AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER __, 2000
REGISTRATION NO. __________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EMISSIONS TESTING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 7500 58-2542609
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
400 COLONY PARK, BUILDING 104, SUITE 600, CUMMING, GEORGIA 30041
(678) 947-6718
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Richard A. Parlontieri,
President/CEO
eMissions Testing, Inc
400 Colony Park, Building 104, Suite 600
Cumming, Georgia 30041
(678) 947-6718
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Agent for Service: With a Copy to:
Richard A. Parlontieri, President/CEO Thomas Stalzer, Esq.
eMissions Testing, Inc. Epstein, Becker & Green, P.C.
400 Colony Park, Building 104, Suite 600 3399 Peachtree Road, N.E.
Cumming, Georgia 30041 Suite 1400
(678) 947-6718 Atlanta, Georgia 30326-2834
(404) 812-5680
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title and Each Class of Amount Proposed Maximum Proposed Maximum Amount of Registration
Securities to be to be Offering Price Per Unit Aggregate Offering Price Fee
Registered Registered
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Common Stock, no par value 2,000,000(1) $ .50 (1.a) $1,000,000
Common Stock, no par value 500,000(2) $1.00 (2.a) $ 500,000
Common Stock, no par value 1,345,000(3) $1.00 (3.a) $1,345,000 $756
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TOTALS: 3,845,000 $2,845,000
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1. Represents share(s) to be issued upon conversion of the Company's Series A
Debentures.
1.a Represents the maximum conversion price for the common stock to be issued
upon conversion of the Series A Debentures.
2. Represents shares to be issued upon the exercise of certain Warrants
related to the Series A Debentures.
2.a Represents the maximum exercise price for the common stock to be issued
upon exercise of the Warrants.
3. Represents shares to be offered by Selling Shareholders.
3.a Estimated solely for purposes of calculating the registration fee.
- ----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
REGISTRANT MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
================================================================================
SUBJECT TO COMPLETION -- _______, 2000
PROSPECTUS
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3,845,000 Shares
Common Stock
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The Company is registering 3,845,000 shares of its Common Stock, no par
value per share. Of those shares, 2,500,000 shares are being registered on
behalf of the holder of a debenture and certain warrants issued previously by
the Company (see "The Series A Debenture and Warrants - Terms and Conditions"),
and 1,345,000 shares are being registered on behalf of the selling shareholders
identified below under the heading "Selling Shareholders".
The Company will not receive any portion of the proceeds from the sale or
resale of the shares registered in this offering. For information on the methods
by which such shares may be sold, refer to the discussion under the heading
"Plan of Distribution" and "Shares Eligible for Future Sale."
In this offering, no sale price has been fixed or determined for the
shares of the Company's Common Stock. Instead, the price at which the shares may
be sold will be based upon market conditions existing at the time of sale by the
holder of such shares.
Prior to this offering, no public market has existed for the shares of the
Company's Common Stock. The Company plans to have its Common Stock quoted on the
OTC Bulletin Board, under the symbol "SMOG".
THE PURCHASE OF THE COMMON STOCK CARRIES WITH IT A HIGH DEGREE OF RISK.
INVESTORS MAY LOSE THEIR ENTIRE INVESTMENT IN OUR COMMON STOCK. SEE "RISK
FACTORS" ON PAGES 16 TO 22 FOR A DISCUSSION OF CERTAIN RISKS CONCERNING US AND
THIS OFFERING BEFORE INVESTING IN OUR SHARES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is September ____, 2000.
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GENERAL INFORMATION
INFORMATION ABOUT THE EMISSIONS TESTING INDUSTRY, STATION AND MARKET DATA
As you review the station and market data contained throughout this
Prospectus, you should note the following:
o We obtained certain information from the United States Environmental
Protection Agency with regard to the ongoing programs for air quality
control, inspections and maintenance. As of June 1, 2000, additional
information is available on the Internet at http://www.epa.gov/.
o We obtained information about the industry, its size and potential
application from the Manufacturers of Emission Controls Association
("MECA"), a non-profit association formed in 1976 to provide information
on exhaust control technology and its implementation. Its members include
manufacturers of emission control equipment for automobiles, trucks,
buses, off-road vehicles and stationary sources. MECA's report of June
1999 on Inspection/Maintenance Implementation Status Report as well as
additional information regarding the industry is available on the Internet
at http://www.meca.org/.
o We utilized population and workforce data for the State of Georgia from
the Bureau of Labor, State of Georgia, in estimating the market size and
demographics for that state. As of June 1, 2000, additional information is
available on the Internet at http://www.clearairforce.com.
o We obtained historical information with regard to the emissions testing
programs in the State of Georgia from the Georgia Environmental Protection
Division. As of June 1, 2000, additional information is available on the
Internet at http://www.cleanairforce.com.
o All market information appearing in this Prospectus is for 1999, unless
otherwise indicated.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE
IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS UNLESS OTHERWISE STATED HEREIN.
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In this Prospectus, when we use the term "Company," "SMOG" or "eMissions"
or the pronouns "we," "our" or "us," we mean eMissions Testing, Inc., unless the
context otherwise requires.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. This summary is not complete and may not contain all of the
information you should consider before investing in our Common Stock. You should
carefully review the information appearing elsewhere in this Prospectus, in
particular the discussion under the heading "Risk Factors".
In this Prospectus, when we use the term "Company," "SMOG" or "eMissions"
or the pronouns "we," "our" or "us," we mean eMissions Testing, Inc., unless the
context otherwise requires.
The Company
The Company, a start-up enterprise, was formed as a Georgia corporation on
May 5, 2000, for the purpose of engaging primarily in the business of acquiring,
developing and operating vehicle emissions testing stations. A number of federal
and state laws mandate vehicle testing as a method of improving air quality.
This mandate has created a unique business opportunity for the Company.
Our current plan is aimed at opening or acquiring certain emissions
testing stations located in the heavily populated 13 county area surrounding
Atlanta, Georgia. The counties include Cherokee, Clayton, Cobb, Coweta, DeKalb,
Douglas, Fayette, Forsyth, Fulton (which encompasses the City of Atlanta),
Gwinnett, Henry, Paulding and Rockdale. Georgia is one of the states that, by
law, mandates periodic testing of vehicles. See "Emissions Testing in the State
of Georgia" below in this section.
On June 1, 2000, we acquired two existing emissions testing stations in
the State of Georgia, one located in Gwinnett County and the other in Forsyth
County, together with additional equipment to support two and one-half other
stations. See "Recent Transactions - The Asset Purchase Agreement between the
Company and Lake Holdings, LLC" below. At our existing two stations, we use
computerized emissions testing equipment, as required by Georgia law, to test
vehicles for compliance with emissions standards.
Our current short-term objective is to operate multiple emissions testing
stations in the Metro Atlanta Area. We believe that by operating multiple
stations with similar operating characteristics, we can achieve operating
efficiencies, equipment purchasing advantages and marketing leverage, all of
which should lead to lower operating costs and enhanced profitability.
Our current long-term goal is to develop a presence in a number of other
markets, both in the United States and, possibly, in foreign countries. This
aspect of our overall plan is not expected to be implemented during the calendar
year 2000.
INDUSTRY AND REGULATORY OVERVIEW
According to the United States Environmental Protection Agency (the
"EPA"), vehicle emissions produce approximately 35% - 70% of ozone forming
emissions and create 90% of the carbon monoxide air pollution in metropolitan
areas. Consequently, the EPA has made emissions testing an integral part of its
overall effort to reduce air pollution.
The EPA has granted state governmental authorities the discretion to
determine how best to establish and operate a network of emissions testing
facilities, including the flexibility to choose either a centralized or a
decentralized program. In a centralized program, vehicle owners
1
take their vehicles to one of a small number of special facilities to be tested.
These facilities perform only tests; they do not repair vehicles. Usually, a
private contractor licensed by the government operates the centralized facility.
In a decentralized program, vehicle owners take their vehicles to a service
station, automotive repair shop or dealership, or standalone testing facility to
be tested. A table with information from the EPA that lists state level programs
and contains web site information for each state as of June 2, 2000 is shown on
page 43 of this Prospectus.
During the most recent period for which the EPA has made testing data
available (1997), centralized programs in the U.S. and Canada performed
approximately 23.0 million paid tests and generated approximately $250 million
in revenues, while facilities in decentralized markets in the United States
performed approximately 41.7 million tests and generated approximately $816
million in revenues. In addition, a number of foreign countries have implemented
various forms of mandatory testing programs, including the United Kingdom,
Germany, Canada (certain provinces), Mexico and Japan, and a number of others
are considering developing or expanding mandatory or voluntary testing programs,
including Poland, the Philippines, Brazil, Argentina, and Chile.
EMISSIONS TESTING IN THE STATE OF GEORGIA
As a result of a rapidly increasing population, which has caused the
levels of smog to escalate sharply, the 13 counties that make up the Metro
Atlanta Area have been identified by the EPA as target sites for a mandatory
vehicle inspections and maintenance program. In 1996, the Environmental
Protection Division of the State of Georgia initiated "Georgia's Clean Air
Force" program that requires testing of all vehicles in a 13 county area
surrounding Atlanta, Georgia, for certain emission levels (the "GCAF Program").
These rules are set forth in Sections 391-3-20-.01 through .22 of the Rules of
the Georgia Department of Natural Resources, Environmental Protection Division.
The state program is a decentralized approach, in which businesses that
wish to perform testing must apply to the state for a license, have their
technicians attend and complete certain state certified training, and report to
the state on their activities every month. Testing stations may be licensed to
test all vehicles (an "ALL VEHICLES WELCOME" station), or only vehicles not more
than five years old ("NEW VEHICLES ONLY" station), or a fleet of vehicles. The
two stations we currently operate are "ALL VEHICLES WELCOME" stations.
The GCAF Program initially required a "basic" test of exhaust gases every
two years. In 1997, the program was changed to include "enhanced" testing, which
combines the simple exhaust test with a simulated "road-test" using a
dynamometer. Prior to January 1, 2000, Georgia required that vehicles in the 13
covered counties undergo an emissions test once every two years. In December
1999, however, Georgia amended this rule, so as to require testing on an annual
basis beginning on January 1, 2000, subject to certain transition rules. Also,
for the year 2000, new vehicles are exempt from testing until the test year two
years following the model year of the vehicle. Beginning on January 1, 2001, new
vehicles will be exempt from testing until the test year three years following
the model year of the vehicle.
The market for emissions testing in Georgia is highly fragmented and
generally consists of services provided by independent auto service providers,
such as service stations and car dealers. According to the State of Georgia,
there were 649 licensed test sites in Georgia under the GCAF Program during the
calendar year 1999. Under Georgia law, the price that a testing station may
charge per test may not be less than $10.00 nor more than $25.00. From such
price,
2
$7.40 per test must be paid by the station operator to the state as a fee. The
balance of the current charge (or $17.60 per vehicle assuming the maximum price
of $25.00 is charged) is retained by the station operator. If a vehicle fails an
emissions test, it may be retested (under current Georgia law) at no additional
charge for up to 30 days after the initial test, so long as the subsequent test
is performed at the same facility. In 1999, approximately 11% of all tests
(155,810) provided in Georgia were retests which were provided at no charge.
If a vehicle fails to pass an emissions test, the owner of the vehicle
must have repair work performed to correct the deficiency, up to a total cost
(for 2000) of $608. If a vehicle fails a reinspection despite the maximum
expenditure required by law, the owner must apply for a compliance waiver from
the state.
Since approximately 11% of the tests performed in Georgia during 1999 were
at no charge, the same figure suggests that roughly 11% of all vehicles tested
in Georgia fail to pass their initial test. Therefore, we anticipate receiving
no revenue from roughly 11% of the tests we perform in Georgia.
We anticipate that compliance with Georgia law in the 13 covered counties
will remain high, since a successful test (or a waiver from the State) is
required to obtain or renew a vehicle's registration. Additionally, persons who
fail to comply with these laws may be subject to a fine of approximately $100.
The typical testing site is located inside of a permanent building,
similar to a residential garage with doors at both ends so that vehicles can
"drive-through" the facility. A computerized testing system is located in each
bay of the building and, in the case of enhanced testing, a dynamometer is fixed
to the floor, generally inset in a concrete floor. The dynamometer is a device
that allows the vehicle to be running, in drive gear, allowing a simulation of
the operation of the vehicle at normal driving speeds, though in place, in the
garage. The cost of equipment for a new testing station is estimated at $50,000
per bay, while the cost of the facility varies. Generally, we do not expect to
own any land or buildings. Instead, we intend to lease or sublease all of the
land and buildings that we use in our business. We expect a total cost for a new
site to be approximate $75,000, including renovations, equipment and
installation.
We have no historical basis with which to compare our results, since we
are only recently formed. However, if we give pro forma effect to the
transactions described in the unaudited pro forma financial statements included
elsewhere in this Prospectus, which financial statements reflect the operational
results of Lake Holdings, LLC and R. V. Evans Enterprises, Inc., we would have
had gross revenues of $212,000 for the year ended December 31, 1999 and earnings
before interest, taxes, depreciation and amortization expenses (hereinafter
"EBITDA") of $10,000 for the year ended December 31, 1999, without taking into
effect any efficiencies that our combined size or operating strategies might
contribute. See "Management's Discussion and Analysis - Financial Analysis"
BUSINESS STRATEGY
Our overall business strategy is to secure and maintain multiple stations
in the Metro Atlanta Area, and to expand into additional markets that have
decentralized, independent testing stations. Our goal in each market is to
obtain multiple stations, each with a high testing volume. With this strategy,
we believe the Company can achieve a dominant position as a result of the higher
volumes and more efficient use of resources. We believe that a significant
number of stations in each market will provide more consistent testing volumes
and, as such, a more efficient business. Further, by creating a presence in
additional testing markets, we believe the
3
Company can develop a long-term strategy for growth and stabilize its revenues
as markets expand and contract, based on population changes, governmental
legislation and other factors.
Our business strategy in the Metro Atlanta Area takes into account the
following factors:
o An increase in the number of vehicles requiring emissions testing in
the State of Georgia as the result of legislative changes (effective
January 1, 2000) that reduced the testing period from every two
years to every year - translating into an approximately 70% increase
in testing volume, according to GCAF;
o Continuing vehicle registration in Georgia in compliance with the
state's emissions testing laws;
o An increasing population in the Metro Atlanta Area, as businesses
and individuals move or relocate to the area, coupled with an
increase in automobile usage, from an estimated 1,932,635 vehicles
in the area in 1995, to approximately 2,175,316 vehicles in 1999;
o Despite a relatively competitive marketplace based upon the sheer
number of testing stations and superior size of some of the testing
stations, most of the emissions testing stations are operated by
small independent businesses, many of whom lack the capital to
promote their service through advertising, to finance expansion or
to acquire sites that may produce higher testing volumes as a result
of their proximity to key intersections, shopping centers or housing
developments;
o Based upon our investigation of the industry in Georgia, few
business operators in the state have demonstrated an ability or
willingness to use or employ meaningful or sophisticated research,
marketing, management or sales techniques in connection with the
operation of emissions testing stations, which should allow the
Company to gain a significant foothold in the area;
o With a focused advertising campaign, we expect to generate "brand"
awareness for our stations, which may translate into repeat business
from year-to-year;
o With our plan to acquire and operate a large number of testing
stations in multiple markets, the Company should be able to minimize
its susceptibility to adverse changes in general economic
conditions; and
o Use of the Internet to allow customers to track the results of their
tests, to research prior results in certain cases, to purchase
automotive related products and services, and to allow the Company
to remind customers of the need to perform their annual test or
perhaps other maintenance.
We believe that these market characteristics, coupled with the opportunity
to establish or expand the total contiguous coverage across multiple market
areas through the operation of multiple emissions testing stations, will create
the potential for revenue growth and cost efficiencies.
GROWTH STRATEGY
Our growth strategy is to establish an initial presence in the Metro
Atlanta Area through a) the acquisition of existing testing stations, and b) the
opening of new stations in locations that management believes will offer
significant potential for a high volume of business. In the acquisition of
existing stations, we seek facilities located on heavily traveled roads and at
busy
4
intersections. Other criteria include proximity to a large number of businesses,
state automobile licensing offices and densely populated residential areas. The
same attributes apply to new sites when identifying the most desirable
locations. Our goal is to locate sites that are convenient and "user friendly"
for our customers.
Many of the existing emission sites in Georgia are located at
intersections with relatively low traffic volume or operate in conjunction with
other low volume businesses, including many service stations and other auto
service businesses. While these sites may operate profitably when combined with
other business activities, they would likely be unprofitable as a stand-alone
testing business. We will generally avoid the acquisition of such sites, instead
focusing on higher volume traffic sites.
