. Cash disclaims beneficial ownership.
(3) These shares are held in a voting trust of which Mr. Cash is trustee and has
sole voting power. Does not include 1,251,534 shares held by Mr. Cash or 732,216
shares held by others and included in the voting trust of which Mr. Cash is
trustee and has sole voting power.
(4) Includes 200,000 shares held by Moorehead Property Company Ltd., a company
controlled by Mr. Moorehead.
(5) Includes 300,000 shares held by Beacon Holdings Limited, a family limited
partnership of which Mr. Patrick is a general partner.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of SanTi as of the date of this filing. The executive
officers will serve until their successors are appointed by the Board of
Directors. The terms of the directors are as set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald F. Moorehead, Jr. 47 Chief Executive Officer
Chairman of the Board (term expires 2000)
Terry W. Patrick 52 President and Chief Operating Officer
Director (term expires 1999)
Kenneth Peak 53 Vice President and Chief Financial Officer
Director (term expires 1998)
Raymond M. Cash 68 Vice Chairman of the Board
(term expires 2000)
William P. Hulligan 55 Director (term expires 1999)
Elroy "Gene" Roelke 67 Director (term expires 1998)
</TABLE>
-18-
<PAGE> 19
Donald F. Moorehead, Jr., Chief Executive Officer and Chairman of the Board
of SanTi, served as Vice Chairman and Chief Development Officer of USA Waste
Services, Inc. ("USA Waste") from May 1994 through August 1997. From October
1990 until May 1994, he served as Chairman of the Board and Chief Executive
Officer of USA Waste. Mr. Moorehead was also a founder of USA Waste. Mr.
Moorehead has served as Director for the Environmental Research and Education
Foundation since November of 1996. Mr. Moorehead serves on the Board of FYI,
Inc., a document and information outsourcing company, and United Road Services,
Inc., a towing and transport service company. Mr. Moorehead was a member of the
compensation committee for FYI, Inc.
Terry W. Patrick, President, Chief Operating Officer and Director of SanTi,
served as Chief Operating Officer of Eastern Environmental, a solid waste
management company, from June 1996 to December 1997. From 1995 to April 1996, he
served as President and was the founder of Chem-Mark Services, a commercial
chemical manufacturing and distributing company. From August 1993 to August
1994, he served as President and Chief Executive Officer of EDM Corporation, a
subsidiary of USA Waste. From April 1990 to August 1993, he served as President
and Chief Operating Officer of USA Waste, Inc., a solid waste management
company.
Kenneth Peak, Vice President, Chief Financial Officer and Director of SanTi
is currently a director of Cheniere Energy, Hogan Energy, and NL Industries,
Inc. From 1991 to 1998, Mr. Peak has been the President of Peak Enernomics,
Inc., a company engaged in financial consulting activities to the oil and gas
industry.
Raymond M. Cash, Vice Chairman and Director of SanTi, is a founder of
Sanifill, Inc. and Southern States Environmental Services, Inc. Mr. Cash is also
a founder of SanTi. From 1997 to June 1998, he served as Chairman of the Board
and Chief Executive Officer of SanTi. From 1993 to 1997, he served as Chairman
and President of Resource, Recovery, Transfer & Transportation, Inc.
William P. Hulligan, Director of SanTi, was employed by Waste Management,
Inc. from 1979 to November 1997. The last position he held at Waste Management
was Executive Vice President. Mr. Hulligan currently serves on the Board of
Directors for NSC Corporation and has been a board member of John Carroll
University since 1994.
Elroy "Gene" Roelke, director of SanTi, has served as the Chairman and
Founder of the Knollwood Mercantile Company from 1985 to the present. From 1989
to 1996, Mr. Roelke served as Senior Vice President and General Counsel of the
Renaissance Capital Group. Mr. Roelke also served as the administrator of the
Portfolio Management Division and as a director designee to portfolio companies.
Mr. Roelke also served as the President and Director of Island Marine Supply
Company and was managing partner for Roelke & Jordan in Dallas, Texas. Mr.
Roelke also served as a Director of Micro and as Chairman of the Board of Micro
in 1996. He is also a Director and member of the Audit Committee of Titogen
Medical, Inc.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of the
chief executive officer of SanTi as of December 31, 1997.
-19-
<PAGE> 20
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------- Compensation
------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
- --------------------------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond Cash (1) 1997 $0 162,500(2)
Chief Executive Officer
</TABLE>
(1) Mr. Cash served in the indicated position from August 19, 1997 and resigned
from such position effective June 29, 1998.
(2) Mr. Cash exercised the options to acquire these shares effective April 30,
1998 at an exercise price of $.65 a share.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE OF ASSUMED
---------------------------------------------------------------- ANNUAL RATE OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE ------------------------
OPTIONS EMPLOYEES PRICE PER EXPIRATION
GRANTED IN FISCAL 1997 SHARE DATE 5% 10%
------- -------------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Raymond Cash(1)....... 162,500 36% $0.65 12/4/00 $21,125 $42,250
</TABLE>
(1) Mr. Cash exercised the options to acquire these shares effective April 30,
1998.
Aggregated Option Exercises in Last Fiscal Year and Option Values at December
31, 1997
The following table sets forth certain information concerning the value
of unexercised options held by the chief executive officer as of December 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 AT DECEMBER 31, 1997 (1)
----------------- ------------------------
EXERCISABLE EXERCISABLE
----------------- ------------------------
<S> <C> <C>
Raymond Cash 162,500 $24,375
</TABLE>
- ------------------
(1) Based on a fair market value of $.80 per share as of December 31, 1997.
Employment Agreements
On June 1, 1998, Donald F. Moorehead and SanTi entered into an employment
agreement. The agreement provides for Mr. Moorehead to serve in the capacity of
Chief Executive Officer and Chairman of the Board of SanTi and provides for a
base salary of $150,000 annually. Mr. Moorehead has elected not to take any
salary until January 1, 1999, at the earliest. Mr. Moorehead will also be
eligible for an annual bonus, which will be a minimum 50% of his annual salary.
The agreement term is five years, with automatic renewal for twelve month
periods. Upon the merger, consolidation or other business combination of SanTi
with another publicly traded or private entity where SanTi is not the surviving
entity or upon the sale of substantially all of SanTi's assets, Mr. Moorehead is
entitled to terminate the agreement and
-20-
<PAGE> 21
receive a severance payment equal to the remaining salary and bonus for each of
the remaining years (or portions thereof) under the full term of the agreement.
The agreement also entitles Mr. Moorehead to participate in any stock option
plan instituted by SanTi. The agreement contains a noncompetition and
nonsolicitation clause for the term of the agreement and for one year after
termination of Mr. Moorehead's employment.
On June 1, 1998, Terry Patrick and SanTi entered into an employment agreement
which provides for Mr. Patrick to serve as President and Chief Operating Officer
of SanTi and provides for a base salary of $150,000 annually. Mr. Patrick has
elected not to take any salary until January 1, 1999, at the earliest. Mr.
Patrick will also be eligible for an annual bonus, which will be a minimum of
50% of his annual salary. The agreement term is five years, with automatic
renewal for twelve month periods. Upon the merger, consolidation or other
business combination of SanTi with another publicly traded or private entity
where SanTi is not the surviving entity or upon the sale of substantially all of
SanTi's assets, Mr. Patrick is entitled to terminate the agreement and receive a
severance payment equal to the remaining salary and bonus for each of the
remaining years (or portions thereof) under the full term of the agreement. The
agreement also entitles Mr. Patrick to participate in any stock option plan
instituted by SanTi. The agreement contains a noncompetition and nonsolicitation
clause for the term of the agreement and for one year after termination of Mr.
Patrick's employment.
On June 1, 1998, Kenneth Peak and SanTi entered into an employment agreement
which provides for Kenneth Peak to serve in the capacity of Vice President and
Chief Financial Officer of SanTi and provides for a base salary of $100,000
annually. Mr. Peak will also be eligible for an annual bonus, which will be a
minimum of 25% of his annual salary. The agreement term is two years, with
automatic renewal for twelve month periods. Upon the merger, consolidation or
other business combination of SanTi with another publicly traded or private
entity where SanTi is not the surviving entity or upon the sale of substantially
all of SanTi's assets, Mr. Peak is entitled to terminate the agreement and
receive a severance payment equal to the remaining salary and bonus for each of
the remaining years (or portions thereof) under the full term of the agreement.
The agreement also entitles Mr. Peak to participate in any stock option plan
instituted by SanTi. The agreement contains a noncompetition and nonsolicitation
clause for the term of the agreement and for one year after the termination of
Mr. Peak's employment.
Director Compensation
Non-employee directors are compensated $1,500 for each non-telephonic meeting
attended. All directors are reimbursed for any expenses incurred in attending
board or committee meetings. Each non-employee director receives an option to
acquire 25,000 shares upon appointment or election to the Board of Directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1997, Bone-Dry entered into a note payable agreement with an entity
controlled by SanTi's majority owner and Vice Chairman of the Board of
Directors, Raymond M. Cash. The note was in the amount of $650,000, with an
interest rate of 13%. This entity received approximately $56,000 in interest
during 1997. This note was paid in full in December 1997. After the note was
paid in full, Mr. Cash purchased 990,000 shares of Bone-Dry for $650,000. After
the share exchange of Bone-Dry and SGI described previously and the Stock
Dividend, Mr. Cash received 1,608,750 shares of SGI Stock.
The Company periodically uses a plane owned by Mr. Cash for SanTi executives
for corporate travel. A fee is charged for this use based upon pilot time, fuel,
depreciation and insurance. There is currently no contract for the use of this
plane for corporate travel.
On June 29, 1998, the Board of Directors granted options to Messrs.
Moorehead, Patrick, and Peak in the following amounts: (i) Mr. Moorehead:
175,000 options, exercisable at $6.00 per share, 150,000 options, exercisable at
$15.00 per share, and 200,000 options exercisable at $25.00 per share; (ii) Mr.
Terry Patrick: options in amount and exercise price identical to Mr. Moorehead;
and (iii) Mr. Kenneth Peak: 50,000 options, exercisable at $6.00 per share,
50,000 options exercisable at $15.00 per share, and 100,000 options exercisable
at $25.00 per share. These options vest over a four year period. The options
will vest automatically, however, upon any termination of employment of Mr.
Moorehead, Mr. Patrick or Mr. Peak upon the merger, consolidation or other
business combination of SanTi with another publicly traded or private entity
where SanTi is not the surviving entity or upon the sale of substantially all of
SanTi's assets.
-21-
<PAGE> 22
ITEM 8. LEGAL PROCEEDINGS.
There are currently no claims or suits against SanTi, Inc, or its operating
subsidiaries. SanTi may become involved in litigation and claims arising out of
the ordinary course of its business.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON SANTI'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Of the 9,526,599 shares of Common Stock issued and outstanding as of August
28, 1998, approximately 1,413,220 shares are subject to over-the-counter trading
on the Nasdaq Market OTC Bulletin Board. The closing price as of August 28, 1998
for the 1,413,220 shares of Common Stock subject to such trading, of which
33,300 shares traded, was $19.00. As of June 30, 1998, the Company had 1061
record and beneficial owners of the Common Stock. Upon becoming a reporting
company under the Securities Exchange Act of 1934, as amended, SanTi shall
furnish its stockholders annual reports containing audited financial statements
reported on by its independent auditors for each fiscal year and will file
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.
SanTi has contractual obligations to issue up to 93,600 additional shares if
the conditions relating to revenue guarantees contained in the acquisition
agreements with NLW service providers are met. As of August 28, 1998,
approximately 195,254 warrants to purchase shares of Common Stock with an
exercise price of $5.80 were outstanding. SanTi has also issued a warrant to
purchase 50,000 shares of Common Stock with an exercise price of $13.00 per
share to Bank of America pursuant to the Credit Agreement with Bank of America.
SanTi has not paid dividends on its Common Stock and does not anticipate
paying dividends. SanTi intends to retain future earnings, if any, to finance
the expansion of its operations and future acquisitions of service providers.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On March 19, 1997, Raymond Cash and Joyce Bone purchased a total of 16,250
shares of Common Stock (reflecting the Bone-Dry exchange and the Stock Dividend)
for $10,000. The proceeds from this sale were used to fund working capital.
On August 19, 1997, Raymond Cash purchased 1,625,000 of Common Stock for
$130,000. The proceeds from this purchase were used to acquire new service
providers and fund working capital needs of the Company.
On December 1, 1997, the Cash Family Limited Partnership purchased 1,608,750
shares of Common Stock (reflecting the Bone-Dry exchange and the Stock Dividend)
for $650,000. The Cash Family Limited Partnership is controlled by an entity
controlled by Raymond Cash. The proceeds from this sale were used to acquire new
service providers.
On December 22, 1997, 14,479 shares of Common Stock were issued to Andrews in
exchange for the settlement of a note payable in the amount of $263,663.
On December 22, 1997, 21,400 shares were issued as consideration for $17,120
of the acquisition price of Andrews.
On January 12, 1998, the Company sold 1,250,000 shares of Common Stock for
$1,000,000. The proceeds were used to acquire new service providers and fund
working capital needs of the Company.
On January 22, 1998, 90,000 shares of Common Stock were issued as
consideration for $72,000 of the acquisition price of Ferrero.
On February 13, 1998, 100,000 shares of Common Stock were issued as
consideration for $100,000 of the acquisition price of A Rapid.
On March 6, 1998, 60,000 shares of Common Stock were issued as consideration
for $60,000 of the acquisition price of Seagraves.
-22-
<PAGE> 23
On April 2, 1998, SanTi sold 2,000,000 shares of Common Stock for
$11,600,000. The proceeds raised by this private offering was used to acquire
new service providers and fund working capital needs of the Company.
On May 1, 1998, 105,000 shares of Common Stock were issued as consideration
for $609,000 of the acquisition price of RGM.
On May 4, 1998, the Company sold 500,000 shares of Common Stock for
$2,900,000. The proceeds raised by this private offering was used to acquire new
service providers and fund working capital needs of the Company.
On May 8, 1998, 85,000 shares of Common Stock were issued as consideration
for $493,000 of the acquisition price of Eldredge.
All of these shares of Common Stock were issued pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") in private
transactions not involving a public offering. These shares are subject to
restrictions on transferability and resale except as permitted under the
Securities Act and applicable state securities laws.
ITEM 11. DESCRIPTION OF SANTI'S SECURITIES TO BE REGISTERED.
SanTi is authorized to issue 100,000,000 shares of capital stock. Seventy
million of these shares are common stock, $.0001 par value (the "Common Stock"),
entitled to one vote per share on any matter on which stockholders of SanTi are
entitled to vote and are entitled to participate in dividends and to receive the
remaining net assets of SanTi upon dissolution, subject to the rights of any
existing holders of preferred stock having a liquidation preference. Of these
shares of Common Stock, 9,526,599 shares are currently outstanding. The shares
of Common Stock have no preemptive rights and no subscription, redemption or
conversion privileges. The holders of shares of Common Stock do not have
cumulative voting rights. All of the outstanding shares of Common Stock are
fully paid and nonassessable.
Thirty million of the authorized shares of capital stock are designated as
preferred stock, $.0001 par value per share. The Board of Directors will have
the full power and authority to fix the number of shares constituting a series
and to fix the relative rights and preferences of the shares of the series to
the full extent allowable by the law, with respect to dividends, redemptions,
payment on liquidation, sinking fund provisions, conversion privileges and
voting rights.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that no director of the
corporation shall be personally liable to SanTi or its stockholders for monetary
damages for breach of fiduciary duty as a director except for liability: (i) for
any breach of the director's duty of loyalty to SanTi or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware (or the corresponding provision of any
successor law or act), and (iv) for any transaction from which the director
derived an improper personal benefit.
SanTi must indemnify, and upon request will advance expenses to any officer
or director who was or is a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, including
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director or officer of SanTi, or is or was
acting at the request of SanTi as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. This indemnification will not apply
if the indemnitee is adjudged liable to SanTi, unless and only if the court in
which the action is brought determines the indemnitee is fairly and reasonably
entitled to indemnification by SanTi.