As we open new sites, we expect that the Company will lease the land or
building from the existing owner. Where we can use an existing building, such as
an abandoned car wash bay, oil change or service station location, we expect
minimum expense associated with the installation of the equipment. When we lease
the land only, for instance in a shopping center parking lot or an out-parcel
near a commercial development or intersection, we would expect to erect a simple
building. These structures would be assembled on site, using pre-made panels,
such that they could easily be moved at a later date. Based upon recent
estimates obtained by the Company, a structure of this type would cost from
$5,000 to $7,000, depending on size and local building code requirements.
After acquiring a site or opening a new facility, we may advertise our
location using mass mail, television, radio and newspaper, as well as signage at
the location. We believe the use of such promotions will generate increased
awareness of our site, and thereby create increased traffic to the location when
compared to other testing sites. We expect to make our information available on
the Internet for look-up by our customers, and may use email techniques to
remind our customers of an upcoming deadline for testing. We may also sell other
products and services to our customers, and expect to augment our testing
revenues by doing so. The products that we may offer to our customers at our
sites, and through our Internet presence, include contacts for automobile
insurance and automobile appraisals through third parties, automobile
accessories, maintenance products and other related items. We expect testing
revenues to be our primary activity and view these other activities as
complementary services that may help differentiate us from our competitors
and through which we can develop long-tem relationships with our customers.
OPERATING STRATEGY
Our operating strategy focuses on a) increasing the number of sites we
operate in a given market, b) increasing the volume of business at each site, c)
creating brand awareness for our services and products, and d) creating repeat
customer sales, all of which are designed to enhance our revenue and cash flow.
To achieve these goals, we:
o Seek to secure and maintain a leadership position by owning multiple
stations at well-traveled intersections and other locations that are
easily reachable by our customers;
o Sufficiently staff each station during the busiest time of day and
days of the week so as to maximize the number of tests performed;
o Coordinate operations, training, advertising and sales strategies in
each market to enhance revenue opportunities and maximize cost
efficiencies within each market;
5
o Implement regional management and marketing initiatives to maximize
the effectiveness of our share of local advertising in each of our
markets, as well as across all of our markets;
o Combine extensive market research with an assessment of our
competitors' vulnerabilities in order to identify significant and
sustainable customer development and retention;
o Seek to acquire existing testing sites where significant volume
potential exists, where an existing lease for either facility or
land may be advantageous, or where new increased volumes may exist
as a result of our operating strategy when compared to that of the
prior owner;
o Tailor the facilities, advertising, products and services we offer
to appeal to the broadest range of consumers and establish a
long-term buying pattern with our customers; and
o Use the Internet to differentiate our services from that of our
competitors, provide additional products and services to our
customers, promote our sites effectively and remind our clients to
visit us repeatedly and generate nominal increased revenues and
profits over and above that of the testing activity itself.
Corporate History, Recently Completed Transactions
Certain of the founders of the Company spent a significant amount of time
during 1999 and the first part of 2000 analyzing the market for emissions
testing services, researching available markets and planning for the initial
operations of the Company. The founders formed and organized the Company in May
of 2000 as a Georgia corporation. In conjunction with the formation of the
Company, a total of 2,410,000 shares of Common Stock were issued to 15 holders.
The founders contributed no cash or other tangible property to the Company for
their initial shares of Common Stock. The founders are included in the selling
shareholders in this offering, registering a total of 1,345,000 shares in this
offering. See "Selling Shareholders".
THE ASSET PURCHASE TRANSACTION BETWEEN THE COMPANY AND LAKE HOLDINGS, LLC.
On June 1, 2000, the Company acquired certain assets and assumed certain
liabilities of Lake Holdings, LLC ("Lake"), a Georgia limited liability company
engaged in the emissions testing business in the State of Georgia. The assets
consisted primarily of equipment sufficient to operate 4 1/2 vehicle emissions
testing stations. Other assets acquired in the transaction included all
licenses, permits, and goodwill of the seller, together with lease agreements
covering the land and buildings used by Lake in connection with the operations
of two testing stations (one in Gwinnett County and the other in Forsyth County,
Georgia). Lake represented and warranted that all assets acquired by us are free
and clear of all liens and encumbrances. (The Company subsequently granted a
first priority lien and security interest in and to the primary emissions
testing equipment to the initial holder of the Company's Series A Debentures.
See "Series A Debentures and Warrants - Terms and Conditions".)
The total purchase price for Lake's assets was $220,000, all of which was
paid by the Company in cash subsequent to the closing on June 3, 2000. The
Company used a portion of the proceeds of a financing transaction with GCA
Strategic Investment Fund Limited, described below in this section, to pay the
purchase price for the assets of Lake.
The only significant liabilities of Lake assumed by the Company were the
real estate leases for the Gwinnett County and the Forsyth County sites. Though
the Company entered into
6
that certain Assignment of Leases by Lake Holdings to eMissions as of June 1,
2000, Lake Holdings did not obtain the Landlord's consent to the assignment
of either of the leases (such consent is specifically required pursuant to
the Gwinnett County facility lease). The lease for the Gwinnett station has a
term that expires on May 31, 2004, although the Company may, at its option,
renew the lease for an additional five years. The rent under that agreement
is $1,700 per month, subject to adjustment based upon the consumer price
index. The lease for the Forsyth facility has a term that expires on
September 1, 2001 but may be terminated by either party with 30 days notice.
The Company has the right, at its option, to renew the lease up to two times,
each for an additional five-year term. The monthly rent under that agreement
is the greater of $500 or $1.00 for each vehicle tested at the site during
the applicable month.
The Company currently operates two testing stations formerly operated by
Lake in Gwinnett County and in Forsyth County, Georgia. The facility in Gwinnett
County is located at 27 East Crogan Street, Lawrenceville, Georgia 30343. That
site has two vehicle bays, one of which is currently operated by the Company.
The facility in Forsyth County is located at 554 Atlanta Highway, Cumming,
Georgia, 30040. That site has two vehicle bays, one of which is operated by the
Company.
As for the remaining equipment purchased from Lake (i.e., the equipment
not used in our Gwinnett or Forsyth facilities), equipment for 2 stations is now
in storage, to be used by the Company in its expansion efforts within the next
90 days, and the rest of the equipment (for one-half of a station) has been
leased to an unrelated party for $528 per month under an agreement that is
scheduled to expire May 2003. Our plan is to expand the Company's operations
within the next 90 days by locating and leasing the land and buildings required
for two additional stations in the Metro Atlanta Area, and outfitting them with
the emissions testing equipment currently in storage. See "Recent Transactions -
The Asset Purchase Agreement between the Company and Lake Holdings, LLC".
THE FINANCING TRANSACTION BETWEEN THE COMPANY AND GCA.
On June 1, 2000, the Company entered into a Securities Purchase Agreement
with GCA Strategic Investment Fund Limited (the "Fund"), pursuant to which the
Fund agreed to purchase certain convertible debentures (collectively, the
"Series A Debentures") and certain related stock warrants of the Company
(collectively, the "Warrants"). The agreement contemplates the purchase by the
Fund (on or before June 1, 2001) of the Company's Series A Debentures, in one or
more tranches, up to the aggregate principal amount of $1,000,000, at a price
equal to 95% of principal amount of each debenture. The agreement also
contemplates the Company's issuance, in one or more tranches, of certain
Warrants in favor of the Fund, concurrently with the Fund's purchase of the
Series A Debentures. The terms and conditions of the Series A Debentures and the
related Warrants are described below. See "Series A Debentures and Warrants -
Terms and Conditions".
On June 1, 2000, the Company and the Fund completed the first sale and
purchase of a Series A Debenture and related Warrant under the Securities
Purchase Agreement. At that time the Company sold to the Fund a Series A
Debenture in the original principal amount of $525,000, for a price equal to 95%
thereof, or $498,750. The principal amount of the Series A Debenture is due and
payable, in full, on June 1, 2002, unless the Fund shall have converted the
debenture into shares of the Company's Common Stock or the Company shall have
redeemed the debenture, in each case as provided therein. The Company is
obligated to pay interest on the outstanding principal amount of the Series A
Debenture at the per annum rate of seven percent. Generally, interest is payable
quarterly in arrears, beginning on September 30, 2000, and may be
7
payable, at the Company's option, in cash or shares of the Company's Common
Stock as provided therein. The obligations of the Company arising under the
Securities Purchase Agreement and the Series A Debenture are secured by a first
priority lien and security interest granted by the Company on certain emissions
equipment now owned by the Company, together with any and all equipment acquired
by the Company after June 1, 2000, and the proceeds thereof.
Concurrently with the sale of the Series A Debenture on June 1, 2000, the
Company issued to the Fund a Warrant, allowing the Fund to purchase up to
250,000 shares of the Company's Common Stock at any time over a five year period
(from the issuance date of June 1, 2000) at a price of $1.00 per share, subject
to adjustment as provided therein. The Company received no cash or other
property in exchange for the Warrant.
On September 15, 2000, the Company and the Fund completed a second sale
and purchase of a Series A Debenture and related Warrant under the Securities
Purchase Agreement. At that time the Company sold the Fund a Series A Debenture
in the original principal amount of $100,000 for a price equal to 95% thereof,
or $95,000. Though the Company actually received $100,000 from the Fund at the
sale of this second Series A Debenture and Warrant, there was no change to the
actual purchase price of $95,000 for the Series A Debenture. The Company has
applied this additional $5,000 to general working capital. The principal amount
of the Series A Debenture is due and payable in full, on June 1, 2002, unless
the Fund shall have converted the Debenture into shares of the Company's Common
Stock or the Company shall have redeemed the Debenture, in each case as provided
therein. The Company is obligated to pay interest on the outstanding principal
amount of the Series A Debenture at the per annum rate of seven percent.
Generally, interest is payable quarterly in arrears, beginning on September 30,
2000, and may be payable, at the Company's option, in cash or shares of the
Company's Common Stock as provided therein. The obligations of the Company
arising under the Securities Purchase Agreement and the Series A Debenture are
secured by a first priority lien and security interest granted by the Company on
certain emissions equipment now owned by the Company, together with any and all
equipment acquired by the Company after June 1, 2000, and the proceeds thereof.
Concurrently with the sale of the Series A Debenture on September 15,
2000, the Company issued to the Fund a Warrant, allowing the Fund to purchase up
to 50,000 shares of the Company's common stock at any time over a five year
period (from the issuance date of September 15, 2000) at a price of $1.00 per
share, subject to adjustment as provided therein. The Company received no cash
or other property in exchange for the Warrant.
The shares of Common Stock to be issued upon conversion of the Series A
Debentures and/or upon the exercise of the Warrants will be freely tradable
shares in the United States following the effective date of this registration
statement with the Securities and Exchange Commission (the "Commission"). For
further information concerning the terms and conditions of the Series A
Debentures and the Warrants sold and issued on June 1, 2000 or September 15,
2000, see "Series A Debentures and Warrants - Terms and Conditions".
The Securities Purchase Agreement requires that the Company file with the
Commission, on or before June 6, 2000 a registration statement (the
"Registration Statement") to register the resale of the shares of the Common
Stock to be issued upon the conversion of the Series A Debentures by the Fund
and the shares of Common Stock to be issued upon exercise of the related
Warrants. If the Registration Statement is not declared effective by the
Commission on
8
the earlier of (i) 90 days from June 6, 2000; (ii) five days following the
receipt of a "No Review" letter from the Commission; or (iii) the first day
following the day that the Commission declares the Registration Statement
effective, (the "Required Effectiveness Date), the Company shall pay to the
Fund, as liquidated damages and not as a penalty, an amount equal to 2% of the
outstanding principal amount of the Series A Debentures, prorated, for each 30
day period the Registration Statement is not declared effective by the
Commission, which amount will be increased to 3% of the outstanding principal
amount of the Series A Debentures in the event that the Registration Statement
is not declared effective by the Commission within 120 days of the Closing Date.
In addition, commencing 150 days following the Closing Date or the six month
anniversary date, as applicable, the Conversion Price of the Series A Debentures
will decrease by 1% for each 30 day period in which the Registration Statement
is not declared effective. In the event that the Company fails to obtain a valid
Registration Statement by 180 days following the Closing Date, the Company will
redeem the Series A Debentures and the Warrants as set forth in the Series A
Debentures and the Warrants, respectively. Additionally, the Company will grant
to the Fund first priority piggyback registration rights in the event the
Company proposes to effect a registered offering of common stock or warrants, or
both, prior to the filing of the Registration Statement referenced above. As of
September 20, 2000, the Corporation had incurred liquidated damages payable to
the Fund of approximately $7,000.
In addition, commencing on October 29, 2000, the conversion price of the
Series A Debentures will decrease by one percent for each 30-day period in which
the Registration Statement is not declared effective. In the event the Company
fails to obtain a valid Registration Statement by November 28, 2000, the Company
is required redeem the Series A Debentures and related Warrants. See "Series A
Debentures and Warrants."
CERTAIN TRANSACTIONS WITH BEACHSIDE COMMONS 1, LLC.
On June 2, 2000, the Company loaned to Beachside Commons 1, LLC
("Beachside") a principal amount of $94,833.35 and received from Beachside
that certain Promissory Note (the "Note") dated as of June 2, 2000 by which
Beachside is obligated to repay to the Company the principal amount of
$94,833.35 plus interest calculated at 12% per annum and with an additional
fee of 2% of the principal amount, all to be paid on August 2, 2000 (the
"Maturity Date"). The proceeds from this loan were used in their entirety by
Beachside to make certain past, current and future payments on the primary
mortgage of certain real property owned by Beachside. As of the date of this
Prospectus, the Note has not been repaid by Beachside. This loan to Beachside
by the Company was made in violation of the Securities Purchase Agreement as
an unauthorized use of proceeds. The Fund was made aware of this Note, but
the breach of the Securities Purchase Agreement has not been waived by the
Fund as of the date of this Prospectus.
Pursuant to a letter agreement delivered by the Company dated September
15, 2000, and in consideration of that certain Purchase Agreement entered into
by the Company and Irish Investments, LLC ("Irish") and the grant of additional
collateral by Beachside under the Note, the Company waived the Maturity Date
under the Note, until the 45th day following the effective date of this
Prospectus with the Commission. See "Risk Factors", Recent Transactions" and
"Certain Relationships And Related Transactions".
THE CONSULTING AND EMPLOYMENT AGREEMENTS BETWEEN THE COMPANY AND OTHERS.
Concurrent with the formation of the Company on May 5, 2000, the Company
entered into a consulting agreement with Porter Lane Investments, Inc.
("Porter"), a Georgia corporation.
9
Porter is owned by Gerald F. Sullivan, a founder of the Company and a resident
of Georgia. The consulting agreement with Porter obligates Porter to provide
assistance and advice to the Company in connection with mergers, acquisitions
and other business combinations involving the Company, and in connection with
the capital markets and financing transactions involving the Company. The
agreement has a term of five years and requires the Company to pay Porter a
monthly fee of $8,000, increasing at the rate of ten percent per year, plus a
finder's fee on debt and/or equity acquisition transactions procured through the
efforts of Porter equal to two and one-half percent of the value of the
transaction. The agreement permits Porter to retain, engage and employ other
persons and entities to provide the services required to be furnished by Porter.
The consulting agreement with Porter requires that the Company provide
Porter with office space and office support at the Company's executive offices
in Cumming, Georgia, as well as reimbursement of actual expenses incurred by
Porter in connection with its duties under the consulting agreement with the
Company. Porter is a selling shareholder in this offering, registering 155,000
shares of the 310,000 shares of Common Stock issued to Porter such upon
formation of the Company.
On June 1, 2000, the Company entered into a consulting agreement with
Robert Evans. Robert Evans (through R.V. Evans Enterprises, Inc. for which Mr.
Evans is the sole shareholder) previously operated for Lake Holdings, LLC,
emissions testing stations in Gwinnett and Forsyth Counties (now operated by the
Company). The agreement has a term of 120 days, requires that Robert Evans be
available to consult with the Company on a full-time basis, and obligates the
Company to issue 40,000 shares of our Common Stock to Robert Evans and to pay
him a total of $14,000. Separately, Robert Evans has been issued 100,000 shares
of our Common Stock, as a founder of the Company. Robert Evans is one of the
selling shareholders in this offering. See "Selling Shareholders."
On June 1, 2000, the Company entered into an employment agreement with
William Estroff to serve as the President/CEO of the Company. The agreement had
an initial term of one year, with renewal options for up to three additional
one-year terms. Mr. Estroff resigned as the President of the Company as of
September 15, 2000, for personal reasons. At the same time, Mr. Estroff resigned
as a member of the Company's board of directors. Mr. Estroff remains a founding
shareholder in the Company and was issued 110,000 shares of the Company's common
stock in conjunction with his efforts as such. William Estroff is one of the
selling shareholders in this offering. See "Selling Shareholders."
On September 18, 2000, the Company entered into an employment agreement
with Richard A. Parlontieri to serve as the President/CEO of the Company. The
agreement has an initial term of one year, which may be extended for up to three
one-year periods. Mr. Parlontieri's base compensation is $60,000 per year (which
increases by ten percent per year). In addition, Mr. Parlontieri is entitled to
a receive a quarterly bonus of up to $10,000 per quarter if the Company achieves
certain performance criteria as specified by the Board of Directors from time to
time. He will receive a monthly automobile allowance of $500 and reimbursement
of certain necessary, customary and usual business related expenses. Mr.
Parlontieri is a member of our board of directors and will receive from the
Company no additional compensation while serving as a board member or as a
member of any board committee.
Mr. Parlontieri, who is a founder of the Company, has been issued a total
of 200,000 shares of our Common Stock. Of these 200,000 shares, 100,000 shares
are being registered for Mr. Parlontieri in this offering. See "Selling
Shareholders".
10
Under the terms of the employment agreement, the Company retains the right
to terminate Mr. Parlontieri's services with or without cause. In the event of a
termination by us without cause, the Company is obligated to pay Mr. Parlontieri
severance pay equal to one month's base compensation.
Our principal executive offices are located 400 Colony Park, Building 104,
Suite 600, Cumming, Georgia 30040. Our telephone number is (678) 947-6718.
Future Funding and Financing Plans; Financial Constraints
The Company expects to pursue a dual strategy of acquiring existing
emissions testing stations and of opening new stations. The Company anticipates
the need for further money, both in the next six months and thereafter, as it
seeks to expands its operations and markets, to fund the operation of its
stations, to finance the marketing of its stations and to fund other aspects of
our business plan and strategy. Further, most any financing activity will
require us to pay fees, interest or dividends. We expect that a combination of
debt and equity financing will be required, from both private and public
sources.
As a result, the Company expects that additional shares of Common Stock
and preferred stock of the Company will need to be issued at future dates, and
that these transactions likely will have a dilutive effect on the Company and
its shareholders. We believe that borrowing money from conventional sources such
as banks and commercial lending sources, combined with the sale of preferred
convertible equities, or the use of Common Stock as a form of payment, will be
sufficient to fund our operations during this growth period. Success in the
implementation of the current business plan and strategy, and the profitability
of the Company are contingent on the availability of such funding sources. No
assurance can be given that borrowed money will be available from conventional
sources or that the Company will be able to sell preferred convertible equities
or use its Common Stock on terms acceptable to the Company, or at all, to fund
its operations as set forth above.
Although the Company completed the sale of the first and second Series A
Debentures and related Warrants to the Fund under the Securities Purchase
Agreement, there can be no guarantee that any further funding will available
under that facility or that the Company will be able to satisfy the funding
requirements of the Fund as set forth in the Securities Purchase Agreement.
We presently have 2,450,000 shares of Common Stock issued and outstanding.
None of the Company's authorized shares of preferred stock is outstanding. After
giving effect to the anticipated conversion of the Company's Series A Debentures
into shares of Common Stock (and assuming that 2,000,000 shares of Common Stock
are issued upon such conversion) and to the exercise of the related Warrants
into shares of Common Stock (and assuming that 500,000 shares are issued upon
such exercise), we will have 4,950,000 shares of Common Stock outstanding
(assuming, of course, that no other shares are issued by the Company in the
interim) (4,950,000 = 2,450,000 + 2,000,000 + 500,000).
11
The Offering
Common Stock offered in this offering ............. 3,845,000 Shares (1)
Common Stock to be outstanding after the offering . 4,950,000 Shares (2)
Use of proceeds.................................... The Common Stock will be
sold by the selling
shareholders and a
holder(s) of the Series A
Debentures and related
Warrants. The Company will
receive no proceeds from
such sales or otherwise in
this offering.
OTC/NASDAQ Proposed symbol ........................ "SMOG"
- ----------
The above table includes the following:
(1) The shares offered hereby (i.e., 3,845,000 shares) consist of (a)
2,500,000 shares of Common Stock to be issued upon conversion of the
Company's Series A Debentures and the related Warrants (see Note 2 below)
and (b) 1,345,000 shares being registered for selling shareholders. The
selling shareholders in this offering, and the number of shares to be
registered on their behalf in this offering, are as follows: 100,000 for
Richard A. Parlontieri as President/CEO of the Company; 155,000 shares for
Porter Lane Investments, Inc., issued in conjunction with the formation of
the Company; 155,000 shares for Irish Investments, LLC, issued in
conjunction with the formation of the Company; 155,000 shares for Bolling
Investments, LLC, issued in conjunction with the formation of the Company;
155,000 shares for Westhurst, Ltd., issued in conjunction with the
formation of the Company; 155,000 shares for Emerald Marine, Ltd., issued
in conjunction with the formation of the Company; 100,000 shares for ARM &
Associates, LLC, issued in conjunction with the formation of the Company;
100,000 shares for Gant Alumni Associates, LLC, issued in conjunction with
the formation of the Company; 55,000 shares for William S. Estroff, issued
in conjunction with the formation of the Company; 25,000 shares for Karen
Vickers, the Controller of the Company, issued in conjunction with the
formation of the Company; 25,000 shares for John J. McManus issued in
conjunction with the formation of the Company; 25,000 shares for each of
the Company's three outside directors, for a total of 75,000 shares,
issued in conjunction with the formation of the Company; and 90,000 shares
for Robert Evans, issued in conjunction with the acquisition of Lake
Holdings, LLC and in conjunction with the formation of the Company.
(2) Includes (a) the number of outstanding shares of Common Stock on the date
hereof, 2,450,000, plus (b) 2,000,000 shares of Common Stock to be issued
upon full conversion of the Company's Series A Debentures issued under the
June 1, 2000
12
Securities Purchase Agreement between the Company and GCA Strategic
Investment Fund Limited (which conversion is assumed here), plus (c)
500,000 shares of Common Stock to be issued upon the full exercise of the
Warrants related to the Series A Debentures (which exercise is assumed
here). See "Series A Debentures and Warrants - Terms and Conditions".
Market Information
No Public Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or be sustained or that the market price of the Common Stock will not
decline. Even if an active trading market develops, the market price of the
shares of Common Stock is likely to be highly volatile and could be subject to
wide fluctuations in response to factors such as actual or anticipated
variations in the Company's revenues, net earnings or cash flow, changes in laws
and regulations that relate directly or indirectly to the emissions testing
industry, competition in the emissions testing industry, changes in financial
estimates by securities analysts, conditions and trends in the emissions testing
industry, adoption of new accounting standards affecting the emissions testing
industry, general market conditions and other factors.
Further, the stock markets, and in particular the Nasdaq Over-the-Counter
Bulletin Board, have experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many small
capitalization companies and that often have been unrelated or disproportionate
to the operating performance of such companies. These broad market factors and
market fluctuations, as well as general economic, political and market
conditions such as recessions and interest rate or international currency
fluctuations, may adversely affect the market price of the Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, results of operations and
financial condition.
Shares Eligible for Future Sale; Registration Rights
Sale of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through equity offerings in the future.
Of the 3,845,000 shares offered hereby, 1,345,000 shares to be registered for
the benefit of the selling shareholders as provided herein will be eligible for
immediate sale in the public market without restriction, and the remaining
shares, i.e., 2,500,000 shares of Common Stock to be registered for the benefit
of the holder of the Company's Series A Debenture and the Warrants related
thereto, will be eligible for immediate sale in the public market upon the
Company's issuance of those shares upon a conversion of a Series A Debenture
and/or upon the exercise of a Warrant.
In addition, the Company intends to register additional shares of Common
Stock if and when required as a condition to obtain future financings. All of
these actions will have a dilutive effect on all shareholders and may create a
depressive effect on the price of the Common Stock, and adversely effect a
holder's ability to readily or quickly sell his or her shares in the market.
13
SUMMARY RISK FACTORS
A PURCHASER OF THE COMPANY'S SHARES OF COMMON STOCK MUST CONSIDER THE
FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST. THE COMMON STOCK IS A HIGHLY
SPECULATIVE INVESTMENT AND A PURCHASER COULD LOSE ALL OF THE MONEY SPENT ON
PURCHASING THE COMMON STOCK.
o THE COMPANY IS A START UP COMPANY WITH MINIMUM CAPITALIZATION AND
NET WORTH;
o THE COMPANY IS CURRENTLY IN DEFAULT UNDER THE TERMS OF THE
SECURITIES PURCHASE AGREEMENT WITH THE FUND;
o THE MANAGEMENT OF THE COMPANY HAS LIMITED EXPERIENCE IN ACQUIRING,
DEVELOPING AND OPERATING EMISSIONS TESTING STATIONS AND IN PROVIDING
ADVERTISING, MARKETING AND INTERNET RELATED SERVICES;
o THE MANAGEMENT OF THE COMPANY HAS LIMITED EXPERIENCE IN AUTOMOTIVE
SERVICE SALES, THE TESTING OF VEHICLES FOR EMISSIONS, AND INTERNET
ADVERTISING AND COMMERCE;
o SUCCESS OF THE EMISSIONS TESTING BUSINESS IS CONTINGENT ON SELECTION
OF HIGH TRAFFIC SITES, QUALIFIED STAFFING AND RELIABLE TESTING
EQUIPMENT IN ADDITION TO OTHER FACTORS. POOR SITE SELECTION,
INCREASED RENTAL RATES, UNQUALIFIED TESTING PERSONNEL OR UNRELIABLE
TESTING EQUIPMENT COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS;
o COMPETITION IN THE EMISSIONS TESTING MARKET, PARTICULARLY IN LARGER
CITIES, IS INTENSE;
o COMPETITION IN INTERNET MARKETING IS INTENSE AND WE HAVE LITTLE
EXPERIENCE IN THAT AREA OF BUSINESS;
o THE COMPANY'S BUSINESS STRATEGY REQUIRES ADDITIONAL FINANCING FROM
THIRD PARTIES AND THAT FINANCING MIGHT NOT BE AVAILABLE UPON TERMS
ACCEPTABLE TO THE COMPANY, IN WHICH EVENT THE COMPANY WILL NOT GROW
OR EXPAND AS EXPECTED;
o THE RATE OF TESTING VOLUME DEPENDS UPON THE NUMBER OF PEOPLE
VISITING THE SITE ON ANY GIVEN DAY. RAIN, HEAT, TRENDS IN TRAFFIC
VOLUME AND IN SHOPPING AND HOUSING DESTINATIONS, ECONOMIC DOWNTURNS
AND LACK OF ACCESS TO OUR FACILITIES MAY REDUCE THE REVENUES AND
PROFITS OF THE COMPANY'S OPERATIONS;
o REVENUES FROM EMISSIONS TESTING MAY PROVE TO BE HIGHLY SEASONAL AND
THUS THE ECONOMIC RESULTS FOR ONE PERIOD OF TIME WILL NOT BE
INDICATIVE OF ECONOMIC RESULTS FOR ANOTHER PERIOD OF TIME;
o TERMS OF ADDITIONAL FINANCING MAY REQUIRE THE COMPANY TO ISSUE
ADDITIONAL SHARES OF COMMON STOCK OR PREFERRED STOCK OR DEBT, ANY OF
WHICH COULD REDUCE THE VALUE OF THE SHARES OF COMMON STOCK;
o THE NUMBER OF SHARES AVAILABLE FOR ACTIVE TRADING IS LIMITED AND
THUS THE PRICE OF THE COMMON STOCK MAY RISE OR FALL DRAMATICALLY
UPON THE TRADING OF A RELATIVELY SMALL NUMBER OF SHARES. A PURCHASE
OF THE SHARES OF COMMON STOCK OF THE COMPANY SHOULD NOT BE MADE
UNLESS THE PURCHASER CAN AFFORD TO LOSE THE ENTIRE AMOUNT OF THE
PURCHASE PRICE.
o WE ARE DEPENDENT ON THE CASH FLOWS OF OUR TESTING STATION, MARKETING
AND INTERNET ACTIVITIES TO MEET OUR OBLIGATIONS. THERE IS NO
OPERATING HISTORY TO SUGGEST THAT ANY,
14
OR ALL, OR THESE OPERATIONS CAN BECOME PROFITABLE AND GENERATE
POSITIVE CASH FLOWS. IF THEY DO NOT, AND WE ARE NOT SUCCESSFUL IN
RECRUITING ADDITIONAL FUNDING, IT WILL BE DIFFICULT FOR US TO
CONTINUE AND WE MAY FAIL.
o WE ARE DEPENDENT ON VARIOUS GOVERNMENTAL AGENCIES, AT VARIOUS
LEVELS, TO CREATE DEMAND FOR OUR SERVICES AND TO PROVIDE THE
GUIDELINES WITHIN WHICH WE MUST OPERATE. IF AN AGENCY IMPORTANT TO
US SHOULD CHANGE ITS POSITION OR ELIMINATE OR SIGNIFICANTLY CHANGE
THE REQUIREMENTS OF OUR BUSINESS, WE MAY FACE A DECLINE IN REVENUE
OR A DRAMATIC INCREASE IN OPERATING COSTS, OR BOTH.
YOU SHOULD CONSIDER THE RISK FACTORS AND THE IMPACT FROM VARIOUS EVENTS
THAT COULD ADVERSELY AFFECT OUR BUSINESS BEFORE INVESTING IN OUR COMMON STOCK.
SEE THE "RISK FACTORS" SECTION OF THIS PROSPECTUS FOR A MORE COMPLETE DISCUSSION
OF THESE RISKS.
END OF PROSPECTUS SUMMARY
15
RISK FACTORS
A purchaser of the shares of the Company's Common Stock should consider
the following risk factors before purchasing the Common Stock. The Common Stock
is a highly speculative investment and a purchaser could lose all of the money
spent on purchasing the Common Stock. You should carefully consider the
following risk factors in addition to the other information in this Prospectus
before purchasing shares of our common stock. Each of these risk factors could
adversely affect our business, operating results and financial condition, as
well as the value of an investment in our Common Stock.
AS OF THE DATE OF THIS PROSPECTUS, WE ARE IN DEFAULT OF THE TERMS AND CONDITIONS
OF THE SECURITIES PURCHASE AGREEMENT.
The loan of certain funds to Beachside Commons 1, LLC on June 2, 2000 was
in violation of that certain Securities Purchase Agreement with the Fund. The
Fund has not waived this violation. As a result of such continuing default, and
pursuant to the terms of the Securities Purchase Agreement, the Fund could
declare the Series A Convertible Debentures to be immediately due and payable
and may move to protect and enforce its rights by an action at law, suit in
equity, or other appropriate proceeding.
In addition, as of September 20, 2000, we owe the Fund 2% of the
outstanding principal amount of the Series A Debentures, or an estimated $7,000
in liquidated damages since this Prospectus was not deemed effective by the
Commission prior to September 1, 2000. If this Prospectus is not declared
effective by the Commission by October 1, 2000, the amount of the liquidated
damages will increase to 3% of the outstanding principal amount of the Series A
Debentures. Additional damages may apply, depending upon the date upon which
this Prospectus is declared effective by the Commission.
WE ARE HIGHLY DEPENDENT ON GOVERNMENTAL AGENCIES.
Our business depends upon federal and state legislation and regulations
mandating air pollution controls. The vehicle emissions testing industry in the
U.S. has developed in response to the Clean Air Act and related regulations
issued by the U.S Environmental Protection Agency (the "EPA"). The EPA, as well
as state level organizations, currently is evaluating the need for more
stringent emissions standards for motor vehicles. We cannot assure you that
additional federal or state legislation, or changes in regulatory requirements,
would not, directly or indirectly, have a material adverse effect on the vehicle
emissions testing industry.
Additionally, the growth of our business is dependent on expansion into
markets beyond the Metro Atlanta Area. We will face certain risks and expenses
as we expand outside of our marketplace. Political forces, business conditions
and the cost of real estate for use in our emissions testing sites may all be
different than that which we have experienced to date.
As we contemplate the international market, which we believe may
constitute a significant portion of our business in coming years, we will depend
largely upon the adoption of foreign air pollution control legislation and
related regulations requiring or encouraging vehicle emissions testing
development in those countries. Although a number of countries in Europe, Asia
and Latin America have passed or are considering such legislation, and a limited
number of countries, including the United Kingdom, Germany, Canada, Mexico and
Japan, have mandatory vehicle emissions testing, these countries may not enact
and enforce, or continue to enforce, as the case may be, the necessary
legislation and regulations. Any failure of these and other foreign
16
countries to implement air pollution control legislation that requires or
encourages vehicle emissions testing could limit our international expansion
plans, which could have a material adverse effect on our business, financial
condition and results of operations.