SanTi may also purchase and maintain insurance on the behalf of its directors
and officers against any such liability that may be asserted as a result of the
director's or officer's service in such a capacity.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed as a part of this Form 10 are listed in Item
15.
-23-
<PAGE> 24
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in accountants or disagreements by SanTi with its
accountants on accounting or financial disclosures.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements-The financial statements attached for SanTi are listed
on page F-1.
(b) Exhibits--
<TABLE>
<S> <C>
2.0 Merger Agreement by and between Microlytics, Inc. and
SanTi Group, Inc., dated March 6, 1998 *
3.1 Certificate of Incorporation of the Company dated
May 13, 1998. *
3.2 Bylaws of the Company. *
4.1 Article IV of Registrant's Certificate of Incorporation
4.2 Article VI of Registrant's Certificate of Incorporation
9.1 Voting Trust Agreement *
10.1 Credit Agreement dated June 26, 1998 between SanTi
Group, Inc., various financial institutions and Bank of
America National Trust Association as Agent *
10.2 Company Pledge Agreement dated as of June 26, 1998,
between SanTi Group, Inc., and Bank of America National
Trust Association as Agent *
10.3 Security Agreement dated as of June 26, 1998, among
SanTi, Inc., each subsidiary of SanTi Group, Inc. and
Bank of America National Trust Association as Agent *
10.4 Asset Purchase Agreement dated as of January 22, 1998 by
and between SanTi Group of Pennsylvania, Ferrero
Wastewater Management, Inc., A. Thomas Ferrero, Jr. and
A. Thomas Ferrero, III *
10.5 Asset Purchase Agreement dated as of December 22, 1997
by and between Bone-Dry Enterprises, Inc. Andrews
Environmental Services, Inc. and W. Ronald Andrews *
10.6 Asset Purchase Agreement dated as of February 13, 1998
by and between SanTi Group of Florida, Inc., A Rapid
Rooter Sewer & Drain Service, Inc., William E. Rice,
Joan E. Rice, Alfonse J. Grunskis, Diane Rice Grunskis,
Donald E. Rice and Ruth Ann Rice *
10.7 Asset Purchase Agreement dated as of February 17, 1998
by and between Bone-Dry Enterprises, Inc., Quality
Plumbing & Septic, Ronda R. McMichael and Forney L.
McMichael *
10.8 Asset Purchase Agreement dated as of March 6, 1998 by
and between SanTi Group of Florida, Inc. Seagraves,
Inc., William D. Seagraves, Seaburn Seagraves and
Angelina Seagraves *
10.9 Asset Purchase Agreement dated as of March 6, 1998 by
and between SanTi Group of Florida, Inc., Grease-Tec,
Inc., William D. Seagraves, Seaburn Seagraves and
Angelina Seagraves *
</TABLE>
-24-
<PAGE> 25
<TABLE>
<S> <C>
10.10 Asset Purchase Agreement dated as of April 30, 1998 by
and between SanTi Group of New York, Inc., RGM Liquid
Waste Removal Corporation, and Ralph G. Macchio *
10.11 Asset Purchase Agreement dated as of April 30, 1998 by
and between SanTi Group of New York, Inc., Devito
Environmental Corporation, and Rosalie Macchio *
10.12 Asset Purchase Agreement dated as of April 30, 1998 by
and between SanTi Group of New York, Inc., Advanced
Transfer Technology, Inc., and Steve Macchio *
10.13 Asset Purchase Agreement dated as of April 30, 1998 by
and between SanTi Group of New York, Inc., Envirotec
Leasing and Rental Corporation, and Steve Macchio *
10.14 Asset Purchase Agreement dated as of May 8, 1998 by and
between SanTi Group of Pennsylvania, Inc., Eldredge
Wastewater Management, Inc., Robert Eldredge, Curtis
Eldredge, and John Eldredge. *
10.15 Contract for Purchase and Sale of Certain Assets of
Andrews Environmental Services, Inc. dated March 20,
1997 among and between Bone-Dry Enterprises, Inc. and
Andrews Environmental Services, Inc. *
10.16 Employment Agreement between Santi Group, Inc. and Terry
Patrick dated June 1, 1998. *
21.0 Subsidiaries of SanTi Group, Inc. *
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
* Previously Filed
-25-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended Form 10 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on the 1st day of September, 1998.
SANTI GROUP, INC.
By: /s/ Kenneth Peak
----------------------------------------
Kenneth Peak
Vice President & Chief Financial Officer
<PAGE> 27
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PRO FORMA FINANCIAL STATEMENTS
SanTi Group, Inc. and Subsidiaries
Introduction to Unaudited Pro Forma Combined Financial Statements F-3
Pro Forma Combined Statements of Operations for the Year Ended
December 31, 1997 and the Six Months Ended June 30, 1998 (Unaudited) F-5
Notes to Unaudited Pro Forma Combined Financial Statements F-7
HISTORICAL FINANCIAL STATEMENTS
SanTi Group, Inc. and Subsidiaries
Report of Independent Public Accountants F-10
Consolidated Balance Sheets F-11
Consolidated Statements of Operations F-12
Consolidated Statements of Stockholders' Equity F-13
Consolidated Statements of Cash Flows F-14
Notes to Consolidated Financial Statements F-15
The historical financial statements of certain acquired companies are
included in this filing since each acquiree will contribute significant revenue
to the Company. The operating results of these acquirees should not be
considered indicative of the Company's future operating results.
Andrews Environmental Services, Inc.
Report of Independent Public Accountants F-23
Balance Sheet F-24
Statements of Operations F-25
Statements of Stockholders' Equity F-26
Statements of Cash Flows F-27
Notes to Financial Statements F-28
Ferrero Wastewater Management, Inc.
Report of Independent Public Accountants F-32
Balance Sheets F-33
Statements of Operations F-34
Statements of Stockholders' Equity F-35
Statements of Cash Flows F-36
Notes to Financial Statements F-37
A Rapid Rooter Sewer & Drain Service, Inc.
Report of Independent Public Accountants F-41
Balance Sheets F-42
Statements of Operations F-43
Statements of Stockholders' Equity F-44
Statements of Cash Flows F-45
Notes to Financial Statements F-46
</TABLE>
F-1
<PAGE> 28
<TABLE>
<S> <C> <C>
Seagraves, Inc. (d.b.a. Brownie Environmental Services) and Grease-Tec, Inc.
Report of Independent Public Accountants F-50
Combined Balance Sheets F-51
Combined Statements of Operations F-52
Combined Statements of Stockholders' Equity F-53
Combined Statements of Cash Flows F-54
Notes to Combined Financial Statements F-55
RGM Liquid Waste Removal Corporation and Affiliates
Report of Independent Public Accountants F-59
Combined Balance Sheets F-60
Combined Statements of Operations F-61
Combined Statements of Stockholders' Equity F-62
Combined Statements of Cash Flows F-63
Notes to Combined Financial Statements F-64
Eldredge Wastewater Management, Inc.
Report of Independent Public Accountants F-71
Balance Sheets F-72
Statements of Operations F-73
Statements of Stockholder's Equity F-74
Statements of Cash Flows F-75
Notes to Financial Statements F-76
</TABLE>
F-2
<PAGE> 29
SANTI GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
the acquisitions by SanTi Group, Inc. ("SanTi") of businesses during the period
from March 19, 1997 (inception) through May 8, 1998 (the "Acquired Businesses").
The unaudited pro forma combined financial statements also give effect to the
merger with Microlytics, Inc. ("Microlytics") on May 13, 1998, which has been
accounted for as a capital transaction accompanied by a recapitalization of
Santi ("Recapitalization"). SanTi, the Acquired Businesses and Microlytics are
hereafter referred to as the Company. The Acquired Businesses are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BUSINESS DATE ACQUIRED
- -----------------------------------------------------------------------------------------------------
<S> <C>
Grease business of Andrews Environmental Services, Inc. March 20, 1997
("Andrews Grease")
- -----------------------------------------------------------------------------------------------------
Atlanta Grease Trap Service, Inc. ("Atlanta Grease") August 27, 1997
- -----------------------------------------------------------------------------------------------------
Remaining business of Andrews Environmental Services, Inc. December 22, 1997
("Andrews Other")
- -----------------------------------------------------------------------------------------------------
Ferrero Wastewater Management, Inc. ("Ferrero") January 22, 1998
- -----------------------------------------------------------------------------------------------------
A Rapid Rooter Sewer & Drain Service, Inc. ("A Rapid") February 13, 1998
- -----------------------------------------------------------------------------------------------------
Quality Plumbing and Septic ("Quality") February 17, 1998
- -----------------------------------------------------------------------------------------------------
Seagraves, Inc. (d.b.a. Brownie Environmental Services, Inc.)
and Grease-Tec, Inc. ("Seagraves") March 6, 1998
- -----------------------------------------------------------------------------------------------------
RGM Liquid Waste Removal Corporation and Affiliates ("RGM") May 1, 1998
- -----------------------------------------------------------------------------------------------------
Eldredge Wastewater Management, Inc. ("Eldredge") May 8, 1998
- -----------------------------------------------------------------------------------------------------
</TABLE>
Andrews Grease and Andrews Other are hereafter referred to as "Andrews".
All of the above acquisitions were accounted for using the purchase method of
accounting. These statements are based on the historical financial statements of
the Acquired Businesses and the estimates and assumptions set forth below and in
the notes to the unaudited pro forma combined financial statements.
The unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred January 1, 1997.
SanTi has preliminarily analyzed the savings that it expects to be realized from
reductions in salaries and certain benefits to the owners. To the extent the
owners of the Acquired Businesses have agreed prospectively to reductions in
salary, bonuses and benefits, these reductions have been reflected in the pro
forma combined statements of operations. With respect to other potential cost
savings, SanTi cannot fully quantify these savings at this time. It is
anticipated that these savings will be partially offset by costs related to
SanTi's corporate management and by the costs associated with being a public
company. These costs cannot be quantified accurately. Accordingly, only those
anticipated savings and costs that are factually supportable have been included
in the accompanying pro forma financial information of the Company.
F-3
<PAGE> 30
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what SanTi's
results of operations would actually have been if such transactions in fact had
occurred on those dates and are not necessarily representative of the SanTi
results of operations for any future period. Since the Acquired Businesses were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
combined financial statements should be read in conjunction with the historical
financial statements and notes thereto included elsewhere herein. Also see "Risk
Factors".
F-4
<PAGE> 31
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SANTI FERRERO A RAPID QUALITY SEAGRAVES RGM ELDREDGE
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,947,494 $257,982 $680,870 $194,786 $1,342,431 $4,108,953 $1,514,756
EXPENSES
Cost of operations 7,260,146 175,443 338,971 118,620 930,687 2,298,686 1,108,708
Selling, General and
Administrative Expense 3,756,248 73,399 244,591 61,894 350,137 1,066,890 385,582
Depreciation and
Amortization 517,904 23,334 41,476 5,179 32,886 211,454 68,311
----------- -------- -------- -------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,586,804) (14,194) 55,832 9,093 28,721 531,923 (47,845)
Other expense (income):
Interest 274,042 5,913 11,148 1,684 8,659 (31,626) 11,959
Other - (33) (476) 60 (105,984) - (1,562)
----------- -------- -------- -------- --------- ---------- ----------
INCOME (LOSS) BEFORE TAXES (1,860,846) (20,074) 45,160 7,349 126,046 563,549 (58,242)
Provision (benefit)
for taxes (318,536) - - - -
287,410 (13,686)
----------- -------- -------- -------- --------- ---------- ----------
NET INCOME(LOSS) $(1,542,310) $(20,074) $ 45,160 $ 7,349 $ 126,046 $ 276,139 $ (44,556)
=========== ======== ======== ======== ========= ========== ==========
PRO FORMA NET LOSS
PER SHARE
Basic and Diluted $ (.21)
===========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 7,312,848
===========
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
(Note 5)
<S> <C> <C>
Revenues $ - $18,047,272
EXPENSES 12,231,261
Cost of operations
Selling, General and
Administrative Expense (102,500)(d) 5,836,241
Depreciation and Amortization 240,079 (a) 1,140,623
---------- -----------
INCOME (LOSS) FROM OPERATIONS (137,579) (1,160,853)
Other expense (income):
Interest 60,000 (b) 493,727
151,948 (c) (107,995)
Other
---------- -----------
INCOME (LOSS) BEFORE TAXES (349,526) (1,546,584)
Provision (benefit)
for taxes (80,678)(e)
(136,315)(f) (261,805)
---------- -----------
NET INCOME(LOSS) $ (132,533) $(1,284,779)
========== ===========
PRO FORMA NET (LOSS)
PER SHARE
Basic and Diluted $ (.17)
===========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 189,779 7,502,627
========== ===========
</TABLE>
F-5
<PAGE> 32
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SANTI ANDREWS ATLANTA GREASE FERRERO A RAPID QUALITY
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 737,858 $1,218,268 $ 198,255 $4,122,100 $4,629,655 $1,558,288
- --------
EXPENSES
Cost of operations 406,638 625,892 133,741 2,797,821 2,364,794 948,963
Selling, General and Administrative
Expenses 521,372 646,273 41,941 1,045,315 1,730,394 495,149
Depreciation and Amortization 127,338 121,496 220,432 319,001 41,529
--------- --------- ------------ --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (317,490) (175,393) 22,573 58,532 215,466 72,647
Other expense (income):
Interest 104,494 22,077 3,692 50,920 86,367 13,472
Other (204,124) (2,821) 27,413 476
--------- --------- ------------ --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (421,984) 6,654 18,881 10,433 101,686 58,699
Provision (benefit) for taxes (163,632) 4,334
--------- --------- ------------ --------- --------- ---------
NET INCOME (LOSS) $(258,352) $ 2,320 $ 18,881 $ 10,433 $ 101,686 $ 58,699
========= ========= ============ ========= ========= =========
PRO FORMA NET LOSS PER SHARE
Basic and Diluted $ (.13)
=========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 1,940,536
=========
<CAPTION>
PRO FORMA PRO FORMA
SEAGRAVES RGM ELDREDGE ADJUSTMENTS COMBINED
(Note 5)
<C> <C> <C> <C> <C> <C>
Revenues $6,924,493 $7,459,143 $4,074,248 $ - $30,922,308
- --------
EXPENSES
Cost of operations 4,868,591 4,485,210 2,841,432 - 19,473,082
Selling, General and Administrative
Expenses 1,636,989 2,407,013 1,081,150 (205,000)(d) 9,400,596
Depreciation and Amortization 248,938 394,420 192,534 1,063,889 (a) 2,729,577
--------- --------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 169,975 172,500 (40,868) (858,889) (680,947)
Other expense (income):
Interest 36,425 (88,518) 34,828 124,621 (b) 548,484
160,106 (c)
Other (75,529) (73,276) (6,509) (334,370)
--------- --------- --------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 209,079 334,294 (69,187) (1,143,616) (895,061)
Provision (benefit) for taxes 156,526 (17,957) 117,665 (e) (349,074)
(446,010)(f)
--------- --------- --------- ---------- ----------
NET INCOME (LOSS) $ 209,079 $ 177,768 $ (51,230) $ (815,271) $ (545,987)
========= ========= ========= ========== ==========
PRO FORMA NET LOSS PER SHARE
Basic and Diluted $ (0.23)
==========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic and Diluted 460,652 2,401,188
========== ==========
</TABLE>
F-6
<PAGE> 33
SANTI GROUP, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998 AND DECEMBER 31, 1997
1. BACKGROUND
SanTi Group, Inc. ("SanTi") was formed to act as a consolidator of nonharzardous
liquid waste businesses. From its inception on March 19, 1997 through May 8,
1998, SanTi has acquired nine businesses involved in the nonhazardous liquid
waste business ("Acquired Businesses").
2. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements of the Acquired Businesses were derived from
the respective Acquired Businesses' financial statements. All Acquired
Businesses have a December 31 year-end, or their financial results have been
recast to a December 31 year-end, with the exception of RGM which has an October
31 year-end. The audited historical financial statements included elsewhere in
this Registration Statement have been included in accordance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 80.
3. ACQUISITION OF ACQUIRED BUSINESSES
The acquisitions of the Acquired Businesses were financed by borrowings under
two credit agreements with total availability of $16.6 million and cash proceeds
of $16.3 million from sales of common stock. All acquisitions have been
accounted for using the purchase method of accounting.