THE MARKET FOR EMISSIONS TESTING MAY REACH A POINT OF MATURITY THAT MAY LIMIT
OUR ABILITY TO EXPAND.
We expect the domestic market for decentralized emissions testing programs
to continue to expand for approximately the next three years as additional
states and municipalities are either required to or elect to implement
decentralized programs and/or convert basic testing programs that test a vehicle
in neutral gear only to enhanced programs that test emissions under simulated
driving conditions.
Thereafter, however, the size of the domestic market may decline as a
result of most states with large vehicle populations having already implemented
such programs. While we may still have the ability to acquire or open new
emissions testing stations, the economics of a mature marketplace are not likely
to be as profitable as an emerging market where customers have not acquired
buying habits for these required tests, and where the better, higher traffic
locations may not already be under lease to competitors. Although we do not
require new markets to begin, or consolidate, operations, we cannot assure you
that growth in these markets will be sufficient to offset any decline we are
likely to suffer in our domestic emissions equipment business.
WE MAY NOT BE ABLE TO MANAGE AND SUSTAIN GROWTH; TO SUCCESSFULLY INTEGRATE OUR
NEW OR ACQUIRED OPERATIONS; OR TO ACHIEVE COST SAVINGS FROM MULTIPLE STATIONS.
Our growth will result in new and increased responsibilities for our
management. The process of integrating the businesses of existing emissions
testing stations and of opening new stations may result in unforeseen operating
difficulties and may require substantial attention from members of our senior
management. We cannot assure you that we will be able to integrate successfully
the operations of these businesses.
As a result of our expansion through acquisition and development of new
emission stations, we expect to reduce our operating expenses by eliminating
duplicative management, staff and facilities, and other cost efficiencies.
Although we believe that our strategies are reasonable, we cannot assure you
that we will be able to implement our plans on schedule. When implementing these
initiatives, we could encounter unanticipated problems, and there is no
guarantee that we will attain our goal of reducing our operating expenses.
Finally, we note that our plans will require substantial attention from members
of our management, which may limit the amount of time they can devote to our
day-to-day operations.
WE HAVE A LIMITED OPERATING HISTORY AND LIMITED HISTORICAL FINANCIAL INFORMATION
UPON WHICH YOU MAY EVALUATE OUR PERFORMANCE.
You must consider our prospects in light of the risks and uncertainties
encountered by companies in the early stages of development. We may not
successfully address these risks and uncertainties or successfully implement our
operating and acquisition strategies. If we fail to do so, it could materially
harm our business and impair the value of our Common Stock. Even if we
accomplish these objectives, we may not generate positive cash flows or profits
in the future. Moreover, variations in our performance may cause our quarterly
operating results to fluctuate significantly in the future. One complicating
factor is that historical data from the State of Georgia indicates that the
emissions business in the state is seasonal, with the second and third
17
quarters producing the heaviest volume of tests and the fourth quarter producing
the lowest volume. As a result, our operating results in one or more future
quarters may fail to meet the expectations of securities analysts or investors.
Failure to meet these expectations could impair the price of our Common Stock.
OUR ACQUISITION STRATEGY MAY NOT INCREASE OUR CASH FLOW OR YIELD OTHER
ANTICIPATED RESULTS.
We expect to experience rapid growth, and intend to continue our
aggressive growth strategy, by acquiring multiple emissions testing stations in
both the Metro Atlanta Area and in other markets. This strategy is subject to a
variety of risks, including the:
o Inability to obtain financing to fund future acquisitions;
o Failure or unanticipated delays in completing acquisitions due to
difficulties in obtaining regulatory approvals or consents;
o Difficulty in integrating the operations, systems and management of
our acquired stations and absorbing the increased demands on our
administrative, operational and financial resources;
o Diversion of management's attention from other business concerns;
o Loss of key employees of acquired stations;
o Reduction in the number of suitable acquisition targets resulting
from continued industry consolidation;
o Inability to negotiate definitive purchase agreements on
satisfactory terms;
o Increases in the prices of sites and testing equipment due to
increased competition for acquisition opportunities; and
o Inability to sell any non-performing station, or obsolete equipment.
If we are not able to address successfully these risks, it could materially harm
our business and impair the value of our Common Stock.
OUR INABILITY TO MANAGE EFFECTIVELY OUR PLANNED RAPID GROWTH COULD ADVERSELY
AFFECT OUR OPERATIONS.
We anticipate experiencing rapid growth and development in a relatively
short period of time and expect to continue to experience rapid growth in the
future. The management of this growth will require, among other things,
continued development of our financial and management controls and management
information systems, stringent control of costs, increased marketing activities,
the ability to attract and retain qualified management personnel and the
training of new personnel. We intend to hire additional personnel in order to
manage our expected growth and expansion. Failure to successfully manage our
expected rapid growth and development and difficulties in managing our emissions
testing stations could have a material adverse effect on our business and the
value of our Common Stock.
ADDITIONAL FINANCING FOR FUTURE ACQUISITIONS MAY BE LIMITED.
Depending upon the nature, size and timing of future acquisitions, we may
require financing in excess of that provided under any bank or credit facility.
We cannot assure you that
18
any bank or credit facility or any other agreements to which we are a party will
permit the additional financing or that the additional financing will be
available to use or, if available, that the financing would be on terms
acceptable to us. The inability to finance an aggressive growth strategy may
adversely affect our ability to compete successfully with larger and
better-financed parties engaged in our industry and may impair the value of our
Common Stock.
Furthermore, while the Company has completed its two sales of Series A
Debentures in original principal amounts of $525,000 and $100,000, respectively;
and the related Warrants to GCA Strategic Investment Fund Limited under the
terms of the June 1, 2000 Securities Purchase Agreement, there can be no
assurance that any additional sales of securities will occur under that
facility, since further transactions are contingent upon certain conditions that
may not be met in the future. See "Series A Debentures and Warrants - Terms and
Conditions".
BECAUSE THE EMISSIONS TESTING INDUSTRY IS HIGHLY COMPETITIVE, WE MAY LOSE
CUSTOMERS AND REVENUE.
Our emissions testing stations face competition from other emission
stations in each market for testing volume and revenues. Our revenue from
emissions testing is affected primarily by the number of vehicles our stations
can process during our operating hours. Other emissions testing companies that
are larger and have more resources may also enter markets in which we operate.
Although we believe our stations are well positioned to compete, we cannot
assure you that our stations will maintain, or increase, their current testing
volumes and revenues. A decrease in testing volume could impair our ability to,
among other things, service potential future debt obligations, thereby adversely
affecting the value of our Common Stock.
A DOWNTURN IN ANY OF OUR MARKETS COULD ADVERSELY AFFECT OUR REVENUE AND CASH
FLOW.
Our stations are located, initially, in a limited market, that of the
Metro Atlanta, Georgia, Area. As a result of our recent acquisitions of
equipment and subleases from Lake Holdings, LLC, and assuming we place the
"excess" equipment we acquired in that transaction in new testing sites, we will
have four stations in the market. A significant decline in net testing volume
and revenue in any one of those stations could have a material adverse effect on
our overall operations and financial condition, thereby adversely affecting the
value of our Common Stock.
LAWS AND OTHER REGULATORY CONSIDERATIONS COULD PREVENT OR DELAY OUR STRATEGY TO
EXPAND OUR BUSINESS AND INCREASE REVENUE.
Our future emission station acquisitions and dispositions may be subject
to the license transfer approval process of the responsible governmental agency
at the state or federal level. Such governmental reviews may cause delays in
completing transactions and, in some cases, result in the loss of a transaction
or opportunity for the Company.
THE LOSS OF KEY PERSONNEL COULD DISRUPT THE MANAGEMENT OF OUR BUSINESS.
Our business depends upon the continued efforts, abilities and expertise
of Mr. Richard A. Parlontieri, and our other executive officers and key
employees. We believe that the unique combination of skill and experience
possessed by these individuals would be difficult to replace and that, in
particular, the loss of Mr. Parlontieri would have a material adverse effect on
us. These adverse effects could include the impairment of our ability to execute
our acquisition and operating strategies and a decline in our standing in the
emissions testing industry. We do not presently have "key man" insurance on the
life of Mr. Parlontieri and we do not expect the Company to obtain such
insurance in the foreseeable future.
19
RESTRICTIONS AND LIMITATIONS IMPOSED UNDER THE ANY NEW BANK CREDIT FACILITY, OR
OTHER FINANCING ACTIVITY, COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR
BUSINESS AND THE VALUE OF OUR COMMON STOCK.
We expect that any bank credit facility will restrict our ability to,
among other things:
o Incur additional indebtedness;
o Pay dividends or make certain other restricted payments;
o Enter into certain transactions with affiliates;
o Merge or consolidate with any other person; or
o Sell, assign, transfer, lease, convey, or otherwise dispose of all
or substantially all of our assets.
In addition, we expect that any bank credit facility will restrict our
ability to incur liens or to sell certain assets and require us to maintain
specified financial ratios and satisfy certain financial condition tests. Our
ability to meet those financial ratios and financial condition tests could be
affected by events beyond our control, and we cannot be sure that we would be
able to meet those tests. A breach of any of these restrictions could result in
a default under the new bank credit facility. If an event of default occurs,
then our new credit facility lenders could declare all amounts outstanding,
including accrued interest, immediately due and payable. If we could not repay
those amounts, our lenders could proceed against the collateral pledged to them
to secure that indebtedness. If our new credit facility indebtedness were
accelerated, our assets may not be sufficient to repay in full such indebtedness
and our other indebtedness. Our ability to comply with the restrictions and
covenants imposed by the terms of our indebtedness will depend upon our future
performance and various other factors, such as legislative, business and
regulatory factors, certain of which are beyond our control. If we fail to
comply with these restrictions and covenants, the holders of our indebtedness
under the new bank credit facility could declare all amounts owed to them
immediately due and payable.
Furthermore, in conjunction with the issuance and sale of the Series A
Debentures and Warrants to GCA Strategic Investment Fund Limited (the "Fund"),
the Company (on June 1, 2000 and September 15, 2000) granted to the Fund a first
priority lien and security interest in and to the primary emissions testing
equipment purchased from Lake Holdings, LLC, and also granted a similar lien and
security interest to the Fund in and to any and all other equipment to be
acquired by the Company while the debenture is outstanding. See "Series A
Debentures and Warrants - Terms and Conditions". The grant of that lien and
security interest to the Fund has at least two implications to the Company:
first, upon a default by the Company of the Series A Debentures or the
underlying Securities Purchase Agreement, the Fund may be in a position to
foreclose upon the equipment, thereby threatening the ability of the Company to
continue operations; and second, given the prior lien, the Company cannot grant
another lender a first priority lien or security interest in the collateral
pledged to the Fund, thereby restricting its ability to use that collateral to
obtain additional financing.
UPON COMPLETION OF THE OFFERING, CERTAIN EXISTING SHAREHOLDERS AND THEIR
AFFILIATES WILL BENEFICIALLY OWN A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND
COULD SIGNIFICANTLY AFFECT MATTERS REQUIRING A STOCKHOLDER VOTE.
20
Immediately following the completion of this offering, five shareholders
will together beneficially own 63% of our Common Stock. This concentration of
ownership will mean that a small number of shareholders will have the ability to
significantly affect matters that require a shareholder vote.
CERTAIN SHARES ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE RESOLD INTO THE
MARKET IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO DROP SIGNIFICANTLY.
As restrictions on the resale of the Company's shares of Common Stock
expire or terminate, the market price of our Common Stock could drop
significantly if the holders of the previously restricted shares decide to sell
them, or if the market perceives such holders may sell such shares. After this
offering, we will have outstanding 4,950,000 shares of Common Stock. Of those
shares, the 3,845,000 shares sold in this offering, including the 2,500,000
shares of common stock issued on conversion of shares of our Series A Debentures
and the exercise of the related Warrants, may be immediately resold in the
public market. The remaining 1,105,000 of our total outstanding shares will
become available for resale in the public market after May 5, 2001, subject to
the provisions of SEC Rule 144.
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED AND A MARKET MAY NOT DEVELOP OR
BE LIQUID, OR IF ONE DEVELOPS, OUR STOCK PRICE MAY FLUCTUATE.
Prior to this offering, there has not been a public market for our common
stock. We intend to apply to include the Common Stock for quotation on the
Nasdaq Over-the-Counter Bulletin Board. After this offering, an active trading
market might not develop or, if developed, continue. The price for our Common
Stock will be determined by market forces not within our control, including
market makers and other parties. You may not be able to resell your shares at or
above the price you paid. If an active trading market does develop following
completion of this offering, the market price of our Common Stock will be
subject to fluctuations in response to various factors and events, including:
o Variations in our operating results;
o Regulatory and technological developments;
o Announcements of business developments by us, our competitors or by
applicable governmental agencies;
o Our ability or failure to implement our growth strategy;
o Analysts' reports or projections;
o Loss of or changes in key personnel;
o Changes in market value of emissions testing companies;
o Stock market price and volume fluctuations generally; and
o Sales of our Common Stock by our shareholders or us.
Fluctuations in the market price of our Common Stock may, in turn, adversely
affect our ability to complete targeted acquisitions, to attract additional
capital and financing, and to attract and retain qualified personnel.
21
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about us, including, among other things:
o General economic and business conditions, both nationally and in our
markets;
o Our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
o Anticipated trends in the emissions testing business;
o Existing and future regulations affecting the emissions testing
business;
o Our acquisition opportunities; and
o Other risk factors set forth in the "Risk Factors" section of this
Prospectus.
In addition, in this Prospectus, the words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect" and similar expressions, as they
relate to us, our business or our management, are intended to identify
forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
of Common Stock offered hereby. On June 1, 2000, the Company received
$489,750 upon completion of the initial sale of a $525,000 Series A Debenture
to GCA Strategic Investment Fund Limited (the "Fund"), under the terms of
that certain June 1, 2000 Securities Purchase Agreement between the Company
and the Fund. Of the amount received, $220,000 was paid to Lake Holdings, LLC
in connection with the Company's purchase of emissions testing equipment and
related assets. See "Recent Transactions". The remaining funds were used for
working capital and general corporate purposes, including the payment of
various start-up costs. In addition, on June 2, 2000, the Company loaned to
Beachside Commons 1, LLC ("Beachside") a principal amount of $94,833.35 and
received from Beachside that certain Promissory Note (the "Note") dated as of
June 2, 2000 by which Beachside was obligated to repay to the Company the
principal amount of $94,833.35 plus interest calculated at 12% per annum and
with an additional fee of 2% of the principal amount, all to be paid on
August 2, 2000 (the "Maturity Date"). As of the date of this Prospectus, the
Note has not been repaid by Beachside. This loan to Beachside by the Company
was made in violation of the Securities Purchase Agreement as an unauthorized
use of proceeds. The Fund was made aware of this Note, but the breach of the
Securities Purchase Agreement has not been waived by the Fund as of the date
of this Prospectus. See "Risk Summary", "Recent Transactions" and "Certain
Relationships And Related Transactions".
22
On September 15, 2000, the Company received $95,000 upon the sale of a
$100,000 Convertible Debenture to the Fund, under the terms of that certain June
1, 2000 Securities Purchase Agreement between the Company and the Fund. In
addition, and without any change to the purchase price of the Series A
Debentures, the Company received an additional $5,000 from the Fund, in
conjunction with this sale. The entire $100,000 was used for working capital and
general corporate purposes. See "Recent Transactions".
DIVIDEND POLICY
We have never declared or paid any cash or other dividends on our Common
Stock. We currently intend to retain earnings to finance the growth and
development of our business and do not anticipate declaring or paying cash
dividends on our Common Stock in the foreseeable future. Our Board of Directors
has discretion to declare future dividends after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs and other factors our Board of Directors deems relevant.
The terms of the various documents that will govern our indebtedness may impose
significant restrictions on the payment of dividends.
SERIES A DEBENTURE AND WARRANTS - TERMS AND CONDITIONS
The following paragraphs describe generally the terms and conditions of
the Securities Purchase Agreement we entered into with GCA Strategic Investment
Fund Limited (the "Fund") on June 1, 2000 (the " Securities Purchase
Agreement"), and the Series A Debentures and related Warrants issued, and to be
issued, by the Company thereunder. On June 1, 2000, we sold to the Fund a Series
A Debenture in the original principal amount of $525,000, together with a
related Warrant covering 250,000 shares of Common Stock. On September 15, 2000,
we sold to the Fund a Series A Debenture in the original principal amount of
$100,000, together with a related Warrant covering 50,000 shares of Common
Stock. The Securities Purchase Agreement contemplates that the Fund will
purchase additional Series A Debentures in the aggregate amount of $375,000 and
additional related Warrants covering an additional 200,000 shares of our Common
Stock.
For purposes of this offering, and of this section of the Prospectus, we
are assuming that the Fund has purchased Series A Debentures of $1,000,000 and
related Warrants covering a total of 500,000 shares of Common Stock (both of
which are the maximum number of securities that may be purchased by the Fund
under the Securities Purchase Agreement). Therefore, of the 3,845,000 shares
being registered in this offering, a total of 2,000,000 shares of the Company's
Common Stock are being registered on behalf of the Fund as the holder of the
Series A Debentures and 500,000 shares of Common Stock are being registered on
behalf of the Fund as the holder of the related Warrants. Additionally, for
purposes of this offering and this section, we are using a conversion price for
the Series A Debentures of $.50 and an exercise price for the Warrants of $1.00.
Those prices are the initial conversion and exercise prices set forth in the
Purchase Agreement for the Series A Debentures and the Warrants, respectively,
however, those prices may change as discussed below.
As noted, on June 1, 2000, we entered into the Securities Purchase
Agreement with the Fund, whereby the Fund agreed to purchase certain debentures
and warrants of the Company. The purchase was structured as a private placement
under Sections 4(2) and 4(6) of the
23
Securities Act of 1933, as amended (the "Act") and Rule 506 of Regulation D of
the Securities and Exchange Commission (the "Commission") promulgated
thereunder.
The terms of our agreements with the Fund are as follows:
COMMITMENT AMOUNT: The Fund has agreed to purchase from the Company its
Series A Debentures in the aggregate principal amount of $1,000,000 (the
"Commitment Amount") and related Warrants entitling the Fund to purchase up to
500,000 shares of the Company's Common Stock, all on the terms and conditions
set forth in the Securities Purchase Agreement (such debentures and warrants are
sometimes hereinafter called the "Securities").
COMMITMENT TERM: June 1, 2000 through June 1, 2001 (the "Expiration
Date").
COMMITMENT FEE: The Company is required to pay to the Fund a commitment
fee of one and one-half percent of the portion of the total Commitment Amount
that remains unused and has not been cancelled as of the Expiration Date. The
Company may cancel any unused portion of the Commitment Amount at any time on 10
days notice, in which event the Company will pay to the Fund a commitment fee of
one and one-half of the Commitment Amount that has been so cancelled. If,
however, the Fund wrongfully fails or refuses to a funding request by the
Company, then no commitment fee is due or payable to the Fund.
MULTIPLE CLOSINGS OR TAKEDOWNS: The Securities Purchase Agreement provides
that the Securities will be sold by the Company to the Fund in tranches (each a
"Takedown"), in exchange for the equivalent US Dollars of the Commitment Amount.
The initial Takedown under the Securities Purchase Agreement took place on June
1, 2000, concurrently with the execution and delivery of the Securities Purchase
Agreement. In that transaction, the Fund purchased from the Company a Series A
Debenture having an original principal amount of $525,000 and a related Warrant
covering 250,000 shares of our Common Stock. The second Takedown under the
Purchase Agreement took place on September 15, 2000. In that transaction, the
Fund purchased from the Company a Series A Debenture having an original
principal amount of $100,000 and a related Warrant covering 50,000 shares of our
Common Stock. Subsequent Takedowns are to occur under the Securities Purchase
Agreement as follows: After the sooner of (i) the 120th trading day after the
effective date (the "Effective Date") of this offering with the Commission (in
the case of the second Takedown), and the 120th trading day after the previous
Takedown (in the case of all subsequent Takedowns, together known as "Subsequent
Takedowns") or (ii) conversion by the Fund of the previous Takedown, the
Company, at its sole option, may take down additional amounts of the unused
Commitment Amount. The amount of any Subsequent Takedowns is to be the lesser of
(i) $475,000 of principal per Takedown (the "Maximum Subsequent Takedown
Amount"), and (ii) a dollar amount equal to the product of the formula of:
Subsequent Takedown Amount = [(V multiplied by P) multiplied by 20%].
Where V= the weighted average trading volume of the Common Shares for (i) the
total of the 120 trading days or (ii) the total number of trading days elapsed
between Takedowns, following the Effective Date or the closing of the previous
Takedown, as applicable, and P= the weighted average sale price of the Common
Stock for (i) the 120 trading day period or (ii) the number of trading days
elapsed between Takedowns, following the Effective Date or the closing of the
previous Takedown, as applicable (the "Subsequent Takedown Amount"). Subsequent
Takedowns of the Series A Debentures and related Warrants are expected to close
as soon as
24
reasonably practicable. The Company is required to give the Fund a minimum of 20
business days prior written notice of its intention to effect a Takedown. In the
event the Company does not request and close a Takedown during any 180 day
period after June 1, 2000, the unused amount of the Commitment Amount is
cancelled automatically.
For purposes of our September 15, 2000 sale to the Fund of a Series A
Debenture in the original principal amount of $100,000, (the second Takedown)
the Fund waived, among other items, the calculation of the subsequent takedown
amounts, as contained within the Securities Purchase Agreement.
CONDITIONS TO TAKEDOWNS: Subsequent Takedowns are subject to a number of
conditions being satisfied at the time of closing, including the following:
(i) Effectiveness of the registration statement covering resale of the
Common Shares purchased by the Fund, as well as the Common Shares issuable
upon exercise of any Warrants;
(ii) Accuracy of the Company's representations and warranties set forth in
the Securities Purchase Agreement and other agreement with the Fund;
(iii) Absence of suspensions of trading in or delisting (or pending
delisting) of the Common Shares;
(iv) Receipt of satisfactory legal opinions (including a "10b-5" opinion
as to the registration statement and Prospectus covering re-sales);
(v) Receipt of an accountant's "comfort letter" or "agreed upon
procedures" letter, as appropriate;
(vi) No disputes as to results of periodic due diligence investigations;
and
(vii) No material adverse changes in the Company's financial condition
or prospects, or share listing status or price.
For purposes the second Takedown on September 15, 2000 by the sale to the
Fund of a Series A Debenture in the original principal amount of $100,000, the
Fund waived, among other items, the condition precedent contained within the
Securities Purchase Agreement that the registration statement covering the
resale of the Common Shares purchased by the Fund, as well as the Common Shares
issuable upon exercise of any warranties, be effective.
ADDITIONAL TAKEDOWN LIMITS: Under the terms of the Securities Purchase
Agreement, in no event shall the Fund (or "group" as such term is defined in
Rule 13d-3 of the Securities Exchange Act of 1934, as amended) receive, upon the
issuance of any shares of the Common Stock in connection with a Takedown or
the exercise of any Warrants, if, immediately after giving effect to such
issuance, the Fund (or such group) would beneficially own (excluding for such
purpose additional Common Stock beneficially owned through ownership of the
Warrants) in excess of 4.99% of the shares of Common Stock then outstanding.
This provision of the Securities Purchase Agreement is not effective if an Event
of Default (as defined in the Securities Purchase Agreement) by the Company
occurs and remains uncured for a period of 10 days.
25
SERIES A DEBENTURE PURCHASE PRICE: $950 per $1,000 face amount of each Series A
Debenture.
INTEREST AND MATURITY DATE OF THE SERIES A DEBENTURES: The outstanding amount of
each Series A Debenture bears interest at the per annum rate of seven percent,
payable quarterly in arrears beginning on September 30, 2000 and continuing
thereafter until the debenture has been converted, redeemed or otherwise
satisfied. The Company has the option to pay interest by issuing additional
shares of Common Stock to the holder of the Series A Debenture, so long as
notice is given to the holder when the debenture is issued. With respect to the
first Series A Debenture issued by the Company on June 1, 2000 in the amount of
$525,000, the Company did not give such notice to the Fund. Therefore, interest
on that Series A Debenture must be paid in cash, unless the Fund subsequently
agrees to waive the prior notice requirement set forth in that debenture. The
principal amount of all Series A Debentures is due and payable by the Company on
June 1, 2001 (the "Maturity Date").
CONVERSION PRIVILEGE AND CONVERSION PRICE: Under the terms of the Series A
Debentures, the holder has the right, at its option, to convert all or any part
of the principal amount of the debenture, together with accrued and unpaid
interest and certain default charges, into fully paid and nonassessable shares
of our Common Stock. The holder of a Series A Debenture may exercise this
conversion right at any time while the debenture is outstanding, unless the
Company has elected to exercise its right to redeem the Series A Debenture (as
discussed below under the subheading "Redemption Rights and Obligations of the
Company" in this section of the Prospectus). Generally, the number of shares to
be issued upon the exercise of such a conversion right will be equal to the
aggregate amount of principal, accrued and unpaid interest, and certain default
charges as specified in the Series A Debenture divided by the conversion price.
Generally, the conversion price is equal to the lesser of (a) $.50, and (b) 75%
of the three lowest weighted average sales prices as reported by Bloomberg LP
for the ten trading days immediately preceding but not including the date on
which the holder of the Series A Debenture gives notice of its intent to
convert. The Securities Purchase Agreement provides for a mechanism to adjust
the amount of the conversion price in the event certain extraordinary events
occur involving the Company (as discussed below under the subheading
"Adjustments to Conversion and Exercise Prices" in this section of the
Prospectus).
REDEMPTION RIGHTS AND OBLIGATIONS OF THE COMPANY: Under the terms of the
Securities Purchase Agreement and the Series A Debentures, the Company may elect
to redeem any outstanding Series A Debentures so long as no event of default has
occurred and is continuing. Generally, the redemption price of the Series A
Debentures is equal to (x) the number of shares of Common Stock into which the
Series A Debentures are then convertible, times (y) the average closing bid
price of the Common Stock for the five trading days immediately prior to the
date that the Series A Debentures are called for redemption, plus accrued and
unpaid interest.
Moreover, the Company is obligated to file with the Commission and cause
to be declared effective a registration statement covering the shares of Common
Stock to be issued to the Fund upon conversion of the Series A Debenture and
upon exercise of the related Warrants. If the registration statement is not
declared effective on or before November 28, 2000, the Company is required to
redeem all of the outstanding Series A Debentures, at the redemption price
described in the immediately preceding paragraph. See "Registration Rights".
In addition, the Company is obligated (upon request of a majority of the
holders of the Series A Debentures) to redeem the Series A Debentures upon the
occurrence of (a) a "Change in Control of the Company" (defined below), (b) a
transfer of all or substantially all of the assets of
26
the Company to any person in a single transaction or series of related
transactions, (c) a consolidation, merger or amalgamation of the Company with or
into another person in which the Company is not the surviving entity, (d) the
failure of the Company to comply with its duty to maintain an effective
registration statement with the Securities and Exchange Commission (the
"Commission") with respect to the shares of Common Stock to be issued to the
holders of the Series A Debentures upon conversion, (e) the failure of the
Company to obtain shareholder approval for the issuance of any additional shares
of Common Stock to be issued to the holders of the Series A Debentures
(following the expiration of a 40 day grace period), or (f) the failure of the
Company to maintain a sufficient number of authorized, issuable, unlegended and
freely tradable shares of Common Stock registered with the Commission to fully
convert the Series A Debentures and exercise all of the Warrants related thereto
(following the expiration of a 10 day grace period). In these instances, the
redemption price is equal to (x) the number of shares Common Stock into which
the Series A Debentures are then convertible, times (y) the average closing bid
price of the Common Stock for the five trading days immediately prior to the
date that the Series A Debentures are called for redemption, plus accrued and
unpaid interest,
A "Change in Control of the Company" is defined in the Securities Purchase
Agreement as meaning (i) any person or group of persons (within the meaning of
Sections 13 and 14 of the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission relating to such sections) (other than
the holders of the Series A Debentures) shall have acquired beneficial ownership
of 33 1/3% or more of the outstanding shares of our Common Stock, any sale or
other disposition (other than by reason of death or disability) to any person of
more than 75,000 shares of Common Stock by any executive officers and/or
employee directors of the Company without the prior consent of the holders of
the Series A Debentures, or (iii) individuals serving on the Company's Board of
Directors on June 1, 2000 (together with any new directors whose election by
such board or whose nomination for election by the shareholders of the Company
was approved by a vote of at least 50.1% of the directors still in office who
were either directors of the Company on June 1, 2000 or whose election or
nomination for election was previously so approved) cease for any reason to
constitute at least two-thirds of the Board of Directors then in office.
Furthermore, upon the request of a holder of a Series A Debenture, the
Company is obligated to apply 25% of net cash proceeds derived from any
subsequent debt or equity financing by the Company to redeem the Series A
Debentures. However, this provision does not apply to "permanent financing,"
"project financing," an underwritten offering of our Common Stock, or other
financing transactions consented to by the holder of our Series A Debentures.
See "Restriction on Issuance of Securities" below in this section of the
Prospectus for a more complete description of the financing transactions that
will not impose a redemption obligation on the Company.
COLLATERAL: To secure its obligations under the Securities Purchase Agreement
and the Series A Debentures, the Company, on June 1, 2000, granted to the Fund a
first priority lien and security interest in and to the equipment purchased by
the Company from Lake Holdings, LLC, on June 1, 2000, together with a first
priority lien and security interest in and to any and all equipment thereafter
acquired by the Company, including the proceeds of all of the foregoing.
WARRANTS: Concurrently with the closing of the initial Takedown of the Series A
Debentures on June 1, 2000, the Company, in accordance with the terms of the
Securities Purchase Agreement, issued to the Fund a Warrant, allowing the fund
to purchase up to 250,000 shares of the Company's Common Stock. Concurrently
with the second Takedown of the $100,000 Series A
27
Debenture on September 15, 2000, the Company, in accordance with the terms of
the Securities Purchase Agreement, issued the Fund a Warrant, allowing the Fund
to purchase up to 50,000 shares of the Company's Common Stock. At each
subsequent Takedown, the Fund will receive additional Warrants covering that
number of shares of Common Stock equal to 50% of the Takedown Amount, provided
that the aggregate number of shares covered by all of the Warrants issued to the
Fund under the Securities Purchase Agreement shall not exceed 500,000 shares.
The Warrants issued to the Fund on each Takedown are non-callable except in the
circumstances set out under "Shareholder Approval" below. The term of the
Warrants is 5 years after their respective issuance date. Each Warrant has or
will have a strike price set at $1.00 per share, subject to adjustment. See
"Adjustments to Conversion and Exercise Prices".
The Company received no cash or other property upon the issuance of the
initial or upon the issuance of the second Warrant to the Fund, and will receive
no cash or other property upon the issuance of any subsequent Warrants under the
Securities Purchase Agreement. The Company, however, may be obligated to redeem
the Warrants for cash. Whenever the Company is required to redeem the Series A
Debentures (see "Redemption Rights and Obligations of the Company" above in this
section of the Prospectus), the Company also will be obligated to redeem all of
the outstanding Warrants. In these circumstances, the redemption price of the
Warrants will be equal to the greater of (x) an appraised value of the Warrants,
as determined by Black Sholes, on the date they are called for redemption, and
(y) the number of Warrants being redeemed times the excess of (A) the average
closing bid price of the shares of our Common Stock for the five trading days
immediately prior to the date that the Warrants are called for redemption over
(B) the applicable exercise price of the Warrants.
ADJUSTMENTS TO CONVERSION AND EXERCISE PRICES: The Securities Purchase Agreement
provides a mechanism to adjust the conversion and exercise prices to be paid by
the Fund to the Company upon the conversion of the Series A Debentures or the
exercise of the related Warrants upon the occurrence of certain corporate events
or transactions that change the number of outstanding shares of Common Stock or
the nature of the shares. This mechanism is designed to allow the holders of the
Series A Debentures to obtain the same relative share of the Common Stock upon
conversion of the debentures that existed when the debentures were issued,
notwithstanding the occurrence of an intervening corporate event or transaction
that has changed, or could change through the exercise of options or warrants,
the number of outstanding shares of our Common Stock. An adjustment will be made
to the conversion and exercise prices of the Securities (unless the adjustment
is less than one percent of the conversion price or the exercise price, as the
case may be), in the event of a stock split, a reverse stock split, the payment
of a dividend (or other distribution to the shareholders of the Company) in the
form of Common Stock or another security convertible into Common Stock, a rights
offering (in which the Company issues to all or substantially all of the holders
of Common Stock, rights, options or warrants to purchase shares of Common Stock
not more than 45 days after such issuance, at a price less than 95% of the
market value of the Common Stock), the issuance of preferred stock, any rights,
options or warrants or any other assets (other than cash and cash equivalent
dividends in the ordinary course) to all or substantially all of the holders of
our Common Stock. Furthermore, upon the transfer of all or substantially all of
the assets of the Company, a consolidation, merger or amalgamation of the
Company with or into another corporate body or a reclassification or
redesignation of the shares of Common Stock or any change of the shares of
Common Stock into other shares, then upon conversion of the Series A Debentures,
the holder shall be entitled to receive an appropriate part of the shares, other
securities or property of the Company or the body corporate resulting from such
reorganization.