The following table sets forth the consideration paid in (a) cash, (b) seller
notes and (c) value of common stock to the shareholders of the Acquired
Businesses:
<TABLE>
<CAPTION>
COMMON TOTAL
CASH SELLER NOTES STOCK CONSIDERATION
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrews $ 1,135,000 $ 257,350 $ 17,120 $ 1,409,470
Atlanta Grease 360,000 0 0 360,000
Ferrero 2,240,100 0 72,000 2,312,100
A Rapid 3,990,120 0 100,000 4,090,120
Quality 2,250,000 0 58,000 2,308,000
Seagraves 3,250,000 2,000,000 60,000 5,310,000
RGM 4,500,000 0 609,000 5,109,000
Eldredge 2,040,000 0 493,000 2,533,000
-----------------------------------------------------------------------
Total $19,765,220 $2,257,350 $1,409,120 $23,431,690
-----------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 34
In addition to the above amounts, the agreements include contingent
consideration totaling $1,608,900 in cash and 93,600 shares of common stock.
These amounts are payable by the Company to the Acquired Businesses on various
dates specified by the agreements, contingent upon the meeting of certain goals
as defined in the agreements. For purposes of computing the estimated purchase
price for accounting purposes, the value of the common stock was determined
using an estimated fair value of $.80 - $1 per share for all acquisitions except
for RGM and Eldredge, for which the common stock was valued at $5.80 per share.
These per share prices are based on the offering prices of the Company's common
stock issued in private transactions occurring in January and April of 1998.
Based upon management's analysis of fair value, the historical carrying value of
the acquired assets approximates fair value, with the exception of property and
equipment, for which the carrying value has been increased by approximately
$800,000. The amount allocated to noncompete agreements and goodwill is
approximately $1.2 million and $17.2 million, respectively. Management of SanTi
has not identified any other material tangible or identifiable intangible assets
of the Acquired Businesses to which a portion of the purchase prices could
reasonably be allocated.
4. RECAPITALIZATION
On May 13, 1998 SanTi merged ("Merger") with Microlytics, Inc. ("Microlytics").
Under the terms of the Merger each outstanding share of SanTi common stock was
exchanged for one share of Microlytics common stock. Immediately prior to the
merger, Microlytics had 1,027,066 shares of common stock outstanding and
warrants to purchase an additional 500,000 shares of common stock at an exercise
price of $5.80. The Merger resulted in the receipt by Santi shareholders of
approximately 8,088,379 shares of common stock, representing approximately 86.2%
of the Microlytics shares outstanding on the effective date of the Merger. As a
result of the Merger, SanTi Group, Inc. was merged into Microlytics and
Microlytics certificate of incorporation was amended as of the effective date of
the Merger to change Microlytics' name to SanTi Group, Inc. For accounting
purposes, the Merger has been accounted for as a capital transaction accompanied
by a recapitalization of SanTi.
F-8
<PAGE> 35
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(a) Reflects additional amortization of noncompete agreements using a weighted
average life of 2.2 years and goodwill using a 40 year life. Also includes
additional depreciation of property and equipment using a weighted average
remaining life of 5 years.
(b) Reflects additional interest expense on the $2.3 million in seller notes at
a weighted average annual rate of 6.2%.
(c) Reflects elimination of interest expense of Acquired Businesses net of
additional interest expense on $3.9 million in line of credit borrowings at
8.21%. The elimination of interest expense of the acquired businesses is
required as the Company assumed no debt in the purchase transactions. Additional
borrowings under the Company's line of credit of $3.9 million were required to
supplement equity proceeds from the sale of common stock to pay the cash portion
of the purchase prices.
(d) Adjusts compensation to the level that the owners of the Acquired Businesses
have contractually agreed to receive subsequent to the Acquisitions. The
employment agreements have terms of one to three years and include certain
severance provisions in the event of termination without cause.
(e) Reflects additional income tax provision (benefit) for state and federal
taxes at a combined statutory tax rate of 39% as certain Acquired Businesses
previously were taxed as Subchapter S Corporations.
(f) Reflects (benefit) for income taxes using the Company's combined statutory
tax rate of 39% for the tax effect of adjustments (a) thru (d).
F-9
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SanTi Group, Inc.:
We have audited the accompanying consolidated balance sheet of SANTI GROUP, INC.
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from inception (March 19, 1997) to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SanTi Group, Inc. and
subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for the period from inception (March 19, 1997) to December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 2, 1998 (except for the last six
paragraphs of Note 10 as to which
the date is June 29, 1998)
F-10
<PAGE> 37
SANTI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1997 1998
- ------------------------------------------------- ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 195,552 $ 2,818,658
Accounts receivable, net of allowance for
doubtful accounts of $17,875 and $148,417 in
1997 and 1998, respectively 125,777 3,295,121
Prepaid expenses 81,089 315,084
Deferred income taxes 65,471 0
------------ ------------
Total current assets 467,889 6,428,863
------------ ------------
MACHINERY AND EQUIPMENT 593,416 6,608,717
Less accumulated depreciation (31,874) (337,313)
------------ ------------
561,542 6,271,404
------------ ------------
OTHER NONCURRENT ASSETS:
Intangibles, net 1,473,489 18,605,187
Deferred income taxes 98,161 567,034
Other assets 13,062 1,525,365
------------ ------------
1,584,712 20,697,586
------------ ------------
$ 2,614,143 $ 33,397,853
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
- -------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 37,774 $ 1,822,224
Accrued expenses 339,961 2,744,371
Lines of credit 1,120,000 0
Current portion of long-term debt 123,715 118,500
------------ ------------
Total current liabilities 1,621,450 4,685,095
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 180,240 10,602,490
------------ ------------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 30,000,000
shares authorized, 0 shares issued
and outstanding 0 0
Common stock, $.0001 par value; 70,000,000
shares authorized, 4,312,945 and 9,375,445
shares issued and outstanding in 1997 and
1998, respectively 432 938
Additional paid-in capital 1,070,373 19,909,992
Accumulated deficit (258,352) (1,800,662)
------------ ------------
Total stockholders' equity 812,453 18,110,268
------------ ------------
$ 2,614,143 $ 33,397,853
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-11
<PAGE> 38
SANTI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM SIX-MONTH
INCEPTION INCEPTION PERIOD ENDED
(MARCH 19, 1997) TO (MARCH 19, 1997) TO JUNE 30,
DECEMBER 31, 1997 JUNE 30, 1997 1998
------------------ ------------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES $ 737,858 $ 245,142 $ 9,947,494
----------- ---------- -----------
EXPENSES:
Cost of operations 406,638 85,057 7,260,146
General and administrative 521,372 66,622 3,756,248
Depreciation and amortization 127,338 51,606 517,904
----------- ---------- -----------
Total expenses 1,055,348 203,285 11,534,298
----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS (317,490) 41,857 (1,586,804)
OTHER EXPENSE (INCOME):
Interest 104,494 42,942 274,042
----------- ---------- -----------
(LOSS) BEFORE INCOME TAX BENEFIT (421,984) (1,085) (1,860,846)
INCOME TAX (BENEFIT) (163,632) (423) (318,536)
----------- ---------- -----------
NET (LOSS) $ (258,352) $ (662) $(1,542,310)
=========== ========== ===========
(LOSS) PER SHARE:
Basic and diluted $ (.13) $ N/A $ (.21)
=========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 1,940,536 N/A 7,312,848
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE> 39
SANTI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 19, 1997 (INCEPTION) 1,027,066 $ 103 $ (103) $ 0 $ 0
Sale of common stock 3,250,000 325 789,675 0 790,000
Issuance of common stock in
settlement of notes payable 14,479 2 263,683 0 263,685
Issuance of common stock for
acquired business 21,400 2 17,118 0 17,120
Net loss 0 0 0 (258,352) (258,352)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 4,312,945 432 1,070,373 (258,352) 812,453
Sale of common stock 3,750,000 375 15,499,625 0 15,500,000
Issuance of common stock for
acquired businesses 450,000 45 1,391,955 0 1,392,000
Exercise of stock options 612,500 61 398,064 0 398,125
Exercise of warrants 250,000 25 1,449,975 0 1,450,000
Issuance of warrant
for debt issuance costs 0 0 100,000 0 100,000
Net loss 0 0 0 (1,542,310) (1,542,310)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 (UNAUDITED) 9,375,445 $ 938 $ 19,909,992 $ (1,800,662) $ 18,110,268
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE> 40
SANTI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM SIX-MONTH
INCEPTION INCEPTION PERIOD ENDED
(MARCH 19, 1997) TO (MARCH 19, 1997) TO JUNE 30,
DECEMBER 31, 1997 JUNE 30, 1997 1998
------------------- ------------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (258,352) $ (662) $ (1,542,310)
------------ ---------- ------------
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 127,338 51,606 517,904
Changes in assets and liabilities, excluding
effects of acquired businesses:
Accounts receivable (125,777) (78,425) (3,169,344)
Prepaid expenses (81,089) (87,314) (233,995)
Deferred income taxes (163,632) (423) (403,402)
Other assets (13,062) (10,169) (1,412,303)
Accounts payable 37,774 9,454 1,784,450
Accrued expenses 339,961 6,404 1,589,705
------------ ---------- ------------
Total adjustments 121,513 (108,867) (1,326,985)
------------ ---------- ------------
Net cash (used in) provided by operating
activities (136,839) (109,529) (2,869,295)
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,432) (6,066) (330,570)
Business acquisitions (1,531,337) (475,000) (18,822,189)
------------ ---------- ------------
Net cash used in investing activities (1,546,769) (481,066) (19,152,759)
------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit 1,120,000 0 (1,120,000)
Net borrowings from related party 0 650,000 0
Refinancing of debt 0 0 8,475,978
Payments of long-term debt (30,840) 0 (58,943)
Sale of common stock 790,000 10,000 15,500,000
Exercise of stock options 0 0 398,125
Exercise of warrants 0 0 1,450,000
------------ ---------- ------------
Net cash provided by financing activities 1,879,160 660,000 24,645,160
------------ ---------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 195,552 69,405 2,623,106
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0 0 195,552
------------ ---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 195,552 $ 69,405 $ 2,818,658
============ ========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 78,763 $ 41,377 $ 271,157
============ ========== ============
Cash paid for income taxes $ 0 $ 0 $ 0
============ ========== ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued for business acquisitions $ 257,350 $ 257,350 $ 2,000,000
============ ========== ============
Notes payable issued for noncompete agreements $ 341,130 $ 294,124 $ 0
============ ========== ============
Common stock issued for business acquisitions $ 17,120 $ 0 $ 1,392,000
============ ========== ============
Common stock issued in settlement of notes payable $ 263,685 $ 0 $ 0
============ ========== ============
Warrant issued for debt issuance costs $ 0 $ 0 $ 100,000
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE> 41
SANTI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 1998 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
SanTi Group, Inc. ("SanTi" or the "Company") was incorporated on August
19, 1997 as a Delaware corporation. The Company operates as a
consolidator of the highly fragmented nonhazardous liquid waste
management industry through acquisition of businesses with operating
service centers that treat, process, and recover nonhazardous liquid
waste to serve a variety of customers from private residences and
municipalities to large industrial companies.
Bone-Dry Enterprises, Inc. ("Bone-Dry") was incorporated on March 19,
1997 as a Georgia corporation. On December 1, 1997, all shares of
Bone-Dry common stock were exchanged for SanTi common stock. Since the
Company and Bone-Dry were under common ownership since their respective
dates of inception, the accompanying financial statements are for the
period from the inception of Bone Dry (March 19, 1997) to December 31,
1997. The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase as cash equivalents.
MACHINERY AND EQUIPMENT
Machinery and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the assets using the straight-line
method. The estimated useful lives for machinery and equipment range
from five to seven years.
INTANGIBLES
As of December 31, 1997, intangibles consist primarily of goodwill of
$1,214,228 and noncompete agreements of $259,261 associated with
business acquisitions. Noncompete agreements are being amortized over
the lives of the
F-15
<PAGE> 42
contracts. Goodwill is being amortized over 40 years. Amortization
expense associated with intangibles was $95,464 for the period from
inception (March 19, 1997) to December 31, 1997.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment and intangibles, to determine
whether any impairments are other than temporary. The Company assesses
impairment by determining whether the carrying value of such long-lived
assets will be recovered through undiscounted expected future cash
flows. No impairment losses have been recorded during the period from
inception (March 19, 1997) to December 31, 1997.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
shares outstanding. Diluted earnings per share are based on the
weighted average number of shares outstanding and the dilutive effect
of stock options outstanding (using the treasury stock method) and
contingently issuable shares. For the period from inception (March 19,
1997) to December 31, 1997, outstanding options of 612,500 and
contingently issuable shares have been excluded from diluted weighted
average shares outstanding, as their impact was antidilutive.
USE OF 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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of June 30, 1998, for the
period from inception (March 19, 1997) to June 30, 1997 and for the six
month period ended June 30, 1998, are unaudited. In the opinion of
management, these financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial statements. The results of operations for
the six month period ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the full year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is designed to improve
the reporting of changes in equity from period to period. The Company
currently has no other comprehensive income items as defined by SFAS
No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
requires that an enterprise disclose certain information about
operating segments. SFAS No. 131 is effective for financial
statements for the Company's fiscal year ending December 31, 1998.
The Company does not expect that SFAS No. 131 will require revision of
prior disclosures.
3. ACQUISITIONS
On March 20, 1997, Bone-Dry purchased certain assets of Andrews
Environmental Services, Inc. ("Andrews") associated with Andrews Grease
Disposal Business ("Andrews Grease"). Andrews Grease is in the business
of commercial and governmental grease
F-16
<PAGE> 43
extraction, collection, and transportation services primarily in the
state of Georgia. Consideration associated with the purchase was
$475,000 in cash and $257,350 in notes payable.
On August 27, 1997, Bone-Dry purchased Atlanta Grease Trap Service
("Atlanta Grease"), a Georgia sole proprietorship, for $360,000 in
cash. Atlanta Grease is in the business of commercial and governmental
grease extraction, collection, and transportation services in the state
of Georgia.
On December 22, 1997, Bone-Dry purchased substantially all of the
remaining assets of Andrews. Andrews is engaged in the nonhazardous
liquid waste and septic waste collection, transportation, management,
and disposal business primarily in the state of Georgia. Consideration
associated with the purchase was $660,000 in cash and 21,400 shares of
SanTi common stock. Contingent consideration of 13,600 shares of SanTi
common stock is payable within 90 days of the first anniversary of the
date of purchase, net of offsets for losses, as defined in the purchase
agreement.
The acquisitions of Andrews Grease, Atlanta Grease, and Andrews were
accounted for using the purchase method of accounting; accordingly, the
purchase prices have been allocated to the assets acquired based on
their respective fair values at the dates of acquisition. The resulting
excess of purchase prices over fair values of assets acquired was
recorded as goodwill. Goodwill recorded in the purchases of Andrews
Grease, Atlanta Grease, and Andrews was $482,350, $360,000, and
$349,136, respectively.
The Company's unaudited pro forma consolidated results of operations
for the period from inception (March 19, 1997) to December 31, 1997
shown below are presented assuming that the December 22, 1997
acquisition of Andrews had been consummated on March 19, 1997:
<TABLE>
<S> <C>
Pro forma revenue $1,778,126
Pro forma net (loss) (256,113)
Pro forma (loss) per share $ (.27)
</TABLE>
The Company's unaudited pro forma results of operations are presented
for informational purposes only and may not necessarily reflect the
future results of operations of the Company or what the results of
operations would have been had the Company owned and operated Andrews
as of March 19, 1997. The Company's acquisition of Atlanta Grease is
not significant for purposes of presenting pro forma information.
Subsequent to year-end, the Company acquired the following businesses:
- On January 22, 1998, the Company purchased Ferrero
Wastewater Management, Inc. ("Ferrero"), a
Pennsylvania corporation. Ferrero is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Ambler, Pennsylvania.
Consideration was $2,240,100 in cash and 90,000
shares of SanTi common stock. Contingent
consideration of $248,900 in cash and 10,000 shares
of SanTi common stock is payable 270 days after the
date of purchase, net of offsets for losses, as
defined in the purchase agreement.
F-17
<PAGE> 44
- On February 13, 1998, the Company purchased A Rapid
Rooter Sewer & Drain Service, Inc. ("A Rapid"), a
Florida corporation. A Rapid is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Pompano Beach, Florida.
Consideration was $3,990,120 in cash and 100,000
shares of SanTi common stock.
- On February 17, 1998, the Company purchased Quality
Plumbing and Septic, Inc. ("Quality"), a Georgia
corporation. Quality is engaged in the nonhazardous
liquid waste and septic waste collection,
transportation, management, and disposal business in
and around Douglasville, Georgia. Consideration was
$2,000,000 in cash. Contingent consideration of
$250,000 and 10,000 shares of SanTi common stock is
payable 120 days after the date of purchase, net of
offsets for losses, as defined in the purchase
agreement. In June 1998, all contingent consideration
was paid to Quality in accordance with the purchase
agreement.
- On March 6, 1998, the Company purchased Seagraves,
Inc. (d/b/a Brownie Environmental) and Grease-Tec,
Inc. (collectively, "Seagraves"), two Florida
corporations. Seagraves is engaged in the
nonhazardous liquid waste and septic waste
collection, transportation, management, and disposal
business in and around Orlando, Florida.
Consideration was $3,250,000 in cash, a note payable
of $2,000,000, and 60,000 shares of SanTi common
stock.
- On May 1, 1998, the Company purchased RGM Liquid
Waste Removal Corporation and Affiliates ("RGM"),
consisting of four New York corporations. RGM is
engaged in the nonhazardous liquid waste and septic
waste collection, transportation, management, and
disposal business in and around Long Island, New
York. Consideration was $4,500,000 in cash and
105,000 shares of SanTi common stock. Contingent
consideration of $1,000,000 and 55,000 shares of
SanTi common stock is payable 365 days after the date
of purchase, net of offsets for losses, as defined in
the purchase agreement.
- On May 8, 1998, the Company purchased Eldredge
Wastewater Management, Inc., a Pennsylvania
corporation. Eldredge is engaged in the nonhazardous
liquid waste and septic waste collection,
transportation, management, and disposal business in
and around Philadelphia, Pennsylvania. Consideration
was $2,040,000 in cash and 85,000 shares of SanTi
common stock. Contingent consideration of $360,000
and 15,000 shares of SanTi common stock is payable 13
months after the date of purchase, net of offsets for
losses, as defined in the purchase agreement.
4. LINE OF CREDIT
At December 31, 1997, the Company had a $6,600,000 revolving line of
credit (the "Revolver"). The Revolver has an interest rate of LIBOR
plus 2.25% (8.21% at December 31, 1997) and is secured by substantially
all assets of the Company. At December 31, 1997, $1,120,000 was
outstanding and $5,480,000 was available for future borrowings. The
F-18
<PAGE> 45
Revolver matures August 12, 1998, is renewable for successive one-year
periods, and is personally guaranteed by the majority owner of the
Company. Subsequent to year-end, the Company borrowed funds under the
majority owner's personal line of credit. These borrowings were used to
finance the Company's acquisitions of businesses discussed in Note 3.
In June 1998, the lines of credit were paid in full in conjunction with
the Company obtaining new financing from another bank (Note 10).
5. LONG-TERM DEBT
At December 31, 1997, long-term debt consisted of the following:
<TABLE>
<S> <C>
Subordinated notes payable to former owners of acquired
businesses, interest imputed at 8.1%, payable in various
installments through April 1, 2000, unsecured $ 303,955
Less current portion (123,715)
---------
$ 180,240
=========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as
of December 31, 1997:
<TABLE>
<S> <C>
1998 $123,715
1999 103,431
2000 76,809
--------
$303,955
========
</TABLE>
6. RELATED-PARTY TRANSACTIONS
In 1997, the Company entered into a note payable agreement with an
entity controlled by the Company's majority owner. The note was for
$650,000, had an interest rate of 13%, and was paid in full during
1997. In December 1997, after the note was paid in full, the related
party purchased 1,608,750 shares of SanTi common stock for $650,000.
In March 1997, the Company entered into a four-year consulting
agreement with a former owner of an acquired business. The Company paid
its obligation of $75,000 in full during 1997, as required by the
agreement, and is recognizing the expense over the life of the
agreement. For the period from inception (March 19, 1997) to December
31, 1997, consulting expense related to the agreement was $13,021 and
is included in general and administrative expenses in the accompanying
statement of operations.
During 1997, the Company entered into three noncompete agreements with
former owners of acquired businesses in exchange for notes payable
totaling $341,130. In connection with the December 22, 1997 purchase of
Andrews, one of the former owners of Andrews exchanged $263,685 of
outstanding notes payable, issued in connection with the March 1997
purchase of Andrews Grease, for 14,479 shares of SanTi common stock.
F-19
<PAGE> 46
LEASES
The Company leases office space and equipment from an entity controlled
by the Company's majority owner under a lease agreement which expires
January 31, 1998 and is renewable for successive one-month periods.
Rental expense under the lease was $11,690 for the period from
inception (March 19, 1997) to December 31, 1997.
7. STOCK-BASED COMPENSATION
In August 1997 and December 1997, the Company issued nonqualified stock
options to purchase 125,000 and 487,500 SanTi common stock,
respectively, at $.65 per share, which represented the fair market
value as of the dates of grant as determined by the Company's board of
directors. The options are exercisable for a period of three years
beginning on the dates of grant. See Note 10 where exercised
subsequent to year end.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock options granted. Had
compensation cost for the Company's stock options granted been
determined consistent with the provisions of SFAS No. 123, the
Company's net loss would have been increased to the pro forma amount
indicated below for the period from inception (March 19, 1997) to
December 31, 1997.
<TABLE>
<S> <C>
Net (loss), as reported $(258,352)
Net (loss), pro forma (322,729)
Pro forma net (loss) per share (.35)
</TABLE>
The fair values of options granted were estimated on the date of grant
using the minimum value approach, an expected life of three years, and
risk-free interest rate of 5.88%.
8. INCOME TAXES
The accompanying financial statements include an income tax benefit
computed in accordance with SFAS No. 109, "Accounting for Income
Taxes." The following summarizes the components of the income tax
benefit:
<TABLE>
<S> <C>
Current provision $ 0
Deferred taxes 163,632
--------
Income tax benefit $163,632
========
</TABLE>
Reconciliation from the federal statutory rate to the actual income tax
benefit is as follows:
<TABLE>
<S> <C>
Statutory federal tax rate (34.0)%
State income taxes, net of federal tax benefit (5.0)
Other 2.3
-----
(36.7)%
=====
</TABLE>
F-20
<PAGE> 47
The sources of differences between the financial accounting and tax
bases of the Company's assets and liabilities which give rise to the
deferred tax asset and liabilities and the tax effects of each are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 6,971
Intangibles 17,210
Accrued expenses 58,500
Net operating loss carryforward 107,471
---------
Total deferred tax assets 190,152
Deferred tax liability:
Depreciation (26,520)
---------
Net deferred tax asset $ 163,632
=========
</TABLE>
As of December 31, 1997, deferred tax assets include a net operating
loss carryforward of $275,566 which is available to offset future
taxable income through 2012. Realization of the net deferred tax asset
is dependent on generating sufficient taxable income in future periods.
Although realization is not assured, management believes it is more
likely than not that the net deferred tax asset will be realized.
9. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and
local environmental laws and regulations that have been enacted in
response to technological advances and the public's increased concern
over environmental issues. The majority of the expenditures necessary
to comply with the environmental laws and regulations is made in the
normal course of business. The Company, to the best of its knowledge,
is in compliance, in all material respects, with the laws and
regulations affecting its operations.
10. SUBSEQUENT EVENTS
On January 12, 1998, a group of investors purchased 1,250,000 shares of
the Company's common stock for $.80 per share.
On January 30, 1998, the Company declared a 1.25-for-1 stock split
effected in the form of a stock dividend. All share amounts have been
restated for this stock split.
During March and April, 1998, the Company sold 2,500,000 shares of its
common stock through private offerings. Proceeds from the offerings
totaled $14.5 million.
In connection with certain 1998 acquisitions, the Company has entered
into employment agreements with 8 employees. Upon termination of
employment (other than voluntarily by the employee or by the Company
for cause or upon death of the employee), the Company is committed to
pay certain benefits, including specified monthly severance of not more
than $6,667 per month. The benefits are to be paid from the date of
termination to dates ranging from January 22, 1999 to March 6, 2001.
On April 30, 1998, certain employees of the Company exercised
options to purchase 612,500 shares at a price of $.65 per share.
On May 13, 1998, pursuant to a Plan of Reorganization in the United
States Bankruptcy Court, Microlytics, Inc. ("Microlytics") completed a
merger (the "Merger") with the Company. Under the terms of the Merger,
each outstanding share of SanTi common stock was exchanged for one
share of Microlytics common stock. Immediately prior to the Merger,
Microlytics had 1,027,066 shares of common stock outstanding and
warrants to purchase an additional 500,000 shares with an exercise
price of $5.80, of which 250,000 were exercised immediately following
the Merger. The Merger resulted in the receipt by SanTi shareholders of
approximately 8,088,379 shares of common stock,
F-21
<PAGE> 48
representing approximately 86.2% of the Microlytics shares outstanding
on the effective date of the Merger. As a result of the Merger, SanTi
was merged into Microlytics and Microlytics' certificate of
incorporation was amended as of the effective date of the Merger to
change Microlytics' name to SanTi. The Merger was accounted for as a
capital transaction accompanied by a recapitalization of SanTi. All
costs incurred in connection with the Merger were expensed.
On June 1, 1998, the Company entered into employment agreements with
three executive officers which provide for minimum aggregate annual
compensation of $575,000. The agreements expire either June 1, 2000 or
June 1, 2003, and automatically renew for twelve month periods. Upon
termination of employment related to the change in control of the
Company, the Company is committed to immediately pay in full the
minimum compensation for each of the remaining years or portion
thereof.
On June 26, 1998, the Company entered into a $40 million revolving
credit facility with a bank. The Company may also obtain up to $5
million in letters of credit, subject to availability under the
facility. Interest is payable monthly at variable rates, depending on
the Company's current debt to cash flow ratio, but is capped at LIBOR
plus 2.5%. The facility expires June 26, 2001, is secured by a first
lien on substantially all assets of the Company and requires the
Company to maintain certain financial ratio covenants beginning
September 30, 1998. The Company granted the bank a five-year warrant to
purchase 50,000 shares of common stock at $13 per share in lieu of
issuance costs. The warrant was valued at $100,000 using the Black-
Scholes pricing model.
On June 29, 1998, three executive officers received options to purchase
an aggregate of 1,250,000 shares of common stock as follows; 400,000
exercisable at $6 per share, 350,000 exercisable at $15 per share and
500,000 exercisable at $25 per share.
F-22
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrews Environmental Services, Inc.:
We have audited the accompanying balance sheet of ANDREWS ENVIRONMENTAL
SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1996 and the period from January 1, 1997 to December
21, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Andrews Environmental Services,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the years ended December 31, 1995 and 1996 and the period from January
1, 1997 to December 21, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 18, 1998
F-23
<PAGE> 50
ANDREWS ENVIRONMENTAL SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996
- ------------------------------------------------------ ------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,414
Accounts receivable, net of allowance for
doubtful accounts of $9,300 177,166
Due from related party 51,202
Prepaid expenses and other 25,588
Deferred income taxes 3,575
----------
Total current assets 271,945
PROPERTY AND EQUIPMENT, NET 830,102
----------
$1,102,047
==========
<CAPTION>
LIABILITIES AND DECEMBER 31,
STOCKHOLDERS' EQUITY 1996
- ------------------------------------------------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 142,364
Accrued expenses 19,983
Income taxes payable 10,148
Current portion of long-term debt 229,638
----------
Total current liabilities 402,133
----------
LONG-TERM DEBT, NET OF CURRENT PORTION 310,221
----------
DEFERRED INCOME TAXES 118,752
----------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value, $.50 stated
value; 1,000,000 shares authorized, 1,000
shares issued and outstanding 500
Retained earnings 270,441
----------
Total stockholders' equity 270,941
----------
$1,102,047
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-24
<PAGE> 51
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 PERIOD FROM SIX-MONTH
------------------------ JANUARY 1, 1997 TO PERIOD ENDED
1995 1996 DECEMBER 21, 1997 JUNE 30, 1997
----------- ----------- ------------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 1,499,392 $ 1,832,043 $ 1,218,268 $ 638,994
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations 615,069 785,996 625,892 307,005
General and administrative 754,580 757,655 646,273 324,542
Depreciation and amortization 94,948 122,296 121,496 71,229
----------- ----------- ----------- -----------
Total expenses 1,464,597 1,665,947 1,393,661 702,776
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 34,795 166,096 (175,393) (63,782)
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense 45,475 70,868 22,077 16,760
Other, net 7,404 (2,500) (204,124) (195,794)
----------- ----------- ----------- -----------
52,879 68,368 (182,047) (179,034)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (18,084) 97,728 6,654 115,252
PROVISION (BENEFIT) FOR INCOME TAXES (3,304) 39,094 4,334 44,026
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (14,780) $ 58,634 $ 2,320 $ 71,226
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 52
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,000 $ 500 $ 226,587 $ 227,087
Net loss 0 0 (14,780) (14,780)
------ ------ --------- ---------
BALANCE, DECEMBER 31, 1995 1,000 500 211,807 212,307
Net income 0 0 58,634 58,634
------ ------ --------- ---------
BALANCE, DECEMBER 31, 1996 1,000 500 270,441 270,941
Purchase of treasury stock (585) (292) (136,108) (136,400)
Net income 0 0 2,320 2,320
------ ------ --------- ---------
BALANCE, DECEMBER 21, 1997 415 $ 208 $ 136,653 $ 136,861
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 53
ANDREWS ENVIRONMENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 PERIOD FROM SIX-MONTH
---------------------- JANUARY 1, 1997 TO PERIOD ENDED
1995 1996 DECEMBER 21, 1997 JUNE 30, 1997
--------- --------- ------------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (14,780) $ 58,634 $ 2,320 $ 71,226
--------- --------- --------- ---------
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 94,948 122,296 121,496 71,229
Gain on sale of fixed assets 0 0 (204,124) (196,125)
Changes in assets and liabilities:
Accounts receivable 25,101 (72,882) 68,676 13,325
Prepaid expenses and other 9,233 13,694 (24,555) 5,957
Due from related party 0 (51,202) (60,152) (37,427)
Deferred taxes (3,304) 28,946 (29,905) (309)
Accounts payable (14,990) 51,664 (11,633) 49,478
Accrued expenses 9,457 (579) 238 (3,973)
Income taxes payable 0 10,148 34,239 0
--------- --------- --------- ---------
Total adjustments 120,445 102,085 (105,720) (97,845)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities 105,665 160,719 (103,400) (26,619)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (229,810) (249,024) (144,745) (41,555)
Proceeds from sales of fixed assets 56,358 0 425,000 412,686
--------- --------- --------- ---------
Net cash (used in) provided by
investing activities (173,452) (249,024) 280,255 371,131
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 206,075 321,504 194,679 0
Repayments of long-term debt (137,693) (219,380) (247,677) (210,580)
Purchase of treasury stock 0 0 (136,400) (136,400)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 68,382 102,124 (189,398) (346,980)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 595 13,819 (12,543) (2,468)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 0 595 14,414 14,414
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 595 $ 14,414 $ 1,871 $ 11,946
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 45,475 $ 43,275 $ 38,352 $ 16,320
========= ========= ========= =========
Cash paid for income taxes $ 207 $ 1,644 $ 10 $ 10
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 54
ANDREWS ENVIRONMENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Andrews Environmental Services, Inc. ("Andrews" or the "Company"), a Georgia
corporation, operates a service center that treats, processes, and recovers
nonhazardous liquid waste to serve a variety of customers from private
residences and municipalities to large industrial companies.