28
In addition, with respect to the Series A Debentures only, if the
Commission has not declared the registration statement (of which this Prospectus
is a part) effective on or before October 29, 2000, then the conversion price of
the Series A Debentures will decrease by one percent for each 30-day period in
which such statement is not declared effective. See "Registration Rights" below
in this section of the Prospectus.
REGISTRATION RIGHTS: The Securities Purchase Agreement requires that the Company
file with the Commission, on or before June 6, 2000 (5 days from closing) a
registration statement (the "Registration Statement") to register the resale of
the shares of the Common Stock to be issued upon the conversion of the Series A
Debentures by the Fund and the shares of Common Stock to be issued upon exercise
of the related Warrants. If the Registration Statement is not declared effective
by the Commission on the earlier of (i) 90 days from June 6, 2000 (5 days from
closing); (ii) five days following the receipt of a "No Review" letter from the
Commission; or (iii) the first day following the day that the Commission
declares the Registration Statement effective, (the "Required Effectiveness
Date), the Company shall pay to the Fund, as liquidated damages and not as a
penalty, an amount equal to 2% of the outstanding principal amount of the Series
A Debentures, prorated, for each 30 day period the Registration Statement is not
declared effective by the Commission, which amount will be increased to 3% of
the outstanding principal amount of the Series A Debentures in the event that
the Registration Statement is not declared effective by the Commission within
120 days of the Closing Date. In addition, commencing 150 days following the
Closing Date or the six month anniversary date, as applicable, the Conversion
Price of the Series A Debentures will decrease by 1% for each 30 day period in
which the Registration Statement is not declared effective. In the event that
the Company fails to obtain a valid Registration Statement by 180 day following
the Closing Date, the Company will redeem the Series A Debentures and the
Warrants as set forth in the Series A Debentures and the Warrants, respectively.
Additionally, the Company will grant to the Fund first priority piggyback
registration rights in the event the Company proposes to effect a registered
offering of common stock or warrants, or both, prior to the filing of the
Registration Statement referenced above. As of September 20, 2000, the
Corporation had incurred liquidated damages payable to the Fund of approximately
$7,000.
In addition, commencing on October 29, 2000, the conversion price of the
Series A Debentures will decrease by one percent for each 30-day period in which
the Registration Statement is not declared effective. In the event the Company
fails to obtain a valid Registration Statement by November 28, 2000, the Company
is required redeem the Series A Debentures and related Warrants.
If, following the declaration of effectiveness of the Registration
Statement, the Registration Statement (or any Prospectus or supplemental
Prospectus contained therein) shall cease to be effective for any reason
(including but not limited to the occurrence of any event that results in any
Prospectus or supplemental Prospectus containing an untrue statement of a
material fact or omitting a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading or the inability, for any reason, of
the Company to deliver freely tradable shares of Common Stock upon conversion of
the Notes) (a "Registration Default"), the Company shall immediately take all
necessary steps to cause the Registration Statement to be amended or
supplemented so as to cure such Registration Default. Failure to cure a
Registration Default within ten (10) business days shall result in the Company
incurring a liquidated damage penalty of $5,000 per day.
29
The Company's Common Stock will be listed and traded on the OTC Bulletin
Board (the "OTC"), or any other exchange that the common shares may be traded
(the "Common Shares"). The Common Shares issuable upon conversion of the
Debentures and exercise of the Warrants will be freely tradable shares in the
United States following an S-1 registration statement being declared effective
by the Commission.
TRANSFER AGENT INSTRUCTIONS: On the effective date of the Registration
Statement, the Company is required to irrevocably instruct its transfer agent
that, for so long as the Registration Statement is effective, the transfer agent
will reissue shares of Common Shares to the Fund without restrictive legend upon
appropriate evidence of transfer in compliance with the Securities Act of 1933,
as amended, and the rules and regulations of the Commission, and that for so
long as the Registration Statement is effective, no opinion of counsel will be
required to effect any such transfer.
RESTRICTION ON ISSUANCE OF SECURITIES: For a period of 120 days following the
last to occur of (i) the date of the last Takedown, or (ii) the date that the
Commitment expires, is completed, or is terminated in full, the Company has
agreed that it will not sell, or offer to sell, any securities (including any
credit facilities which are convertible into securities which may be issued at a
discount to the then current market price) other than borrowings under
conventional credit facilities existing as of the date hereof, stock issued or
credit facilities to be established in connection with acquisitions, employee
and director stock options of the Company, or existing rights and warrants of
the Company and securities issued under a Takedown. In addition, the Company has
agreed that it will not issue any securities in connection with a strategic
alliance to be entered into by the Company unless such securities are the
subject of a one year statutory or contractual hold period or, if not subject to
such a hold period, unless the Fund has liquidated the securities acquired in
any previous Takedown and the Securities Purchase Agreement has been amended to
provide that further Takedowns can only be made with the consent of the fund.
Notwithstanding the foregoing, the Company may enter into the following types of
transactions: (1) "permanent financing" transactions, which would include any
form of debt or equity financing (other than an underwritten offering), which is
followed by a reduction of the said financing commitment to zero and payment of
all related fees and expenses; (2) "project financing" transactions which
provide for the issuance of recourse debt instruments in connection with the
operation of the Company's business as presently conducted or as proposed to be
conducted; (3) an underwritten offering of the Company's Common Stock, provided
that such offering provides for the registration of the Common Stock to be
received by the Fund as a result of the conversion of the Series A Debentures
and the exercise of the related Warrants held by the Fund, and (4) other
financing transactions specifically consented to in writing by the Fund.
FEES AND COSTS ASSOCIATED WITH THE TRANSACTION: Except for a placement fee paid
to LKB Financial LLC consisting of a cash fee of $10,000, the Company is not
obligated to pay any fees to, or reimburse any costs of, the Fund or any of its
affiliates in connection with the Series A Debentures or the related Warrants.
DEFAULT UNDER THE SECURITIES PURCHASE AGREEMENT. On June 2, 2000, the Company
loaned to Beachside Commons 1, LLC ("Beachside") a principal amount of
$94,833.35 and received from Beachside that certain Promissory Note (the
"Note") dated as of June 2, 2000 by which Beachside was obligated to repay to
the Company the principal amount of $94,833.35 plus interest calculated at
12% per annum and with an additional fee of 2% of the principal amount, all
to be paid on August 2, 2000 (the "Maturity Date"). As of the date of this
Prospectus,
30
the Note has not been repaid by Beachside. This loan to Beachside by the Company
was made in violation of the Securities Purchase Agreement as an unauthorized
use of proceeds. The Fund was made aware of this Note, but the breach of the
Securities Purchase Agreement has not been waived by the Fund as of the date of
this Prospectus. See "Recent Transactions" and "Certain Relationships And
Related Transactions".
RECENT TRANSACTIONS
Since its formation on May 5, 2000, the Company has entered into the
following agreements:
THE ASSET PURCHASE TRANSACTION BETWEEN THE COMPANY AND LAKE HOLDINGS, LLC.
On June 1, 2000, the Company acquired certain assets and assumed certain
liabilities of Lake Holdings, LLC ("Lake"), a Georgia limited liability company
engaged in the emissions testing business in the State of Georgia. The assets
consisted primarily of equipment sufficient to operate 4 1/2 vehicle emissions
testing stations. Other assets acquired in the transaction included all
licenses, permits, and goodwill of the seller, together with lease agreements
covering the land and buildings used by Lake in connection with the operations
of two testing stations (one in Gwinnett County and the other in Forsyth County,
Georgia). Lake represented and warranted that all assets acquired by us are free
and clear of all liens and encumbrances. (The Company subsequently granted a
first priority lien and security interest in and to the primary emissions
testing equipment to the initial holder of the Company's Series A Debentures.
See "Series A Debentures and Warrants - Terms and Conditions".)
The total purchase price for Lake's assets was $220,000, all of which was
paid by the Company in cash subsequent to closing on June 3, 2000. The Company
used a portion of the proceeds of a financing transaction with GCA Strategic
Investment Fund Limited, described below in this section, to pay the purchase
price for the assets of Lake.
The only significant liabilities of Lake assumed by the Company were the
real estate leases for the Gwinnett County and the Forsyth County sites. Though
the Company entered into that certain Assignment of Leases by Lake Holdings to
eMissions as of June 1, 2000, Lake Holdings did not obtain the Landlord's
consent to the assignment of either of the leases (such consent is specifically
required pursuant to the Gwinnett County Lease). The lease for the Gwinnett
station has a term that expires on May 31, 2004, although the Company may, at
its option, renew the lease for an additional five years. The rent under that
agreement is $1,700 per month, subject to adjustment based upon the consumer
price index. The lease for the Forsyth facility has a term that expires on
September 1, 2001 but may be terminated by either party with 30 days notice. The
Company has the right, at its option, to renew the lease up to two times, each
for an additional five-year term. The monthly rent under that agreement is the
greater of $500 or $1.00 for each vehicle tested at the site during the
applicable month.
The Company currently operates two testing stations formerly operated by
Lake in Gwinnett County and in Forsyth County, Georgia. The facility in Gwinnett
County is located at 27 East Crogan Street, Lawrenceville, Georgia 30343. That
site has two vehicle bays, one of which is currently operated by the Company.
The facility in Forsyth County is located at 554 Atlanta Highway, Cumming,
Georgia, 30040.
As for the remaining equipment purchased from Lake (i.e., the equipment
not used in our Gwinnett or Forsyth facilities), equipment for two stations is
in storage and the rest of the
31
equipment (for one-half of a station) has been leased to an unrelated party for
$528 per month under an agreement that is scheduled to expire May 2003. Our plan
is to expand the Company's operations within the next 90 days by locating and
leasing the land and buildings required for two additional stations in the Metro
Atlanta Area, and outfitting them with the emissions testing equipment currently
in storage.
THE FINANCING TRANSACTION BETWEEN THE COMPANY AND GCA.
On June 1, 2000, the Company entered into a Securities Purchase Agreement
with GCA Strategic Investment Fund Limited (the "Fund"), pursuant to which the
Fund agreed to purchase certain convertible debentures (collectively, the
"Series A Debentures") and certain related stock warrants of the Company
(collectively, the "Warrants"). The agreement contemplates the purchase by the
Fund (on or before June 1, 2001) of the Company's Series A Debentures, in one or
more tranches, up to the aggregate principal amount of $1,000,000, at a price
equal to 95% of principal amount of each debenture. The agreement also
contemplates the Company's issuance, in one or more tranches, of certain
Warrants in favor of the Fund, concurrently with the Fund's purchase of the
Series A Debentures. The terms and conditions of the Series A Debentures and the
related Warrants are described below. See "Series A Debentures and Warrants -
Terms and Conditions".
On June 1, 2000, the Company and the Fund completed the first sale and
purchase of a Series A Debenture and related Warrant under the Securities
Purchase Agreement. At that time the Company sold to the Fund a Series A
Debenture in the original principal amount of $525,000, for a price equal to 95%
thereof, or $498,750. On September 15, 2000, the Company and the Fund completed
a second sale and purchase of a Series A Debenture and related Warrant under the
Securities Purchase Agreement. At that time, the Company sold to the Fund a
Series A Debenture in the original principal amount of $100,000, for a price
equal to 95% thereof or $95,000. The principal amount of both of the Series A
Debentures is due and payable, in full, on June 1, 2002, unless the Fund shall
have converted the debentures into shares of the Company's Common Stock or the
Company shall have redeemed the debenture, in each case as provided therein. The
Company is obligated to pay interest on the outstanding principal amount of the
Series A Debentures at the per annum rate of seven percent. Generally, interest
is payable quarterly in arrears, beginning on September 30, 2000, and may be
payable, at the Company's option, in cash or shares of the Company's Common
Stock as provided therein. The obligations of the Company arising under the
Securities Purchase Agreement and the Series A Debentures are secured by a first
priority lien and security interest granted by the Company on certain emissions
equipment now owned by the Company, together with any and all equipment acquired
by the Company after June 1, 2000, and the proceeds thereof.
Concurrently with the sale of the Series A Debenture on June 1, 2000, the
Company issued to the Fund a Warrant, allowing the Fund to purchase up to
250,000 shares of the Company's Common Stock at any time over a five year period
(from the issuance date of June 1, 2000) at a price of $1.00 per share, subject
to adjustment as provided therein. Concurrently with the sale of the Series A
Debenture on September 15, 2000, the Company issued to the Fund a Warrant,
allowing the Fund to purchase up to 50,000 shares of the Company's Stock at any
time over a five year period (from the issuance date of September 15, 2000) at a
price of $1.00 per share, subject to Adjustments as provided herein. The Company
received no cash or other property in exchange for either of the Warrants.
The shares of Common Stock to be issued upon conversion of the Series A
Debentures and/or upon the exercise of the Warrants will be freely tradable
shares in the United States
32
following the effective date of this registration statement with the Securities
and Exchange Commission. For further information concerning the terms and
conditions of the Series A Debenture and the Warrant sold and issued on June 1,
2000 or September 15, 2000, see "Series A Debentures and Warrants - Terms and
Conditions".
CERTAIN TRANSACTIONS WITH BEACHSIDE COMMONS 1, LLC.
On June 2, 2000, the Company loaned to Beachside Commons 1, LLC
("Beachside") a principal amount of $94,833.35 and received from Beachside that
certain Promissory Note (the "Note") from Beachside dated as of June 2, 2000 by
which Beachside was obligated to repay to the Company the principal amount of
$94,833.35 plus interest calculated at 12% per annum and with an additional fee
of 2% of the principal amount, all to be paid on August 2, 2000 (the "Maturity
Date"). As of the date of this Prospectus, the Note has not been repaid by
Beachside. This loan to Beachside by the Company was made in violation of the
Securities Purchase Agreement as an unauthorized use of proceeds. The Fund was
made aware of this Note, but the breach of the Securities Purchase Agreement has
not been waived by the Fund as of the date of this Prospectus.
Pursuant to a letter agreement delivered by the Company and in
consideration of that certain Purchase Agreement entered into by the Company and
Irish Investments, LLC ("Irish"), and the grant of additional collateral by
Beachside under the Note, all as of September 15, 2000, the Company waived the
Maturity Date under the Note, until the 45th day following the effective date of
this Prospectus with the Commission. See "Certain Relationships And Related
Transactions".
THE CONSULTING AND EMPLOYMENT AGREEMENTS BETWEEN THE COMPANY AND OTHERS.
Concurrent with the formation of the Company on May 5, 2000, the Company
entered into a consulting agreement with Porter Lane Investments, Inc.
("Porter"), a Georgia corporation. Porter is owned by Gerald F. Sullivan, a
founder of the Company and a resident of Georgia. The consulting agreement with
Porter obligates Porter to provide assistance and advice to the Company in
connection with mergers, acquisitions and other business combinations involving
the Company, and in connection with the capital markets and financing
transactions involving the Company. The agreement has a term of five years and
requires the Company to pay Porter a monthly fee of $8,000, increasing at the
rate of ten percent per year, plus a finder's fee on debt and/or equity
acquisition transactions procured through the efforts of Porter equal to two and
one-half percent of the value of the transaction. The agreement permits Porter
to retain, engage and employ other persons and entities to provide the services
required to be furnished by Porter.
The consulting agreement with Porter requires that the Company provide
Porter with office space and office support at the Company's executive offices
in Cumming, Georgia, as well as reimbursement of actual expenses incurred by
Porter in connection with its duties under the consulting agreement with the
Company. Porter is a selling shareholders in this offering, registering 155,000
shares of the 310,000 shares of Common Stock issued to Porter such upon
formation of the Company.
On June 1, 2000, the Company entered into a consulting agreement with
Robert Evans. Robert Evans previously operated for Lake Holdings, LLC, the
emissions testing stations in Gwinnett and Forsyth Counties (now operated by the
Company). The agreement has a term of 120 days, requires that Robert Evans be
available to consult with the Company on a full-time basis, and obligate the
Company to issue 40,000 shares of our Common Stock to Robert Evans
33
and to pay him a total of $14,000. Separately, Robert Evans has been issued
100,000 shares of our Common Stock, as a founder of the Company. Robert Evans is
one of the selling shareholders in this offering. See "Selling Shareholders."