On March 20, 1997, certain assets of the Company associated with its grease
disposal business were sold to SanTi Group, Inc. ("SanTi"). The grease
disposal business was primarily involved with commercial and governmental
grease extraction, collection, and transportation services. Consideration
associated with the sale was $475,000 in cash and $257,350 in notes
receivable. In conjunction with the sale, the Company recorded a gain on the
sale of fixed assets of $204,124 which is included in other income in the
accompanying statement of operations for the period from January 1, 1997 to
December 21, 1997.
On December 22, 1997, substantially all of the remaining property and
equipment and the ongoing business of the Company were sold to SanTi.
Consideration was $660,000 in cash and 21,400 shares of SanTi common
stock. Contingent consideration of 13,600 shares of SanTi common stock is
receivable within 90 days of the first anniversary of the date of purchase,
net of offsets for losses, as defined in the sale agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region. No single customer accounted for a
significant amount of the Company's sales, and there are no significant
accounts receivable from a single customer. The Company reviews a customer's
credit history before extending credit. The Company establishes an allowance
for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other information.
F-28
<PAGE> 55
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method. The
estimated useful lives for machinery and equipment and office equipment range
from 5 to 7 years. The building is depreciated over an estimated useful life
of 40 years.
At December 31, 1996, property and equipment consisted of the following:
<TABLE>
<S> <C>
Machinery and equipment $ 1,040,874
Office equipment 29,385
Building 162,686
Land 2,000
-----------
1,234,945
Less accumulated depreciation (404,843)
-----------
$ 830,102
===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value of
such long-lived assets will be recovered through undiscounted expected future
cash flows. No impairment losses have been recorded in the accompanying
results of operations.
USE OF 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the six-month period ended June
30, 1997 are unaudited. In the opinion of the management of Andrews, these
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
F-29
<PAGE> 56
3. LONG-TERM DEBT
At December 31, 1996, long-term debt consisted of the following:
<TABLE>
<S> <C>
Equipment loans, interest at varying rates between 8.5%
and 16.3%, interest and principal due in monthly
installments through 2002, secured by related equipment $ 453,094
Line of credit 83,789
Loan from stockholder (Note 4) 2,976
---------
539,859
Less current portion (229,638)
---------
$ 310,221
=========
</TABLE>
At December 31, 1996, the Company had a $100,000 revolving line of credit
(the "Revolver"). The Revolver has an interest rate of prime plus 2% (10.25%
at December 31, 1996). At December 31, 1996, $83,789 was outstanding and
$16,211 was available for future borrowings. The Revolver matures July 15,
1998, is renewable for successive one-year periods, is personally guaranteed
by the Company's majority stockholder, and is secured by substantially all
assets of the Company.
On December 21, 1997, in conjunction with the sale of the Company's remaining
assets (Note 1), the Revolver and all equipment loans were paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's majority stockholder advances monies to the Company from time
to time to maintain certain working capital levels, as needed. At December
31, 1996, the Company was indebted to the majority stockholder for $2,976,
which is included in current portion of long-term debt in the accompanying
balance sheet.
During 1997, the Company had repairs and maintenance performed on its trucks
by an entity owned by the Company's majority stockholder. For the period from
January 1, 1997 to December 21, 1997, the Company incurred $32,371 of expense
for these services, which is included in cost of operations in the
accompanying statement of operations.
The Company advances monies from time to time to an entity owned by the
Company's majority stockholder to enable that entity to maintain certain
levels of working capital. At December 31, 1996, the related entity owed the
Company $51,202, which is included in the accompanying balance sheet as due
from related party.
The Company performs services from time to time for an entity owned by a
stockholder of the Company. Revenues from this entity totaled $11,111,
$7,683, and $0 for the years ended December 31, 1995 and 1996 and for the
period from January 1, 1997 to December 21, 1997, respectively.
F-30
<PAGE> 57
5. INCOME TAXES
The accompanying financial statements reflect the provision (benefit) for
income taxes computed in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
following summarizes the components of the income tax provision (benefit) for
the years ended December 31, 1995 and 1996 and for the period from January 1,
1997 to December 21, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current taxes $ 0 $ 10,148 $ 28,165
Deferred taxes (3,304) 28,946 (29,905)
-------- -------- --------
Provision (benefit) for income taxes $ (3,304) $ 39,094 $ (1,740)
======== ======== ========
</TABLE>
Reconciliation from the federal statutory rate to the actual provision
(benefit) for the years ended December 31, 1995 and 1996 and for the period
from January 1, 1997 to December 21, 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate (34.0)% 34% 34.0%
State income taxes, net of federal tax benefit (4.0) 4 4.0
Other 19.7 2 27.1
-------- -------- --------
(18.3)% 40% 65.1%
======== ======== ========
</TABLE>
The components of the net deferred tax liability as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 3,530
Other 45
---------
Total deferred tax asset 3,575
Deferred tax liability:
Depreciation (118,752)
---------
Net deferred tax liability $(115,177)
=========
</TABLE>
6. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations that have been enacted in response to
technological advances and the public's increased concern over environmental
issues. The majority of the expenditures necessary to comply with the
environmental laws and regulations are made in the normal course of business.
The Company, to the best of its knowledge, is in compliance, in all material
respects, with the laws and regulations affecting its operations.
F-31
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ferrero Wastewater Management, Inc.:
We have audited the accompanying balance sheets of FERRERO WASTEWATER
MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Ferrero Wastewater Management,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 1998
F-32
<PAGE> 59
FERRERO WASTEWATER MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
ASSETS 1996 1997
- ------------------------------------------------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,383 $ 40,201
Accounts receivable, net of allowance for
doubtful accounts of $50,000 in 1996 and 1997 308,187 379,852
Prepaid expenses and other 68,280 22,034
---------- ----------
Total current assets 383,850 442,087
PROPERTY AND EQUIPMENT, NET 698,934 903,774
OTHER ASSETS 11,740 26,477
---------- ----------
$1,094,524 $1,372,338
========== ==========
<CAPTION>
DECEMBER 31
LIABILITIES AND --------------------
STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 350,879 $ 185,551
Accrued expenses 35,288 48,304
Due to stockholder 43,716 81,580
Current portion of long-term debt 109,802 128,454
---------- ----------
Total current liabilities 539,685 443,889
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 244,566 607,743
---------- ----------
COMMITMENTS (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; 250 shares
authorized, 50 shares issued and
outstanding 5,000 5,000
Retained earnings 305,273 315,706
---------- ----------
Total stockholders' equity 310,273 320,706
---------- ----------
$1,094,524 $1,372,338
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE> 60
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX-MONTH PERIOD FROM
--------------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 JUNE 30, 1997 JANUARY 22, 1998
---------- ----------- ----------- ------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $2,864,459 $ 2,866,758 $ 4,122,100 $ 1,737,870 $ 257,982
---------- ----------- ----------- ----------- ---------
EXPENSES:
Cost of operations 1,693,181 1,913,700 2,797,821 1,191,091 175,443
General and administrative 722,523 773,286 1,045,315 521,051 73,399
Depreciation and amortization 253,874 287,742 220,432 120,627 23,334
---------- ----------- ----------- ----------- ---------
Total expenses 2,669,578 2,974,728 4,063,568 1,832,769 272,176
---------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS 194,881 (107,970) 58,532 (94,899) (14,194)
---------- ----------- ----------- ----------- ---------
OTHER EXPENSE (INCOME):
Interest expense 51,226 48,024 50,920 21,302 5,913
Other, net 11,402 (22,404) (2,821) (269) (33)
---------- ----------- ----------- ----------- ---------
62,628 25,620 48,099 21,033 5,880
---------- ----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 132,253 $ (133,590) $ 10,433 $ (115,932) $ (20,074)
========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE> 61
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ ---------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $5,000 $ 362,610 $ 367,610
Distribution to stockholder 0 (56,000) (56,000)
Net income 0 132,253 132,253
------ --------- ---------
BALANCE, DECEMBER 31, 1995 5,000 438,863 443,863
Net (loss) 0 (133,590) (133,590)
------ --------- ---------
BALANCE, DECEMBER 31, 1996 5,000 305,273 310,273
Net income 0 10,433 10,433
------ --------- ---------
BALANCE, DECEMBER 31, 1997 5,000 315,706 320,706
Net (loss) 0 (20,074) (20,074)
------ --------- ---------
BALANCE, JANUARY 22, 1998 (UNAUDITED) $5,000 $ 295,632 $ 300,632
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE> 62
FERRERO WASTEWATER MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX-MONTH PERIOD FROM
----------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 JUNE 30, 1997 JANUARY 22, 1998
--------- --------- --------- -------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 132,253 $(133,590) $ 10,433 $(115,932) $(20,074)
--------- --------- --------- --------- --------
Adjustments to reconcile net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 253,874 287,742 220,432 120,627 23,334
Loss (gain) on sale of fixed assets 8,402 (17,019) 0 0 0
Changes in assets and liabilities:
Accounts receivable 7,721 5,928 (71,665) 19,076 (10,844)
Prepaid expenses and other (9,850) (56,030) 46,246 (9,000) 0
Other assets 62,096 10,553 (14,737) 2,643 12,977
Accounts payable 70,390 93,525 (165,328) 80,767 33,571
Accrued expenses 21,580 (21,295) 13,016 10,703 2,670
--------- --------- -------- --------- --------
Total adjustments 414,213 303,404 27,964 224,816 61,708
--------- --------- -------- --------- --------
Net cash provided by operating activities 546,466 169,814 38,397 108,884 41,634
--------- --------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 0 20,949 0 0 0
Capital expenditures (532,674) (158,843) (425,272) (446,512) 0
--------- --------- -------- --------- --------
Net cash used in investing activities (532,674) (137,894) (425,272) (446,512) 0
--------- --------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 163,327 74,830 728,568 280,162 0
Payments of long-term debt (192,491) (157,972) (346,739) (38,858) (3,635)
Net borrowings from stockholder 15,500 28,216 37,864 93,999 (67,603)
Distribution to stockholder (56,000) 0 0 0 0
--------- --------- --------- --------- --------
Net cash (used in) provided by financing
activities (69,664) (54,926) 419,693 335,303 (71,238)
--------- --------- --------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (55,872) (23,006) 32,818 (2,325) (29,604)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 86,261 30,389 7,383 7,383 40,201
--------- --------- --------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,389 $ 7,383 $ 40,201 $ 5,058 $ 10,597
========= ========= ========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 28,210 $ 43,389 $ 50,920 $ 20,053 $ 3,530
========= ========= ========= ========= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment traded in for capital expenditures $ 0 $ 0 $ 41,464 $ 0 $ 0
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE> 63
FERRERO WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Ferrero Wastewater Management, Inc. (the "Company") designs, constructs,
repairs, maintains, and operates on-site sewage disposal systems, primarily
in metropolitan Philadelphia, Pennsylvania.
Nutrecon, Inc. disposed of the waste collected by the Company. On January
1, 1997, the net assets of Nutrecon, Inc. were transferred to the Company.
Since the companies were under common ownership from their respective dates
of inception, the accompanying financial statements of the Company include
the accounts of Nutrecon, Inc. for all periods presented. All material
intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region and in one line of business. No
single customer accounted for a significant amount of the Company's sales,
and there are no significant accounts receivable from a single customer.
The Company reviews a customer's credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method.
The estimated useful lives for
F-37
<PAGE> 64
machinery and equipment and office equipment range from five to seven
years. Buildings are depreciated over 20 years.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Machinery and equipment $ 1,803,675 $ 2,175,946
Buildings and improvements 308,071 349,941
Office equipment 78,236 82,445
----------- -----------
2,189,982 2,608,332
Less accumulated depreciation (1,491,048) (1,704,558)
----------- -----------
$ 698,934 $ 903,774
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
USE OF 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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the six-month period ended
June 30, 1997, and for the period from January 1, 1998 through January
22, 1998 are unaudited. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
through January 22, 1998 are not necessarily indicative of future results
of the Company.
INCOME TAXES
The Company has elected, for federal and state income tax purposes, S
corporation tax status whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provision for income
taxes is recorded.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
F-38
<PAGE> 65
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Loans from banks, interest at 9.25%, interest and principal due
in monthly payments through 2003; secured by substantially all
assets of the Company $ 184,251 $348,035
Equipment loans, interest at varying rates between
7.25% and 12.5%, interest and principal due in monthly
installments through 2003, secured by related equipment 170,117 388,162
--------- --------
354,368 736,197
Less current portion 109,802 128,454
--------- --------
$ 244,566 $607,743
========= ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $ 128,454
1999 122,456
2000 115,386
2001 103,520
2002 and thereafter 266,381
---------
$ 736,197
=========
</TABLE>
In February 1998, in conjunction with the sale of the business (Note 7),
all related long-term debt was paid in full.
4. RELATED-PARTY TRANSACTION
The Company's majority stockholder makes advances to the Company from time
to time to better manage cash flows and maintain adequate working capital.
At December 31, 1996 and 1997, the amounts owed to the majority stockholder
were $43,716 and $81,580, respectively. In February 1998, the amount owed
to the majority stockholder was paid in full (Note 7).
5. BENEFIT PLAN
Employees of the Company are eligible to participate in a
company-maintained salary reduction simplified employee pension plan (the
"Plan"). The Company has the option to contribute a profit-sharing portion
to the Plan each year. During the years ended December 31, 1995, 1996, and
1997, no such contributions were made.
F-39
<PAGE> 66
6. LEASES
The Company leases its facility under a noncancelable operating lease.
Rental expense during 1995, 1996, and 1997 was $84,943, $67,734, and
$72,000, respectively. Future minimum lease payments under the current
lease agreement are $72,000 per year through December 31, 1999.
7. SUBSEQUENT EVENT
On January 22, 1998, substantially all property and equipment and the
ongoing business of the Company were sold to SanTi Group, Inc.
("SanTi") for $2,240,100 in cash and 90,000 shares of SanTi common
stock. Contingent consideration of $248,900 in cash and 10,000 shares of
SanTi common stock are receivable 270 days after the date of purchase,
net of offset for losses, as defined in the purchase agreement. Prior to
the closing, all related long-term debt was paid in full to convey the
assets to SanTi free and clear of all encumbrances and liens.
F-40
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A Rapid Rooter Sewer & Drain Service, Inc.:
We have audited the accompanying balance sheets of A RAPID ROOTER SEWER & DRAIN
SERVICE, INC. (a Florida corporation) as of December 31, 1996 and 1997 and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of A Rapid Rooter Sewer & Drain
Service, Inc. as of December 31, 1996 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 8, 1998
F-41
<PAGE> 68
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 134,110 $ 303,291
Accounts receivable, net of allowance for doubtful accounts of
$10,000 in 1996 and 1997 313,426 259,860
Loans to stockholders 76,787 134,257
Notes receivable 58,503 0
Prepaid expenses 16,090 16,090
---------- ----------
Total current assets 598,916 713,498
PROPERTY AND EQUIPMENT, NET 903,299 922,582
---------- ----------
$1,502,215 $1,636,080
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 99,935 $ 161,337
Accrued expenses 56,783 59,759
Current portion of long-term debt 251,695 269,278
---------- ----------
Total current liabilities 408,413 490,374
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 551,542 590,380
---------- ----------
COMMITMENTS (NOTES 4 AND 5)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 7,500 shares authorized, 100 shares
issued and outstanding 100 100
Additional paid-in capital 3,249 3,249
Retained earnings 538,911 551,977
---------- ----------
Total stockholders' equity 542,260 555,326
---------- ----------
$1,502,215 $1,636,080
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-42
<PAGE> 69
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX-MONTH PERIOD FROM
---------------------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 JUNE 30, 1997 FEBRUARY 13, 1998
----------- ----------- ---------- ------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 4,201,989 $ 4,820,398 $4,629,655 $ 2,249,356 $ 680,870
----------- ----------- ---------- ----------- ---------
EXPENSES:
Cost of operations 2,139,783 2,270,988 2,364,794 1,153,277 338,971
General and administrative 1,564,497 1,702,588 1,730,394 779,059 244,591
Depreciation and amortization 233,730 291,293 319,001 159,143 41,476
----------- ----------- ---------- ----------- ---------
Total expenses 3,938,010 4,264,869 4,414,189 2,091,479 625,038
----------- ----------- ---------- ----------- ---------
INCOME FROM OPERATIONS 263,979 555,529 215,466 157,877 55,832
----------- ----------- ---------- ----------- ---------
OTHER EXPENSE (INCOME):
Interest expense 64,116 85,789 86,367 36,482 11,148
Other, net (33,597) (97,058) 27,413 (867) (476)
----------- ----------- ---------- ----------- ---------
30,519 (11,269) 113,780 35,615 10,672
----------- ----------- ---------- ----------- ---------
NET INCOME $ 233,460 $ 566,798 $ 101,686 $ 122,262 $ 45,160
=========== =========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 70
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 100 $ 3,249 $ 312,757 $ 316,106
Distributions to stockholders 0 0 (267,500) (267,500)
Net income 0 0 233,460 233,460
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1995 100 3,249 278,717 282,066
Distributions to stockholders 0 0 (306,604) (306,604)
Net income 0 0 566,798 566,798
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1996 100 3,249 538,911 542,260
Distributions to stockholders 0 0 (88,620) (88,620)
Net income 0 0 101,686 101,686
------ ---------- --------- ---------
BALANCE, DECEMBER 31, 1997 100 3,249 551,977 555,326
Distributions to stockholders 0 0 0 0
Net income 0 0 45,160 45,160
------ ---------- --------- ---------
BALANCE, FEBRUARY 13, 1998 (UNAUDITED) $ 100 $ 3,249 $ 597,137 $ 600,486
====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE> 71
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX-MONTH PERIOD FROM
--------------------------------- PERIOD ENDED JANUARY 1, 1998 TO
1995 1996 1997 JUNE 30, 1997 FEBRUARY 13, 1998
--------- --------- --------- -------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 233,460 $ 566,798 $ 101,686 $ 122,262 $ 45,160
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 233,730 291,293 319,001 159,143 41,476
(Gain) loss on disposal of fixed assets (21,727) (74,606) (15,665) 27,177 0
Changes in assets and liabilities:
Accounts receivable 22,784 (89,315) 53,566 82,723 8,968
Notes receivable 0 (58,503) 58,503 0 0
Prepaid expenses and other 9,000 300 0 12,757 (1,573)
Accounts payable 8,486 (7,380) 61,402 (20,976) (37,949)
Accrued expenses 1,538 6,914 2,976 (51,686) 2,965
--------- --------- --------- --------- ---------
Total adjustments 253,811 68,703 479,783 209,138 13,887
--------- --------- --------- --------- ---------
Net cash provided by operating activities 487,271 635,501 581,469 331,400 59,047
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed assets 97,652 83,658 54,766 0 0
Capital expenditures (788,903) (184,510) (341,859) (9,700) (291)
--------- --------- --------- --------- ---------
Net cash used in investing activities (691,251) (100,852) (287,093) (9,700) (291)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 729,528 169,407 306,333 0 0
Payments of long-term debt (315,906) (288,568) (285,438) (109,165) (30,160)
Net borrowings of stockholders 11,824 (66,061) (57,470) (119,191) (56,366)
Distributions to stockholders (267,500) (306,604) (88,620) 0 0
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 157,946 (491,826) (125,195) (228,356) (86,526)
--------- --------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (46,034) 42,823 169,181 93,344 (27,770)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 137,321 91,287 134,110 134,110 303,291
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 91,287 $ 134,110 $ 303,291 $ 227,454 $ 275,521
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 64,116 $ 85,789 $ 86,367 $ 34,625 $ 11,148
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 72
A RAPID ROOTER SEWER & DRAIN SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
A Rapid Rooter Sewer & Drain Service, Inc. (the "Company") designs,
constructs, repairs, maintains, and operates on-site sewage disposal systems,
primarily in and around Pompano Beach, Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase as cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables. The Company's customers are
concentrated in one geographic region and in one line of business. No single
customer accounted for a significant amount of the Company's sales, and there
are no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based on factors surrounding
the credit risk of specific customers, historical trends, and other
information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line method. The
estimated useful lives for machinery and equipment and office equipment range
from five to seven years. Leasehold improvements are depreciated over the
shorter of the term of the lease or the useful life of the improvements.
F-46
<PAGE> 73
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Machinery and equipment $ 1,840,443 $ 1,984,504
Office equipment 65,406 67,782
Leasehold improvements 19,473 19,473
----------- -----------
1,925,322 2,071,759
Less accumulated depreciation (1,022,023) (1,149,177)
----------- -----------
$ 903,299 $ 922,582
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value of
such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
USE OF 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of February 13, 1998, for the
six-month period ended June 30, 1997, and for the period from January 1,
1998 through February 13, 1998 are unaudited. In the opinion of management,
these financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
through February 13, 1998 are not necessarily indicative of future results of
the Company.
INCOME TAXES
For federal and state income tax purposes, the Company has elected S
corporation tax status whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provision for income taxes
is recorded. Amounts are distributed to stockholders for making applicable
tax payments, and are included in distributions to stockholders in the
accompanying statements of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
F-47
<PAGE> 74
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Equipment loans, interest at varying rates
between 7.25% and 12.5%, interest and
principal due in monthly installments
through 2003, secured by related equipment $ 803,237 $ 859,658
Less current portion 251,695 269,278
----------- -----------
$ 551,542 $ 590,380
=========== ===========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $269,278
1999 240,547
2000 181,433
2001 89,506
2002 and thereafter 78,894
--------
$859,658
========
</TABLE>
In February 1998, in conjunction with the sale of the business (Note 6), all
long-term debt was paid in full.
4. BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company matches 25% of
employee contributions to the plan up to 5% of employee compensation. Company
contributions for the years ended December 31, 1995, 1996, and 1997 were
$7,581, $7,720, and $9,792, respectively.
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders borrow from the Company from time to time to make
estimated tax payments on income taxed at the stockholder level. In addition,
the Company makes advances to stockholders from time to time to cover certain
expenses. At December 31, 1996 and 1997, the amounts owed to the Company from
stockholders were $76,767 and $134,257, respectively. In February 1998, the
outstanding balance was paid in full by the stockholders.
The Company leases its Pompano Beach facility from a related party. Rental
expense during 1995, 1996, and 1997 was $35,400, $36,000, and $39,614,
respectively. Future minimum lease payments under the current lease agreement
are $48,000 per year through August 31, 2000.
F-48
<PAGE> 75
6. SUBSEQUENT EVENT
On February 13, 1998, substantially all property and equipment and the
ongoing business of the Company were sold to SanTi Group, Inc. ("SanTi") for
$3,990,120 in cash and 100,000 shares of SanTi common stock. Prior to the
closing, all related long-term debt was paid in full to convey the assets to
SanTi free and clear of all encumbrances and liens.
F-49
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seagraves, Inc. and Grease-Tec, Inc.:
We have audited the accompanying combined balance sheets of SEAGRAVES, INC. (a
Florida corporation d.b.a. Brownie Environmental Services) AND GREASE-TEC, INC.
(a Florida corporation) as of December 31, 1997 and 1996 and the related
combined statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Seagraves, Inc. (d.b.a.
Brownie Environmental Services) and Grease-Tec, Inc. as of December 31, 1997
and 1996 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 14, 1998
F-50
<PAGE> 77
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
ASSETS 1996 1997
=============================================== ========== ==========
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,724 $ 111,799
Accounts receivable, net of allowance for doubtful
accounts of $10,000 in 1996 and 1997 388,056 395,977
Prepaid expenses and other 53,899 77,028
---------- ----------
Total current assets 587,679 584,804
PROPERTY AND EQUIPMENT, NET 917,596 928,251
OTHER ASSETS 3,487 4,598
---------- ----------
$1,508,762 $1,517,653
========== ==========
<CAPTION>
DECEMBER 31
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
=============================================== ========== ==========
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 370,683 $ 360,289
Accrued expenses 228,449 206,191
Current portion of long-term debt 278,794 293,132
---------- ----------
Total current liabilities 877,926 859,612
---------- ----------
LONG-TERM DEBT:
Long-term debt, net of current portion 219,854 183,214
Related-party notes payable, net of current portion 15,902 94,658
---------- ----------
235,756 277,872
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common stock of Seagraves, Inc., $1 par value; 500
shares authorized, 100 shares issued and outstanding 100 100
Common stock of Grease-Tec, Inc., no par value; 10,000
shares authorized, 10,000 shares issued and outstanding 0 0
Retained earnings 394,980 380,069
---------- ----------
Total stockholders' equity 395,080 380,169
---------- ----------
$1,508,762 $1,517,653
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-51
<PAGE> 78
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX-MONTH PERIOD FROM
------------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 JUNE 30, 1997 TO MARCH 6, 1998
========== ========== ========== ============== ================
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $5,500,041 $6,491,346 $6,924,493 $3,430,217 $1,342,431
---------- ---------- ---------- ---------- ----------
EXPENSES:
Cost of operations 3,873,919 4,626,757 4,868,591 2,430,718 930,687
Sales, general, and administrative 1,166,270 1,360,725 1,636,989 813,902 350,137
Depreciation and amortization 256,770 236,777 248,938 108,798 32,886
---------- ---------- ---------- ---------- ----------
Total expenses 5,296,959 6,224,259 6,754,518 3,353,418 1,313,710
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 203,082 267,087 169,975 76,799 28,721
---------- ---------- ---------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense 69,853 61,242 36,425 22,805 8,659
Other, net 23,219 (22,634) (75,529) (83,336) (105,984)
---------- ---------- ---------- ---------- ----------
93,072 38,608 (39,104) (60,531) (97,325)
---------- ---------- ---------- ---------- ----------
NET INCOME $ 110,010 $ 228,479 $ 209,079 $ 137,330 $ 126,046
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-52
<PAGE> 79
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
GREASE-TEC, INC. SEAGRAVES, INC.
COMMON STOCK COMMON STOCK
--------------- -------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 10,000 $0 100 $100 $ 168,167 $ 168,267
Distributions to stockholders 0 0 0 0 (17,000) (17,000)
Net income 0 0 0 0 110,010 110,010
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1995 10,000 0 100 100 261,177 261,277
Distributions to stockholders 0 0 0 0 (94,676) (94,676)
Net income 0 0 0 0 228,479 228,479
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1996 10,000 0 100 100 394,980 395,080
Distributions to stockholders 0 0 0 0 (223,990) (223,990)
Net income 0 0 0 0 209,079 209,079
------ -- --- ---- --------- ---------
BALANCE, DECEMBER 31, 1997 10,000 0 100 100 380,069 380,169
Distributions to stockholders 0 0 0 0 (32,000) (32,000)
Net income 0 0 0 0 126,046 126,046
------ -- --- ---- --------- ---------
BALANCE, MARCH 6, 1998 (UNAUDITED) 10,000 $0 100 $100 $ 474,115 $ 474,215
====== == === ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-53
<PAGE> 80
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX-MONTH PERIOD FROM
------------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 JUNE 30, 1997 TO MARCH 6, 1998
========= ========= ========== ============= ================
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 110,010 $ 228,479 $ 209,079 $ 137,330 $ 126,046
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 256,770 236,777 248,938 108,798 32,886
(Gain) loss on sale of fixed assets (1,949) 21,805 (70,254) (72,568) (97,641)
Changes in assets and liabilities:
Accounts receivable 33,665 (97,202) (7,921) (14,406) (58,166)
Prepaid expenses and other (3,593) (4,838) (23,129) 31,163 54,520
Other assets 5,909 (2,010) (1,221) (613) 0
Accounts payable (34,634) 191,375 (10,394) (9,361) (67,605)
Accrued expenses 12,022 57,896 (22,258) (29,419) 54,363
--------- --------- --------- --------- ---------
Total adjustments 268,190 403,803 113,761 13,594 (81,643)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 378,200 632,282 322,840 150,924 44,403
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 4,210 66,592 100,928 100,928 100,000
Capital expenditures (293,516) (509,292) (290,157) (119,139) (148,121)
--------- --------- --------- --------- ---------
Net cash used in investing activities (289,306) (442,700) (189,229) (18,211) (48,121)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 175,861 234,672 316,932 128,637 59,425
Payments of long-term debt (259,055) (329,545) (266,287) (160,068) (33,635)
Net borrowings from related party 99,459 17,947 5,809 (15,902) (94,658)
Distributions to stockholders (17,000) (94,676) (223,990) (123,460) (32,000)
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities (735) (171,602) (167,536) (170,793) (100,868)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 88,159 17,980 (33,925) (38,080) (104,586)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,585 127,744 145,724 145,724 111,799
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 127,744 $ 145,724 $ 111,799 $ 107,644 $ 7,213
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 72,074 $ 63,327 $ 37,838 $ 21,701 $ 7,095
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-54
<PAGE> 81
SEAGRAVES, INC.
(d.b.a. BROWNIE ENVIRONMENTAL SERVICES)
AND GREASE-TEC, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Seagraves, Inc. and Grease-Tec, Inc. (collectively, the "Company") design,
construct, repair, maintain, and operate on-site sewage disposal systems,
primarily in metropolitan Orlando, Florida. Seagraves, Inc. and
Grease-Tec, Inc. are under common ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Seagraves, Inc. and Grease-Tec, Inc. All significant intercompany accounts
have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's
customers are concentrated in one geographic region. No single customer
accounted for a significant amount of the Company's sales, and there are
no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
F-55
<PAGE> 82
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line basis using useful lives of 5 to 7 years for machinery
and equipment and office equipment and 20 years for building and
improvements.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
========== ==========
<S> <C> <C>
Machinery and equipment $1,705,843 $1,866,519
Buildings and improvements 361,183 391,780
Office equipment 89,153 101,715
---------- ----------
2,156,179 2,360,014
Less accumulated depreciation (1,238,583) (1,431,763)
---------- ----------
$ 917,596 $ 928,251
========== ==========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
USE OF 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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the six-month period ended
June 30, 1997 and for the period from January 1, 1998 through March 6,
1998 are unaudited. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
through March 6, 1998 are not necessarily indicative of future results of
the Company.
INCOME TAXES
The Company has elected for federal and state income tax purposes S
corporation tax status, whereby income is taxed at the stockholder level.
Therefore, no deferred tax assets, liabilities, or provisions for income
taxes are recorded. Amounts are distributed to the stockholders for making
applicable tax payments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
F-56
<PAGE> 83
3. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
========== ==========
<S> <C> <C>
Equipment loans, interest at varying rates between 8.5% and 11%,
interest and principal due in monthly installments through 2000,
secured by related equipment $351,278 $401,923
Related-party notes payable, interest at varying rates between
10% and 12%, interest and principal due in monthly
installments through 1999, unsecured 163,272 169,081
-------- --------
514,550 571,004
278,794 293,132
Less current portion -------- --------
$235,756 $277,872
======== ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998 $293,132
1999 192,387
2000 67,548
2001 13,418
2002 and thereafter 4,519
--------
$571,004
========
</TABLE>
In March 1998, in conjunction with the sale of the business (Note 5), all
long-term debt was paid in full.
4. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to
purchase equipment. At December 31, 1996 and 1997, the amounts owed to
stockholders were $163,272 and $169,081, respectively. During fiscal years
1995, 1996, and 1997, the Company paid interest of $12,244, $13,031, and
$6,421, respectively, to stockholders. Subsequent to December 31, 1997,
the amounts owed to stockholders were paid in full.
The Company rents land and buildings from certain stockholders. Rent paid
to stockholders was $15,600, $20,000, and $48,336 in 1997, 1996, and 1995,
respectively.
F-57
<PAGE> 84
5. SUBSEQUENT EVENT
On March 6, 1998, substantially all property and equipment and the ongoing
business of the Company were sold to SanTi Group, Inc. ("SanTi") for
$3,250,000 in cash, a $2,000,000 note receivable, and 60,000 shares of
SanTi common stock. Prior to the closing, all related long-term debt
was paid in full to convey assets to SanTi free and clear of all
encumbrances and liens.