On June 1, 2000, the Company entered into an employment agreement with
William Estroff to serve as the President/CEO of the Company. The agreement had
an initial term of one year, with renewal options for up to three additional
one-year terms. Mr. Estroff resigned as the President of the Company as of
September 15, 2000, for personal reasons. At the same time, Mr. Estroff resigned
as a member of the Company's board of directors. Mr. Estroff remains a founding
shareholder in the Company and was issued 110,000 shares of the Company's common
stock in conjunction with his efforts as such. William Estroff is one of the
selling shareholders in this offering. See "Selling Shareholders."
On September 18, 2000, the Company entered into an employment agreement
with Richard A. Parlontieri. The agreement has an initial term of one year,
which may be extended for up to three one-year periods. Mr. Parlontieri's base
compensation is $60,000 per year (which increases by ten percent per year). In
addition, Mr. Parlontieri is entitled to a receive a quarterly bonus of up to
$10,000 per quarter if the Company achieves certain performance criteria as
specified by the Board of Directors on an annual basis. He will receive a
monthly automobile allowance of $500 and reimbursement of certain necessary,
customary and usual business related expenses. Mr. Parlontieri is a member of
our board of directors and will receive from the Company no additional
compensation while serving as a board member or as a member of any board
committee.
Mr. Parlontieri, who is a founder of the Company, has been issued a total
of 200,000 shares of our Common Stock. Of these 200,000 shares, 100,000 shares
are being registered for Mr. Parlontieri in this offering. See "Selling
Shareholders".
Under the terms of the employment agreement, the Company retains the right
to terminate Mr. Parlontieri's services with or without cause. In the event of a
termination by us without cause, the Company is obligated to pay Mr. Parlontieri
severance pay equal to one month's base compensation.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements reflect
our results of operations for the year ended December 31, 1999 and the five
months ended May 31, 2000. The unaudited pro forma statements of operations give
effect to the following transactions as if they had occurred on January 1, 1999.
The unaudited pro forma financial statements give effect to:
o all emission station acquisitions that we have completed;
o the costs associated with our placement of a Series A Debenture; and
o the start-up costs of the Company, including certain legal and
accounting fees.
The unaudited pro forma financial statements are based on our historical
financial statements and the historical financial statements of those entities
acquired. They reflect the use of the purchase method of accounting for the Lake
acquisition but do not reflect any estimated cost savings that we believe may be
realized. In our opinion, all adjustments have been made that are necessary to
present fairly the pro forma data.
34
The unaudited pro forma financial statements are presented for
illustrative purposes only and are not indicative of the operating results or
financial position that would have occurred if the transactions described above
had been completed on the dates indicated, nor is it indicative of future
operating results.
You should read the unaudited pro forma financial statements presented
below together with our financial statements and notes thereto, as well as those
of the entities acquired and the information contained in the "Use of Proceeds"
and "Management's Discussion and Analysis" sections included elsewhere in this
Prospectus.
35
EMISSIONS TESTING, INC.
PRO FORMA COMBINING, CONDENSED STATEMENT OF OPERATIONS
FOR THE FIVE MONTHS ENDED MAY 31, 2000
(UNAUDITED)
Lake Holdings, LLC/R. V.
eMissions Testing, Inc. Evans Enterprises, Inc.
----------------------- ------------------------
Inception (May 5, 2000) Five Months Ended Pro Forma Pro Forma
to June 2, 2000 May 31, 2000 Adjustments Combined
----------------------- ------------------------ ------------- ------------
Revenue $ -- $ 134,000 $ (18,000)(a) $ 116,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of emissions certificates -- 35,000 (5,000)(a) 30,000
Operating expenses 144,000 82,000 (26,000)(a)(d) 117,000
2,000 (b)
10,000 (e)
(95,000)(f)
----------- ----------- ----------- -----------
Income (loss) before income taxes (144,000) 17,000 96,000 (31,000)
Income tax benefit -- -- 7,000 (c) 7,000
----------- ----------- ----------- -----------
Net income (loss) $ (144,000) $ 17,000 $ 103,000 $ (24,000)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.06) $ (0.01)
=========== ===========
Weighted average shares outstanding,
basic and diluted 2,411,000 2,430,000(g)
=========== ===========
36
EMISSIONS TESTING, INC.
PRO FORMA COMBINING, CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
Lake Holdings, LLC/
R. V. Evans Pro Forma Pro Forma
eMissions Testing, Inc. Enterprises, Inc Adjustments Combined
------------------------- --------------------- ------------- ----------
Revenue $ -- $ 339,000 $(127,000)(a) $ 212,000
------------ --------- --------- ----------
Costs and expenses:
Cost of emissions certificates -- 60,000 (38,000)(a) 22,000
Operating expenses -- 265,000 (114,000)(a)(d) 180,000
5,000 (b)
24,000 (e)
------------ --------- --------- ----------
Income before income taxes -- 14,000 (4,000) 10,000
Provision for income taxes -- -- 2,000 (c) 2,000
------------ --------- --------- ----------
Net income $ -- $ 14,000 $ (6,000) $ 8,000
============ ========= ========= ==========
Basic and diluted net income per share $ 0.003
==========
Weighted average shares outstanding:
Basic 2,430,000 (g)
==========
Diluted 2,450,000 (g)
==========
EMISSIONS TESTING, INC.
NOTES TO PRO FORMA COMBINING, CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(a) To reduce revenue, cost of emissions certificates and operating expenses
directly associated with emission testing stations which were not included
as part of the Lake Holdings, LLC acquisition.
(b) To reflect amortization of goodwill of $45,000 arising from the purchase
price allocation which is being amortized over 10 years.
(c) To reflect a provision (benefit) for income taxes on the pro forma
combined results of operations at the effective federal and state
statutory income tax rates for the applicable periods.
(d) The pro forma effect of depreciation related to certain assets acquired
from Lake Holdings, LLC as compared to the assets' treatment as capital
leases prior to the acquisition was insignificant and therefore no
adjustment was made to the pro forma financial statements.
(e) To reflect interest expense and amortization of deferred financing costs
associated with the convertible debenture assuming the net proceeds from
the debenture would have been
37
$220,000 (the purchase price in the Lake Holdings, LLC acquisition) and
assuming the debenture was issued at the beginning of the earliest period
presented.
(f) To reduce operating expenses for nonrecurring provision for uncollectible
note receivable associated with a note receivable from related party.
(g) The pro forma basic weighted average shares outstanding for both the five
months ended May 31, 2000 and the year ended December 31, 1999 was assumed
to be the number of shares outstanding on June 2, 2000. The pro forma
diluted weighted average shares outstanding for the year ended December
31, 1999 includes an additional 20,000 shares to be issued under a
restricted stock arrangement. The effect of all other potentially dilutive
securities was antidilutive and therefore not included in diluted weighted
average shares outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The Company is a start-up enterprise formed on May 5, 2000 as a Georgia
corporation. Our purpose is to establish a network of automotive emissions
testing sites through the acquisition of existing emission sites and by opening
new sites. On June 1, 2000, we opened our first two testing stations. These
stations, located in the Metro Atlanta Area, were previously operated by Lake
Holdings, LLC, from whom we purchased the assets needed to operate the
facilities. Other than our very brief experience with our initial sites, the
Company has no operating or financial history. The financial information
provided herein is representative of Lake Holdings, LLC's management efforts,
not those of the Company. Though we acquired some of Lake Holdings' facilities
and equipment, we cannot guarantee equal or better results from those facilities
under the Company's management.
Since the time of our formation, however, the Company has made
considerable strides in establishing a solid platform from which to build our
business. We have an assembled group of founders who as a group have devoted
their time and energy in researching and studying all key aspects of the
emissions testing business in the United States, particularly in the State of
Georgia, and in certain foreign countries. We have identified and entered into
an employment agreement with Richard A. Parlontieri to serve as our president to
handle the day-to-day operations of the Company, and have engaged persons with
significant business experience and acumen to provide the support we will need
in specialized areas, such as the capital and debt financing markets, as the
Company seeks to grow. See "Recent Transactions - Consulting and Employment
Agreements between the Company and Others" above.
We successfully completed our initial securities issuance on June 1, 2000,
selling $525,000 of our Series A Debentures and related Warrant to a single
investor that is expected to purchase additional debentures from us of $475,000.
On September 15, 2000, we completed a second sale of an additional $100,000
debenture and related warrant to the same investor See "Recent Transactions -
The Financing Transaction between the Company and GCA" above.
We utilized a portion of the proceeds derived from the initial sale of our
Series A Debentures and related Warrant to purchase emissions testing equipment
sufficient to operate 4 1/2 testing facilities from Lake Holdings, LLC ("Lake"),
a company then engaged in providing
38
emissions testing services. In addition, we assumed Lake's obligations (as
lessee) under two land/building leases, from which Lake operated two testing
facilities - one in Gwinnett County and the other in Forsyth County, Georgia
(each of which lies in the Metro Atlanta Area).
We are now operating the Gwinnett and Forsyth facilities with a portion of
the equipment we acquired from Lake. These facilities are staffed by four of our
employees, formerly employees of Lake. Also, Robert Evans, who operated these
emissions stations for Lake, has agreed to serve as a consultant to us to
provide advice during a transition period of four months. Given this structure
we believe the Company is well-equipped to service the needs of its customers at
the existing facilities.
As for the remaining equipment purchased from Lake (i.e., the equipment
not used in our Gwinnett or Forsyth facilities), equipment for 2 stations is now
in storage, to be used by the Company in its expansion efforts within the next
90 days, and the rest of the equipment (for one-half of a station) has been
leased to an unrelated party for $528 per month under an agreement that is
scheduled to expire May 2003. Our plan is to expand the Company's operations
within the next 90 days by locating and leasing the land and buildings required
for two additional stations in the Metro Atlanta Area, and outfitting them with
the emissions testing equipment currently in storage. See "Recent Transactions -
The Asset Purchase Agreement between the Company and Lake Holdings, LLC".
BUSINESS PLAN AND STRATEGY
As noted, we recently completed the acquisition of two operating stations
and sufficient equipment to equip two additional stations, which we expect to
have installed at new sites in the Metro Atlanta Area within the next 90 days.
Afterwards, we intend to expand our presence within that market by acquiring or
opening additional stations, with the goal of operating multiple testing
stations in the Metro Atlanta Area.
Our long-term goal is to develop a presence in a number of other emissions
testing areas, both in the United States and internationally. We believe that by
assembling a large number of stations with similar operating characteristics we
can achieve operating efficiencies, equipment purchasing advantages and
marketing leverage that come may through the higher testing volumes associated
with multiple units in multiple markets.
Our long-term goal is to develop a presence in a number of other emissions
testing areas, both in the United States and foreign countries. See "Business."
FINANCIAL ANALYSIS
Our principal source of revenue will be fee income from the testing of
automobiles for compliance with emission level laws. In our initial market (the
State of Georgia), the price that we may charge for this service is fixed by the
state regulations. Currently, the maximum price that may be charged is $25.00
per vehicle (and from that amount the state receives $7.40 in the form of a
fee). The balance of the price received by the emissions station is retained by
the emissions operator. As a result, our gross revenue from emissions testing
will be affected by, among other things, the number of tests our stations are
able to complete, the number of retests performed (for which, by law, we cannot
collect a fee), the price we are allowed by law to charge for our service and
the time required by our employees to complete the tests.
The financial information provided herein is representative of Lake
Holdings, LLC's and R. V. Evans Enterprises, Inc.'s management efforts, not
those of the Company. Though we
39
acquired some of Lake Holdings' facilities and equipment, we cannot guarantee
equal or better results from those facilities under the Company's management.
The combined results of Lake Holdings, LLC and R. V. Evans Enterprises,
Inc., for the fiscal year ending December 31, 1999, include two emissions
testing facilities that were closed during the course of the fiscal year 1999.
The two emissions testing sites purchased by the Company were included in this
data but the revenue and expense associated therewith were not detailed. At the
time of the purchase, the Company had determined that the Gwinnett facility was
at a financial breakeven point and the Forsyth facility was generating a modest
profit.
The Company expects that results at the Gwinnett facility may improve as a
result of internal growth and the change in Georgia law that will require annual
vehicle emissions testing rather than bi-annual testing, beginning January 2000.
The Company expects that results at the Forsyth facility may also improve as a
result of the change to annual testing, although the improvement most likely
will not be as great as those expected at the Gwinnett facility. The improvement
at the Forsyth facility may be limited as it approaches maximum capacity.
We expect that our revenues will vary throughout the year. Based on
information obtained from the State of Georgia for the calendar year 1999, the
second and third calendar quarters were busier than the first and last calendar
quarters of the year. We expect these quarterly differences, which appear to be
the result of weather, convenience and personal habits, will be repeated in 2000
and beyond.
The primary operating expenses incurred in the ownership and operation of
emissions testing stations include employee salaries, facility rental expense,
equipment purchase, rental or maintenance expense and advertising and
promotional expenses. We will strive to control these expenses by working
closely with facility owners and equipment vendors. We also will incur
significant depreciation and amortization expense as a result of completed and
future acquisitions of stations.
Our financial results are dependent on a number of factors, including the
general strength of the local and national economies, population growth, local
market and regional competition, relative efficiency of our testing stations,
and government regulation and policies. From time to time the markets in which
we operate experience weak economic conditions that may negatively affect our
revenue. We believe, however, that this impact is somewhat mitigated by our
planned diverse geographical presence.
BUSINESS
We are a start-up enterprise formed for the purpose of acquiring,
developing and operating automobile emissions testing stations. A number of
federal and state laws mandate automobile testing as a method of improving air
quality, and these laws have created a unique business opportunity for the
Company.
Our current activities are generally aimed at the opening and acquisition
of certain stations located in the 13 county area surrounding Atlanta, Georgia.
We have completed the acquisition of two operating stations and the equipment
for two and one-half more sites. We now operate one vehicle bay at each of our
locations, one in Gwinnett County, Georgia, and one in Forsyth County, Georgia.
We intend to place the additional equipment in two new sites in the Metro
Atlanta Area within the next 90 days. Afterwards, we intend to expand within the
Metro Atlanta market by acquiring or opening additional stations within that
testing market. Our long-term goal is to develop a presence in a number of other
emissions testing areas, both in the
40
United States and foreign countries. We believe that by assembling a large
number of stations with similar operating characteristics we can achieve
operating efficiencies, equipment purchasing advantages and marketing leverage
that may come through the higher testing volumes associated with multiple units
in multiple markets.
Our objective is to assemble a large number of stations within the Atlanta
market so that we have certain leverage in our advertising, equipment
procurement and employment capabilities, then to evaluate expansion into other
markets.
GOVERNMENTAL AND REGULATORY OVERVIEW: Public awareness of air pollution and
its hazardous effects on human health and the environment has increased in
recent years. The U.S. Environmental Protection Agency (the "EPA") estimates
that in the United States alone approximately 46 million persons live in
areas where air quality levels have failed to meet the EPA's national air
quality standards. Increased awareness of air pollution and its hazardous
effects on human health and the environment has led many governmental
authorities to pass more stringent pollution control measures. One especially
effective measure that many governmental authorities have adopted is vehicle
emissions testing. Vehicle emissions produce approximately 35%-70% of the
ozone air pollution and 90% of the carbon monoxide air pollution in
metropolitan areas. The EPA estimates that enhanced emissions testing on
motor vehicles is approximately 10 times more cost-effective in reducing air
pollution than increasing controls on stationary pollution sources such as
factories and utilities. Consequently, the EPA has made emissions testing an
integral part of its overall effort to reduce air pollution by ensuring that
vehicles meet emissions standards throughout their lives.
We estimate that the world market potential for vehicle emissions testing
services is currently in excess of 670 million vehicles. There are approximately
230 million vehicles, or 34% of the world total, in the United States and
Canada. Over 90 million of these United States and Canadian vehicles are
currently subject to annual or biennial emissions testing and approximately 65
million paid tests and re-tests are conducted annually in these markets.
In general, these tests are performed either in a centralized program or
in a decentralized program. In a centralized program, vehicle owners take their
vehicles to one of a small number of special centralized facilities to be
tested. These facilities only perform tests; they do not repair vehicles.
Usually, a private contractor licensed by the government operates the
centralized facility. In a decentralized program, vehicle owners take their
vehicles to a service station, automotive repair shop or dealership to be
tested. These decentralized facilities both perform tests and repair vehicles.