F-58
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RGM Liquid Waste Removal Corporation
and Affiliates:
We have audited the accompanying combined balance sheets of RGM LIQUID WASTE
REMOVAL CORPORATION AND AFFILIATES as of October 31, 1996 and 1997 and the
related combined statements of operations, stockholders' equity, and cash flows
for the 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 financial statements referred to above present fairly, in
all material respects, the financial position of RGM Liquid Waste Removal
Corporation and Affiliates as of October 31, 1996 and 1997 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 10, 1998
F-59
<PAGE> 86
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31
----------------------------- April 30,
ASSETS 1996 1997 1998
- -------------------------------------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 581,017 $ 1,280,106 $ 749,601
Marketable equity securities 490,318 580,017 613,165
Accounts receivable, net of
allowance for doubtful accounts
of $70,000, $49,000, and $80,000
in 1996, 1997, and 1998,
respectively 2,065,540 1,179,148 2,036,353
Note receivable 813,462 579,481 131,731
Prepaid expenses and other 37,032 41,342 24,227
----------- ----------- -----------
Total current assets 3,987,369 3,660,094 3,555,077
PROPERTY AND EQUIPMENT, NET 1,394,204 1,032,921 994,309
NOTE RECEIVABLE 579,482 0
OTHER ASSETS 81,585 124,579 140,347
----------- ----------- -----------
$ 6,042,640 $ 4,817,594 $ 4,689,733
=========== =========== ===========
<CAPTION>
October 31
LIABILITIES AND ----------------------------- April 30,
STOCKHOLDERS' EQUITY 1996 1997 1998
- -------------------------------------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,274,689 $ 374,827 $ 294,665
Accrued expenses 240,159 211,577 212,112
Due to related parties 484,263 506,713 523,333
Income taxes payable, net 324,496 281,566 50,491
Deferred income taxes 132,529 16,360 16,360
Current portion of long-term debt 281,264 133,741 87,250
----------- ----------- -----------
Total current liabilities 2,737,400 1,524,784 1,184,211
----------- ----------- -----------
LONG-TERM DEBT, NET OF CURRENT PORTION 353,724 82,827 26,444
----------- ----------- -----------
DUE TO STOCKHOLDERS 18,688 131,637 124,593
----------- ----------- -----------
DEFERRED INCOME TAXES 100,989 59,057 59,057
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common stock (Note 2) 11,000 11,000 11,000
Unrealized depreciation of
investments (9,682) 0 0
Retained earnings 2,830,521 3,008,289 3,284,428
----------- ----------- -----------
Total stockholders' equity 2,831,839 3,019,289 3,295,428
----------- ----------- -----------
$ 6,042,640 $ 4,817,594 $ 4,689,733
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-60
<PAGE> 87
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended October 31 SIX-MONTH SIX-MONTH
------------------------------- PERIOD ENDED PERIOD ENDED
1996 1997 APRIL 30, 1997 APRIL 30, 1998
------------ ------------ ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 10,104,213 $ 7,459,143 $ 3,864,824 $ 4,108,953
------------ ------------ ------------ ------------
EXPENSES:
Cost of operations 6,929,729 4,485,210 2,462,673 2,298,686
General and administrative 2,627,519 2,407,013 1,125,523 1,066,890
Depreciation and amortization 417,476 394,420 198,342 211,454
------------ ------------ ------------ ------------
Total expenses 9,974,724 7,286,643 3,786,538 3,577,030
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 129,489 172,500 78,286 531,923
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest expense (income), net 65,497 (88,518) 104,892 (31,626)
Other, net 804,489 (73,276) 0 0
------------ ------------ ------------ ------------
869,986 (161,794) 104,892 (31,626)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME
TAXES (740,497) 334,294 183,178 563,549
(BENEFIT) PROVISION FOR
INCOME TAXES (425,210) 156,526 87,075 287,410
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (315,287) $ 177,768 $ 96,103 $ 276,139
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-61
<PAGE> 88
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
LOSSES ON
SECURITIES
COMMON AVAILABLE RETAINED
STOCK FOR SALE EARNINGS TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1995 $ 11,000 $ 0 $ 3,145,808 $ 3,156,808
Unrealized depreciation on
securities available for sale 0 (9,682) 0 (9,682)
Net loss 0 0 (315,287) (315,287)
----------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 1996 11,000 (9,682) 2,830,521 2,831,839
Change in unrealized depreciation
on securities available for sale 0 9,682 0 9,682
Net income 0 0 177,768 177,768
----------- ----------- ----------- -----------
BALANCE, OCTOBER 31, 1997 11,000 0 3,008,289 3,019,289
Net income 0 0 276,139 276,139
----------- ----------- ----------- -----------
BALANCE, APRIL 30, 1998 (UNAUDITED) $ 11,000 $ 0 $ 3,284,428 $ 3,295,428
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-62
<PAGE> 89
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31 SIX-MONTH SIX-MONTH
------------------------- PERIOD ENDED PERIOD ENDED
1996 1997 APRIL 30, 1997 APRIL 30, 1998
----------- ----------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (315,287) $ 177,768 $ 96,103 $ 276,139
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 417,476 394,420 198,342 211,454
Loss on sale of fixed assets 26,956 48 0 0
Changes in assets and liabilities:
Accounts receivable, net 508,139 886,392 304,531 (857,205)
Prepaid expenses and other (1,746) (4,310) 13,312 17,115
Other assets 109,680 (42,994) 743 (15,768)
Accounts payable (965,735) (899,862) (372,793) (80,162)
Accrued expenses 9,260 (28,582) (14,832) 535
Income tax payable 311,670 (42,931) (298,763) (232,801)
Deferred taxes (893,777) (158,101) (943) 829
----------- ----------- ----------- -----------
Total adjustments (478,077) 104,080 (170,403) (956,003)
----------- ----------- ----------- -----------
Net cash provided
by operating activities (793,364) 281,848 (74,300) (679,864)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Merco $ 3,603,192 $ 0 $ 0 $ 0
Note receivable from Merco (1,392,944) 813,463 398,625 447,751
Marketable securities (500,000) (80,017) (35,668) (33,148)
Capital expenditures (114,175) (33,184) (1,804) (6,332)
----------- ----------- ----------- -----------
Net cash provided by investing activities 1,596,073 700,262 361,153 408,271
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 27,364 0 0 0
Repayments of long-term debt (695,504) (418,420) (181,613) (216,568)
Net borrowing from related party 80,806 22,450 22,450 (42,344)
Net borrowing from stockholder 16,860 112,949 0 0
----------- ----------- ----------- -----------
Net cash used in financing activities (570,474) (283,021) (159,163) (258,912)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 232,235 699,089 127,690 (530,505)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 348,782 581,017 581,017 1,280,106
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 581,017 $ 1,280,106 $ 708,707 $ 749,601
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 112,328 $ 57,140 $ 26,673 $ 16,160
=========== =========== =========== ===========
Cash paid for income taxes $ 193,421 $ 368,767 $ 351,992 $ 305,088
=========== =========== =========== ===========
NONCASH INVESTING ACTIVITY:
Unrealized loss (gain) on securities
available for sale $ 9,682 $ (9,682) $ (9,682) $ 0
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-63
<PAGE> 90
RGM LIQUID WASTE REMOVAL CORPORATION
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
RGM Liquid Waste Removal Corporation ("RGM") and affiliates (collectively,
the "Company") is engaged in the removal of various waste materials. As
part of its normal operations, the Company enters into agreements of up to
four years with governmental, institutional, and commercial entities.
These agreements specify that the Company will remove various waste
materials at per unit prices. Billings are submitted as services are
provided.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Devito Environmental Corporation ("Devito"), Advanced Transfer Technology,
Inc. ("ATT"), and Envirotech Leasing & Rental Corporation ("Envirotech")
(collectively, the "Affiliates") since they have been under the same
ownership of RGM since their respective dates of inception. All material
intercompany accounts have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents.
The carrying amounts of short-term investments approximate fair value.
Short-term investments consist of marketable equity securities and money
market funds. In accordance with the criteria specified by Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," these investments were
classified as available for sale.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company's
customers are concentrated in one geographic region. No single customer
accounted for a significant amount of the Company's sales, and there are
no significant accounts receivable from a single customer. The Company
reviews a customer's credit history before extending credit. The Company
F-64
<PAGE> 91
establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other information.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using useful lives of five to ten years for machinery and equipment and
office equipment. Leasehold improvements are depreciated over the shorter
of the term of the lease or the useful life of the improvements.
At October 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Machinery and equipment $4,528,286 $4,478,562
Office equipment 25,955 42,140
Leasehold improvements 105,646 129,005
---------- ----------
4,659,887 4,649,707
Less accumulated depreciation (3,265,683) (3,616,786)
---------- ----------
$1,394,204 $1,032,921
========== ==========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
COMMON STOCK
No par value common stock of RGM and affiliates consists of the following
as of October 31, 1996 and 1997 and January 31, 1998:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
RGM 200 10
Devito 200 100
ATT 200 10
Envirotech 200 100
</TABLE>
USE OF 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
disclosure of contingent assets and liabilities
F-65
<PAGE> 92
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of April 30, 1998 and for the
six-month periods ended April 30, 1997 and 1998 are unaudited. In the
opinion of management, these financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial statements. The results of operations for
the six-month period ended April 30, 1998 are not necessarily indicative
of future results of the Company.
INCOME TAXES
For federal and state income tax purposes, two of the affiliates (the "S
corporations") have elected S corporation tax status whereby income is
taxed at the shareholder level. Therefore, no deferred tax assets,
liabilities, or provisions for income taxes is recorded. See Note 7 for
income tax information for the two affiliates which are C corporations
(the "C corporations").
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is designed to improve the reporting of changes in
equity from period to period. The Company currently has no other
comprehensive income items as defined by SFAS No. 130.
3. NOTE RECEIVABLE
From July 1992 to June 1996, the Company participated in the Merco Joint
Venture ("Merco"), which was accounted for using the equity method of
accounting. Merco contracts with the city of New York to receive,
transport, and dispose of dewatered sewage sludge. The Company's ownership
interest in Merco was 33 1/3%. At May 31, 1996, the Company's investment
in Merco was $2,439,761. On June 1, 1996, pursuant to a settlement
agreement between the Company and Merco, the joint venture agreed to pay
$1,650,000 for the Company's interest in Merco. In 1996, the Company
recognized a loss on the sale of the investment in the amount of $789,761,
which is included in other, net, in the accompanying statements of
operations. The settlement was in the form of a note receivable which is
payable in monthly installments of $74,625 through June 1998 and bears
interest at 8% per annum.
F-66
<PAGE> 93
4. LONG-TERM DEBT
At October 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Equipment loans, interest at varying rates
between 7.75% and 12.38%, interest and
principal due in monthly installments
through August 2001, secured by related
equipment $595,272 $207,665
Capital lease obligations and other 39,716 8,903
-------- --------
634,988 216,568
Less current portion (281,264) (133,741)
-------- --------
$353,724 $ 82,827
======== ========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
October 31, 1997:
<TABLE>
<S> <C>
1998 $133,741
1999 71,468
2000 5,983
2001 5,376
--------
$216,568
========
</TABLE>
In May 1998, the Company repaid all long-term debt in full in conjunction
with the sale of the business (Note 9).
5. RELATED-PARTY TRANSACTIONS
The Company's stockholders make loans to the Company from time to time to
meet working capital needs and to purchase equipment. At December 31, 1996
and 1997, the amounts owed to stockholders were $18,688 and $131,637,
respectively. In May 1998, all amounts owed to stockholders were paid in
full in conjunction with the sale of the business (Note 9).
The Company is a guarantor of a loan entered by the stockholder in the
amount of $118,000. The loan was paid in full in May 1998 in conjunction
with the sale of the business (Note 9).
The Company leases its office facilities from related parties under
noncancelable operating leases on a month-to-month basis. Rent expense for
the years ended October 31, 1996 and 1997 was $406,558 and $396,991,
respectively, and is included in general and administrative expenses in
the accompanying statements of operations. Amounts owed to these related
parties for back rents at October 31, 1996 and 1997 were $456,475 and
$506,713, respectively.
F-67
<PAGE> 94
The Company performs waste removal services for an entity under the
control of one of the Company's stockholders. The related party also
provided waste treatment services to the Company. During 1996 and 1997,
revenue from the related party was $55,280 and $74,016, respectively.
Waste treatment services performed by the related party for RGM during
1996 and 1997 were $7,765 and $2,600, respectively. Net amounts due to the
related party at October 31, 1996 and 1997 were $40,061 and $0 and are
included in due to related parties in the accompanying balance sheets.
6. COMMITMENTS AND CONTINGENCIES
The Company has a defined contribution 401(k) plan (the "Plan") covering
substantially all of its full-time employees. The Company has the option
to contribute a profit-sharing portion to the Plan each year. During the
years ended October 31, 1996 and 1997, no such contributions were made.
Under the terms of a bargaining agreement with its union employees, one
of the affiliates is required to make contributions based on hours worked
to a union annuity fund. Contributions to this fund for the years ended
October 31, 1996 and 1997 were $18,336 and $64,323, respectively, and are
included in general and administrative expenses in the accompanying
statements of operations.
7. INCOME TAXES
The accompanying financial statements include income tax provisions
related to the C corporations computed in accordance with SFAS No. 109,
"Accounting for Income Taxes." The components of the income tax (benefit)
provision for the years ended October 31, 1996 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Current provision $ 468,567 $ 314,627
Deferred taxes (893,777) (158,101)
--------- ---------
Income tax (benefit) provision $(425,210) $ 156,526
========= =========
</TABLE>
F-68
<PAGE> 95
Reconciliation from the federal statutory rate to the actual income tax
benefit is as follows:
<TABLE>
<CAPTION>
1996 1997
----- ----
<S> <C> <C>
Statutory federal tax rate (34.0)% 34.0%
State and city income taxes, net of
federal tax benefit (8.0) 7.0
(Income) loss from the S corporations (9.2) 3.8
Other (6.2) 2.0
----- ----
(57.4)% 46.8%
===== ====
</TABLE>
The sources of differences between the financial accounting and tax bases
of the Company's assets and liabilities which give rise to the deferred
tax assets and liabilities and the tax effects of each are as follows as
of October 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 29,120 $ 20,384
Capital loss carryforward 59,805 38,206
--------- --------
Total deferred tax assets 88,925 58,590
--------- --------
Deferred tax liabilities:
Depreciation (121,027) (94,240)
Joint venture income (121,881) 0
Cash to accrual (79,535) (39,767)
--------- --------
Total deferred tax liabilities (322,443) (134,007)
--------- --------
Net deferred tax liability $(233,518) $(75,417)
========= ========
</TABLE>
8. ENVIRONMENTAL REGULATIONS
The Company is subject to extensive and evolving federal, state, and local
environmental laws and regulations that have been enacted in response to
technological advances and the public's increased concern over
environmental issues. The majority of the expenditures necessary to comply
with the environmental laws and regulations is made in the normal course
of business. The Company, to the best of its knowledge, is in compliance,
in all material respects, with the laws and regulations affecting its
operations.
9. SUBSEQUENT EVENT
On May 1, 1998, the Company sold substantially all property and equipment
and the ongoing business to SanTi Group, Inc. ("SanTi") for $4,500,000 in
cash and 105,000 shares of SanTi common stock. Contingent consideration of
$1,000,000 in cash and 55,000 shares of SanTi common stock is receivable
365 days after the date of purchase, net of offsets for losses, as defined
in the purchase agreement. Prior to the closing, all equipment
F-69
<PAGE> 96
loans and related-party payables were paid in full to convey assets to SanTi
free and clear of all encumbrances and liens.
F-70
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eldredge Wastewater Management, Inc.:
We have audited the accompanying balance sheets of ELDREDGE WASTEWATER
MANAGEMENT, INC. (a Pennsylvania corporation) as of December 31, 1996 and 1997
and the related statements of operations, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Eldredge Wastewater Management,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 19, 1998
F-71
<PAGE> 98
ELDREDGE WASTEWATER MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
ASSETS 1996 1997
- ------------------------------------------ ---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 79,129 $ 20,975
Accounts receivable, net of allowance
for doubtful accounts of $19,300 in
1996, 1997, and 1998 309,488 313,464
Related-party receivable 332,028 363,264
Prepaid expenses and other 13,363 13,774
---------- ----------
Total current assets 734,008 711,477
PROPERTY AND EQUIPMENT, NET 285,799 425,626
---------- ----------
$1,019,807 $1,137,103
========== ==========
<CAPTION>
DECEMBER 31
LIABILITIES AND -----------------------
STOCKHOLDER'S EQUITY 1996 1997
- ----------------------------------------- ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 324,716 $ 353,165
Accrued expenses 35,630 41,010
Current portion of long-term debt 179,023 119,461
---------- ----------
Total current liabilities 539,369 513,636
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 115,141 322,347
---------- ----------
DEFERRED INCOME TAXES 22,873 9,926
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 5
AND 6)
STOCKHOLDER'S EQUITY:
Common stock, no par value; 10,000
shares authorized, 4,000 shares
issued and outstanding in 1996
and 1997 1,000 1,000
Retained earnings 341,424 290,194
---------- ----------
Total stockholder's equity 342,424 291,194
---------- ----------
$1,019,807 $1,137,103
========== ==========
</TABLE>
F-72
<PAGE> 99
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH
YEARS ENDED DECEMBER 31 PERIOD ENDED PERIOD FROM
----------------------------------------- JUNE 30, JANUARY 1, 1998
1995 1996 1997 1997 TO MAY 8, 1998
----------- ----------- ----------- ------------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 3,800,950 $ 4,206,779 $ 4,074,248 $ 1,829,552 $ 1,514,756
----------- ----------- ----------- ----------- ------------
EXPENSES:
Cost of operations 2,641,298 3,094,579 2,841,432 1,254,567 1,108,708
General and administrative 1,033,326 999,328 1,081,150 508,067 385,582
Depreciation and amortization 177,427 176,250 192,534 93,423 68,311
----------- ----------- ----------- ----------- ------------
Total expenses 3,852,051 4,270,157 4,115,116 1,856,057 1,562,601
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (51,101) (63,378) (40,868) (26,505) (47,845)
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (9,204) (35,505) (34,828) (24,377) (11,959)
Other 18,244 10,873 6,509 3,995 1,562
----------- ----------- ----------- ----------- -----------
9,040 (24,632) (28,319) (20,382) (10,397)
----------- ----------- ----------- ----------- -----------
LOSS BEFORE BENEFIT FROM INCOME TAXES (42,061) (88,010) (69,187) (46,887) (58,242)
INCOME TAX BENEFIT (10,056) (17,968) (17,957) (12,169) (13,686)
----------- ----------- ----------- ----------- -----------
NET LOSS $ (32,005) $ (70,042) $ (51,230) $ (34,718) (44,556)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE> 100
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $1,000 $443,471 $444,471
Net loss 0 (32,005) (32,005)
------ -------- --------
BALANCE, DECEMBER 31, 1995 1,000 411,466 412,466
Net loss 0 (70,042) (70,042)
------ -------- --------
BALANCE, DECEMBER 31, 1996 1,000 341,424 342,424
Net loss 0 (51,230) (51,230)
------ -------- --------
BALANCE, DECEMBER 31, 1997 1,000 290,194 291,194
Net Loss 0 (44,556) (44,556)
------ -------- --------
BALANCE, MAY 8, 1997 (UNAUDITED) $1,000 $245,638 $246,638
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE> 101
ELDREDGE WASTEWATER MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX-MONTH PERIOD FROM
----------------------------------- PERIOD ENDED JANUARY 1, 1998
1995 1996 1997 JUNE 30, 1997 TO MAY 8, 1998
--------- --------- --------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (32,005) $ (70,042) $ (51,230) $ (34,718) $ (44,556)
--------- --------- --------- --------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 177,427 176,250 192,534 93,423 68,311
Deferred income taxes (11,539) (17,234) (12,947) (13,192) 17,355
Changes in assets and liabilities:
Accounts receivable 23,302 (39,202) (3,976) (1,505) (3,956)
Related-party receivable (401,156) 227,250 (31,236) (21,348) 72,159
Prepaid expenses and other (4,971) 25,550 (411) 3,363 3,774
Accounts payable (127,814) (43,273) 28,449 22,604 35,601
Accrued expenses 6,126 20,444 5,380 (11,179) 10,553
--------- --------- --------- --------- ---------
Total adjustments (338,625) 349,785 177,793 72,166 203,797
--------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities (370,630) 279,743 126,563 37,448 159,241
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,806) (72,516) (297,361) (112,765) (35,297)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 414,522 0 197,901 146,568 0
Repayments of long-term debt (91,397) (156,754) (85,257) (78,377) (39,733)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 323,125 (156,754) 112,644 68,191 (39,733)
--------- --------- --------- --------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (97,311) 50,473 (58,154) (7,126) 84,211
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 125,967 28,656 79,129 79,129 20,975
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,656 $ 79,129 $ 20,975 $ 72,003 $ 105,186
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,562 $ 33,466 $ 37,146 $ 22,201 $ 10,212
========= ========= ========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment financed under capital lease
obligation $ 0 $ 0 $ 35,000 $ 0 $ 0
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE> 102
ELDREDGE WASTEWATER MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Eldredge Wastewater Management, Inc. (the "Company"), a Pennsylvania
corporation, is engaged in the design, construction, repair, and
maintenance of on-site sewage disposal systems. The Company's services are
sold to customers located primarily in the Delaware Valley of Southeastern
Pennsylvania. The Company is a wholly owned subsidiary of The Eldredge
Companies, Inc. ("The Eldredge Companies").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with purchased
maturities of three months or less at the date of purchase to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided over
estimated useful lives of five to ten years using the straight-line
method.
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 1,925,838 $ 2,258,199
Less accumulated depreciation (1,640,039) (1,832,573)
----------- -----------
$ 285,799 $ 425,626
=========== ===========
</TABLE>
The Company periodically reviews the values assigned to property and
equipment to determine whether any impairments are other than temporary.
The Company assesses impairment by determining whether the carrying value
of such long-lived assets will be recovered through undiscounted expected
future cash flows. No impairment losses have been recorded in the
accompanying results of operations.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
F-76
<PAGE> 103
-2-
USE OF 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
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements for the six-month period ended June
30, 1997 and for the period from January 1, 1998 to May 8, 1998 are
unaudited. In the opinion of the management of the Company, these
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
statements. The results of operations for the period from January 1, 1998
to May 8, 1998, are not necessarily indicative of the future results of
the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting
of changes in equity from period to period. The Company currently has no
other comprehensive income items as defined by SFAS No. 130.
3. INCOME TAXES
The benefit from income taxes is summarized as follows for the years ended
December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current $ 1,483 $ (734) $ (5,010)
Deferred (11,539) (17,234) (12,947)
-------- -------- --------
$(10,056) $(17,968) $(17,957)
======== ======== ========
</TABLE>
Significant components of the Company's deferred income tax liability as
of December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liability:
Property and equipment $18,361 $ 5,391
Other 4,512 4,535
------- -------
$22,873 $ 9,926
======= =======
</TABLE>
The operations of the Company are included in the consolidated federal
income tax return of The Eldredge Companies. All tax amounts above as well
as tax amounts included in the accompanying financial statements have been
reflected as if the Company filed separate state and federal tax returns.
F-77
<PAGE> 104
4. LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Note payable to bank, interest at 9.75%, principal and interest
payable in monthly installments through September 1, 2001;
secured by substantially all property and equipment acquired
prior to April 1995 $ 258,499 $ 235,609
Equipment loans and capital lease obligation, interest at
varying rates between 7.75% and 10.75%, interest and principal
due in monthly installments through 2000; secured by related
equipment 35,665 173,948
Note payable to officer, interest at 12.5%, principal
and interest payable in monthly installments through
March 1, 2000; unsecured 0 32,251
--------- ---------
294,164 441,808
Less current portion (179,023) (119,461)
--------- ---------
$ 115,141 $ 322,347
========= =========
</TABLE>
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997:
<TABLE>
<S> <C> <C>
1998 $119,461
1999 131,187
2000 127,197
2001 61,394
2001 2,569
--------
$441,808
========
</TABLE>
In May 1998, in conjunction with the sale of the business (Note 7), all
related long-term debt was paid in full.
F-78
<PAGE> 105
5. COMMITMENTS AND CONTINGENCIES
BENEFIT PLAN
The Company maintains a 401(k) plan for employees. The Company makes a
discretionary profit-sharing contribution to the plan based on estimated
company profitability. Company contributions for the years ended December
31, 1995, 1996, and 1997 were $0, $10,000, and $6,000, respectively.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the
ultimate resolution of any such matters should not have a material adverse
effect on the Company's financial position or results of operations.
6. RELATED-PARTY TRANSACTIONS
The Company makes periodic cash transfers to (from) The Eldredge Companies
and its subsidiaries based on available cash. Additionally, the Company
receives certain administration services from its parent company, The
Eldredge Companies. Allocations of parent company direct costs related to
these services, totaled $189,188, $207,727, and $158,929 for the years
ended December 31, 1995, 1996, and 1997, respectively. These allocations
are included in general and administrative expense in the accompanying
statements of operations. The Company also receives certain management
services from other wholly owned subsidiaries of The Eldredge Companies.
Management fees, which are reflected in general and administrative expense
in the accompanying statements of operations, totaled $296,100, $247,392,
and $220,913 for the years ended December 31, 1995, 1996, and 1997,
respectively. The stockholders of The Eldredge Companies also served as
key officers of the Company during 1995, 1996, and 1997. Compensation paid
to one of these officers totaled $108,109, $104,067, and $103,879 for
1995, 1996, and 1997, respectively, and is included in general and
administrative expense in the accompanying statements of operations.
The Company leases its office space and equipment storage facilities from
a partnership owned by the stockholders of The Eldredge Companies. Rental
expense during the years ended December 31, 1995, 1996, and 1997 was
$21,400, $22,740, and $22,320, respectively.
The Company purchases certain equipment improvements from a wholly owned
subsidiary of The Eldredge Companies. These improvements relate primarily
to the Company's fleet of septic waste tanker trucks. For the years ended
December 31, 1995, 1996, and 1997, these equipment purchases totaled
$30,760, $4,174, and $123,218, respectively. In addition, this sister
company performs substantially all of the repair and maintenance services
on the company vehicles. For the years ended December 31, 1995, 1996, and
1997, these services totaled $159,273, $176,247, and $192,034,
respectively, and are reflected in cost of operations in the accompanying
statements of operations.
F-79
<PAGE> 106
7. SUBSEQUENT EVENT
On May 8, 1998, substantially all property and equipment and the ongoing
business of the Company was sold to SanTi Group, Inc. ("SanTi") for
$2,040,000 in cash and 85,000 shares of Santi common stock. Contingent
consideration of $360,000 in cash and 15,000 shares of SanTi common
stock is receivable 13 months after the date of purchase, net of offsets
for losses, as defined in the purchase agreement. Prior to the closing,
all outstanding long-term debt was paid in full to convey the assets free
and clear of all encumbrances and liens.
F-80
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.0 Merger Agreement by and between Microlytics,
Inc. and SanTi Group, Inc., dated March 6,
1998*
3.1 Certificate of Incorporation of the Company
dated May 13, 1998*
3.2 Bylaws of the Company.*
4.1 Article IV of Registrant's Certificate of
Incorporation
4.2 Article VI of Registrant's Certificate of
Incorporation
9.1 Voting Trust Agreement*
10.1 Credit Agreement dated June 26, 1998 between
SanTi Group, Inc., various financial
institutions and Bank of America National
Trust Association as Agent*
10.2 Company Pledge Agreement dated as of June 26,
1998, between SanTi Group, Inc., and Bank of
America National Trust Association as Agent*
10.3 Security Agreement dated as of June 26, 1998,
among SanTi, Inc., each subsidiary of SanTi
Group, Inc. and Bank of America National
Trust Association as Agent*
10.4 Asset Purchase Agreement dated as of January
22, 1998 by and between SanTi Group of
Pennsylvania, Ferrero Wastewater Management,
Inc., A. Thomas Ferrero, Jr. and A. Thomas
Ferrero, III*
10.5 Asset Purchase Agreement dated as of December
22, 1997 by and between Bone-Dry Enterprises,
Inc., Andrews Environmental Services, Inc. and
W. Ronald Andrews*
10.6 Asset Purchase Agreement dated as of February
13, 1998 by and between SanTi Group of
Florida, Inc., A Rapid Rooter Sewer & Drain
Service, Inc., William E. Rice, Joan E. Rice,
Alfonse J. Grunskis, Diane Rice Grunskis,
Donald E. Rice and Ruth Ann Rice*
10.7 Asset Purchase Agreement dated as of February
17, 1998 by and between Bone-Dry Enterprises,
Inc., Quality Plumbing & Septic, Ronda R.
McMichael and Forney L. McMichael*
10.8 Asset Purchase Agreement dated as of March 6,
1998 by and between SanTi Group of Florida,
Inc. Seagraves, Inc., William D. Seagraves,
Seaburn Seagraves and Angelina Seagraves*
10.9 Asset Purchase Agreement dated as of March 6,
1998 by and between SanTi Group of Florida,
Inc., Grease-Tec, Inc., William D. Seagraves,
Seaburn Seagraves and Angelina Seagraves*
</TABLE>
<PAGE> 108
<TABLE>
<S> <C>
10.10 Asset Purchase Agreement dated as of April
30, 1998 by and between SanTi Group of New
York, Inc., RGM Liquid Waste Removal
Corporation, and Ralph G. Macchio *
10.11 Asset Purchase Agreement dated as of April
30, 1998 by and between SanTi Group of New
York, Inc., Devito Environmental Corporation,
and Rosalie Macchio *
10.12 Asset Purchase Agreement dated as of April
30, 1998 by and between SanTi Group of New
York, Inc., Advanced Transfer Technology,
Inc., and Steve Macchio *
10.13 Asset Purchase Agreement dated as of April
30, 1998 by and between SanTi Group of New
York, Inc., Envirotec Leasing and Rental
Corporation, and Steve Macchio *
10.14 Asset Purchase Agreement dated as of May 8,
1998 by and between SanTi Group of
Pennsylvania, Inc., Eldredge Wastewater
Management, Inc., Robert Eldredge, Curtis
Eldredge, and John Eldredge. *
10.15 Contract for Purchase and Sale of Certain
Assets of Andrews Environmental Services,
Inc. dated March 20, 1997 among and between
Bone-Dry Enterprises, Inc. and Andrews
Environmental Services, Inc. *
10.16 Employment Agreement between Santi Group, Inc.
and Terry Patrick dated June 1, 1998. *
21.0 Subsidiaries of SanTi Group, Inc.*
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
* Previously Filed.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,818,658
<SECURITIES> 0
<RECEIVABLES> 3,443,538
<ALLOWANCES> (148,417)
<INVENTORY> 0
<CURRENT-ASSETS> 6,428,863
<PP&E> 6,608,717
<DEPRECIATION> (337,313)
<TOTAL-ASSETS> 33,397,853
<CURRENT-LIABILITIES> 4,685,095
<BONDS> 0
0
0
<COMMON> 938
<OTHER-SE> 18,109,330
<TOTAL-LIABILITY-AND-EQUITY> 18,110,268
<SALES> 0
<TOTAL-REVENUES> 9,947,494
<CGS> 0
<TOTAL-COSTS> 11,534,298
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274,042
<INCOME-PRETAX> (1,860,846)
<INCOME-TAX> (318,536)
<INCOME-CONTINUING> (1,542,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,542,310)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 195,552
<SECURITIES> 0
<RECEIVABLES> 143,652
<ALLOWANCES> 17,875
<INVENTORY> 0
<CURRENT-ASSETS> 467,889
<PP&E> 593,416
<DEPRECIATION> (31,874)
<TOTAL-ASSETS> 2,614,143
<CURRENT-LIABILITIES> 1,621,450
<BONDS> 0
0
0
<COMMON> 432
<OTHER-SE> 812,021
<TOTAL-LIABILITY-AND-EQUITY> 812,453
<SALES> 0
<TOTAL-REVENUES> 737,858
<CGS> 0
<TOTAL-COSTS> 1,055,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,494
<INCOME-PRETAX> (421,984)
<INCOME-TAX> (163,632)
<INCOME-CONTINUING> (258,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (258,352)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