The EPA has granted state and local governmental authorities the discretion to
determine how best to establish and operate a network of emissions testing
facilities, including the flexibility to choose either a centralized or a
decentralized program.
In 1997, the last year in which the EPA publicly published such
information, it was reported that centralized programs in the United States and
Canada performed approximately 23.0 million paid tests and generated
approximately $250 million in revenues, while facilities in decentralized
markets in the United States and Canada performed approximately 41.7 million
tests and generated approximately $816 million in revenues. The percentage of
programs that are either centralized or decentralized has remained relatively
constant since 1991. Vehicle emissions control requirements have become
progressively more stringent since the passage of the Clean Air Act in 1970. The
1990 Amendments, in particular, emphasized the need for effective emissions
control programs and in 1992 the EPA adopted regulations that required 181
geographic areas to implement certain types of emissions control programs by
certain dates, depending on the area's population and its level of air
pollution. The EPA has the authority under
41
the Clean Air Act to withhold non-safety related federal highway funds from
states that fail to implement such mandated programs by prescribed deadlines. To
date, the EPA has been willing, in certain circumstances, to grant extensions of
these deadlines and it has yet to impose any sanctions or penalties for
non-compliance.
More recently, on July 31, 1998, the EPA issued a final study that
concluded that more stringent air quality standards for motor vehicle emissions
are needed, and that such standards should be implemented as it becomes
technologically feasible and cost-effective to do so. We believe that the
setting of such standards will be the most important EPA regulatory initiative
affecting motor vehicles since the passage of the 1990 Amendments. We believe
that the EPA study is likely to result in more stringent standards that will
have the effect of increasing the number of areas that must implement emissions
testing programs and thereby potentially increase the market for our products
and services.
Since 1977, when federal legislation first required states to comply with
emissions standards through the use of testing programs, California has been a
leader in testing procedures and technical standards. California has
approximately 22 million vehicles subject to emissions testing, more than three
times that of any other state. California's testing program is overseen by the
California Bureau of Automotive Repair (the "BAR"). The BAR has revised its
emissions testing standards three times: in 1984, 1990 and, most recently, in
1997. With each of these revisions, the BAR has required the use of new, more
sophisticated and more accurate emissions testing and analysis equipment, which
must be certified by the BAR. California's testing standards have become the
benchmark for emissions testing both in the United States and in many foreign
countries. All states with decentralized programs and many states with
centralized programs require emissions testing and analysis equipment used in
their programs to be either "BAR-84," "BAR-90," or "BAR-97" certified, with all
newly-implemented enhanced programs requiring BAR-97 certification.
As emissions testing equipment has become more technologically advanced,
government regulators have required that testing facilities use this more
advanced equipment. The most significant technological advance that has occurred
in the emissions testing industry over the past decade is the development of
"enhanced" testing systems. Prior to 1990, the EPA required government agencies
to test vehicles only for emissions of carbon monoxide and hydrocarbons, which
form smog. During this "basic" test, a technician inserts a probe in the
vehicle's tailpipe while the vehicle is idling and emissions analyzers then
measure pollution levels in the exhaust. These basic tests worked well for
pre-1981, non-computerized vehicles containing carburetors because typical
emission control problems involved incorrect air/fuel mixtures and such problems
increase pollution levels in the exhaust even when the vehicle is idling.
However, today's vehicles have different emissions problems. For tests on
modern vehicles to be effective, the equipment must measure nitrogen oxide
emissions that also cause smog and must test the vehicle under simulated driving
conditions. The EPA now requires these "enhanced" tests in some areas. A
technician conducts these enhanced tests on a dynamometer, a treadmill-type
device that simulates actual driving conditions, including periods of
acceleration, deceleration and cruising.
A number of recent international initiatives evidence the increasing
recognition by foreign countries of the hazardous effects of air pollution to
human health and the environment. We believe that foreign countries will
continue to follow the lead of the United States in
42
pollution control and, more particularly, vehicle emissions testing, and will
adopt or upgrade existing emissions testing programs as an efficient and
effective step towards reducing air pollution. A number of foreign countries
have implemented various forms of mandatory testing programs, including the
United Kingdom, Germany, Canada, Mexico and Japan, and a number of others are
considering developing or expanding mandatory or voluntary testing programs,
including Poland, the Philippines, Brazil, Argentina, and Chile.
THE FOLLOWING TABLE WAS DEVELOPED BY THE EPA AND PROVIDES CONTACT
INFORMATION ABOUT THOSE STATE INSPECTION PROGRAMS IN PLACE AS OF DECEMBER 1999.
THESE LINKS WERE VALID AS OF JUNE 1, 2000.
================================================================================
CENTRALIZED STATE PROGRAM PAGES
================================================================================
Arizona http://www.adeq.state.az.us/air/vei/index.htm
================================================================================
Connecticut http://dmvct.org/emipage.htm
================================================================================
Colorado http://www.state.co.us/gov_dir/revenue_dir/mv_dir/emissions.html
================================================================================
DC No Links
================================================================================
Delaware http://www.dnrec.state.de.us/air/aqm_page/aqm_nets.htm
================================================================================
Florida http://www.hsmv.state.fl.us/html/emissions1.html
================================================================================
Illinois http://www.epa.state.il.us/air/vim/
================================================================================
Indiana http://www.state.in.us/bmvexpress/titles/regmanol.html
================================================================================
Maryland http://www.mde.state.md.us/arma/veip/veiphome.html
================================================================================
Ohio http://www.epa.state.oh.us/dapc/mobile/mobile.html
================================================================================
Washington http://www.wa.gov/ecology/air/emis-1.html
================================================================================
Wisconsin http://www.dot.state.wi.us/dmv/im.html
================================================================================
DECENTRALIZED STATE PROGRAM PAGES
================================================================================
Alaska http://www.state.ak.us/dmv/general/remiss.htm
================================================================================
California http://www.smogcheck.ca.gov/
================================================================================
Georgia http://www.cleanairforce.com/
================================================================================
Kentucky http://www.nr.state.ky.us/nrepc/dep/daq/outreach/smog.html
================================================================================
Massachusetts http://www.magnet.state.ma.us/dep/bwp/iandm/imhome.htm
================================================================================
New Jersey http://www.state.nj.us/mvs/inspection.htm
================================================================================
Nevada http://www.state.nv.us/dmv_ps/nvreg.htm
================================================================================
New York http://www.nydmv.state.ny.us/vehsafe.htm/emissions inspection
================================================================================
Oregon http://www.odot.state.or.us/dmv/veh_deq.htm
-------------------------------------------
http://www.deq.state.or.us/aq/vip/vip.htm
================================================================================
Pennsylvania http://www.drivecleanpa.state.pa.us/
================================================================================
Rhode Island No Links
================================================================================
Texas http://www.tnrcc.state.tx.us/air/ms/motoristchoice.html
================================================================================
Utah http://www.slchealth.org/eh/em.html
================================================================================
Vermont No Links
================================================================================
Virginia http://www.deq.state.va.us/protair/homepage.html
================================================================================
43
EMISSIONS TESTING IN THE STATE OF GEORGIA: As a result of a rapidly increasing
population, which has caused the levels of smog to escalate sharply, the 13
counties that make up the Metro Atlanta Area have been identified by the EPA as
target sites for a mandatory vehicle inspections and maintenance program. In
1996, the Environmental Protection Division of the State of Georgia initiated
"Georgia's Clean Air Force" program that requires testing of all vehicles in a
13 county area surrounding Atlanta, Georgia, for certain emission levels (the
"GCAF Program"). These rules are set forth in Sections 391-3-20-.01 through .22
of the Rules of the Georgia Department of Natural Resources, Environmental
Protection Division.
The state program is a decentralized approach, in which businesses that
wish to perform testing must apply to the state for a license, have their
technicians attend and complete certain state certified training, and report to
the state on their activities every month. Testing stations may be licensed to
test all vehicles (an "ALL VEHICLES WELCOME" station), or only vehicles not more
than five years old ("NEW VEHICLES ONLY" station), or a fleet of vehicles. The
two stations we currently operate are "ALL VEHICLES WELCOME" stations.
The GCAF Program initially required a "basic" test of exhaust gases every
two years. In 1997, the program was changed to include "enhanced" testing, which
combines the simple exhaust test with a simulated "road-test" using a
dynamometer. Prior to January 1, 2000, Georgia required that vehicles in the 13
covered counties undergo an emissions test once every two years. In December
1999, however, Georgia amended this rule, so as to require testing on an annual
basis beginning on January 1, 2000, subject to certain transition rules. Also,
for the year 2000, new vehicles are exempt from testing until the test year two
years following the model year of the vehicle. Beginning on January 1, 2001, new
vehicles will be exempt from testing until the test year three years following
the model year of the vehicle.
The market for emissions testing in Georgia is highly fragmented and
generally consists of services provided by independent auto service
providers, such as service stations and car dealers. According to the State
of Georgia, there were 649 licensed test sites were performed in Georgia
under the GCAF Program during the calendar year 1999. Under Georgia law, the
price that a testing station may charge per test may not be less than $10.00
nor more than $25.00. From such price, $7.40 per test must be paid by the
station operator to the state as a fee. The balance of the current charge (or
$17.60 per vehicle assuming the maximum price of $25.00 is charged) is
retained by the station operator. If a vehicle fails an emissions test, it
may be retested (under current Georgia law) at no additional charge for up to
30 days after the initial test, so long as the subsequent test is performed
at the same facility. In 1999, approximately 11% all tests (155,810) provided
in Georgia were retests which were provided at no charge.
If a vehicle fails to pass an emissions test, the owner of the vehicle
must have repair work performed to correct the deficiency, up to a total cost
(for 2000) of $608. If a vehicle fails a reinspection despite the maximum
expenditure required by law, the owner must apply for a compliance waiver from
the state.
Since approximately 11% of the tests performed in Georgia during 1999 were
at no charge, the same figure suggests that roughly 11% of all vehicles tested
in Georgia fail to pass their initial test. Therefore, we anticipate receiving
no revenue from roughly 11% of the tests we perform in Georgia.
44
We anticipate that compliance with Georgia in the 13 covered counties will
remain high, since a successful test (or a waiver from the State) is required to
obtain or renew a vehicle's registration. Additionally, persons who fail to
comply with these laws may be subject to a fine of approximately $100.
The typical testing site is located inside of a permanent building,
similar to a residential garage with doors at both ends so that vehicles can
"drive-through" the facility. A computerized testing system is located in each
bay of the building and, in the case of enhanced testing, a dynamometer is fixed
to the floor, generally inset in a concrete floor. The dynamometer is a device
that allows the vehicle to be running, in drive gear, allowing a simulation of
the operation of the vehicle at normal driving speeds, though in place, in the
garage. The cost of equipment for a new testing station is estimated at $50,000
per bay, while the cost of the facility varies. Generally, we do not expect to
own any land or buildings. Instead, we intend to lease or sublease all of the
real property that we use in our business. We expect a total cost for a new site
to be approximate $75,000, including renovations, equipment and installation.
We have no historical basis with which to compare our results, since we
are only recently formed. However, if we give pro forma effect to the
transactions described in the unaudited pro forma financial statements included
elsewhere in this Prospectus, which financial statements reflect the operational
results of Lake Holdings, LLC and R. V. Evans Enterprises, Inc., we would have
had gross revenues of $212,000 for the year ended December 31, 1999 and EBITDA
of $10,000 for the year ended December 31, 1999, without taking into effect any
efficiencies that our combined size or operating strategies might contribute.
See "Management's Discussion and Analysis - Financial Analysis"
BUSINESS STRATEGY: Our overall business strategy is to secure and maintain a
significant position in our initial market (in the Metro Atlanta Area) and to
expand into additional markets that have decentralized, independent testing
stations such that we will have a significant position in the market based on
both number of stations and testing volume With this approach we believe the
Company can achieve a dominant position as a result of higher volumes and more
efficient use of resources in aggregate. We believe that a significant number of
stations in each market will provide more a consistent testing volume, and as
such a more efficient business. Further, by creating a presence in additional
testing markets, we believe we can develop a long-term strategy for growth and
stabilize our revenues as our markets change, based on population changes,
governmental legislation and other factors.
Our business strategy takes into account the following factors;
o An increase of approximately 70% (as determined in the GCAF) in the
number of cars requiring emissions testing as a result of a
legislative order increasing the testing period from every two years
to every year, in conjunction with the issuance of a license tag for
every vehicle registered in the 13 county area that comprises the
Metro Atlanta Area;
o A population increasing as a result of the move of businesses and
individuals to the Atlanta metropolitan area, including an increase
in automobiles, from 1,932,635 cars in 1995, to 2,175,316 in 1999;
o Opportunities for substantial growth in revenues exist as awareness
for the testing program grows, as well as the local population.
Further, with a focused advertising
45
campaign we expect to generate "brand" awareness for our stations,
which may translate into repeat business from year-to-year;
o A weaker competitive environment, as compared to other business
areas as a result of an industry characterized by a large number of
small independent operators, many of whom lack the capital to
promote their products through advertising, finance expansion or
acquire sites which may product higher testing volumes as a result
of their proximity to key intersections, shopping center or housing
developments
o Few business owners who, based on their experience, capitalization
or sophistication, have the ability to employ research, marketing,
management and sales techniques;
o With a larger number of testing stations, involved in multiple
testing marketplaces, a lower overall susceptibility to fluctuations
in general economic and legislative factors.
o Use of the Internet to allow customers to track the results of their
tests, to research the prior results in certain cases, to purchase
automotive related products and services, and to allow the Company
to remind customers of the need to perform their annual test, or
other maintenance issues.
We believe that these market characteristics, coupled with the opportunity
to establish or expand the total contiguous coverage across the market area
through the ownership of multiple emissions testing stations, create for the
Company the potential for revenue growth and cost efficiencies.
GROWTH STRATEGY: Our growth strategy is to establish an initial presence in the
Metro Atlanta Area through a) the acquisition of existing testing stations, and
b) the opening of new stations in locations that management believes will offer
significant potential for a high volume of business. In the acquisition of
existing stations, we seek facilities located on heavily traveled roads and at
busy intersections. Other criteria include proximity to a large number of
businesses, state automobile licensing offices, and densely populated
residential areas. The same attributes apply to new sites, when establishing the
most desirable locations. Our goal is to locate sites that are convenient and
"user friendly" for our customers.
Many of the existing emission sites in Georgia are located at
intersections with relatively low traffic volume, or operate in conjunction with
other low volume businesses, including many service stations and other auto
service businesses. While these sites may operate profitably when combined with
other business activities, they would likely be unprofitable as a standalone
testing business. We will generally avoid the acquisition of such sites, instead
focusing on higher volume traffic sites.
As we open new sites, we expect that the Company will lease the land, or
building, from the existing owner. Where we can use an existing building, such
as an abandoned car wash bay, oil change or service station location, we expect
minimum expense associated with the installation of the equipment. In the case
that we lease the land only, for instance in a shopping center parking lot, or
an out-parcel near a commercial development or intersection, we would expect to
erect a simple building. These would be assembled on site, using pre-made
panels, such that they can easily be moved at a later date. A building of this
style would cost from $5,000 to $7,000, depending on size and local building
code requirements.
After acquiring a site, or opening a new facility, we may advertise our
location using mass mail, television, radio and newspaper, as well as signage at
the location. We believe the use of this promotion will generate increased
awareness of our site, and thereby create increased
46
traffic to the location when compared to other testing sites. We expect to
make our information available on the Internet for look-up by our customers,
and may use email techniques to remind our customers of an upcoming deadline
for testing. We may also sell other products and services to our customers,
and expect to augment our testing revenues by doing so. The products that we
may offer to our customers at our sites, and through our Internet presence,
include contacts for automobile insurance and automobile appraisals through
third parties, automobile accessories, maintenance products and other related
items. We expect testing revenues to be our primary activity and view these
other activities as complementary services that may help us differentiate
ourselves from our competitors and through which we can develop long-tem
relationships with our customers.
OPERATING STRATEGY: Our operating strategy focuses on a) increasing the number
of sites we operate in a given market, b) increasing the volume of business at
each site, c) creating brand awareness for our services and products, and d)
creating repeat customer sales, all of which is designed to enhance our revenue
and cash flow. To achieve these goals, we:
o Seek to secure and maintain a leadership position by owning multiple
stations at well-traveled intersections and other locations that are
easily reachable by our customers:
o Sufficiently staff each station during the busiest time of day and
days of the week so as to maximize the number of tests performed;
o Coordinate operations, training, advertising and sales strategies in
each market to enhance revenue opportunities and maximize cost
efficiencies within each market;
o Implement regional management and marketing initiatives to maximize
the effectiveness of our share of local advertising in each of our
markets, as well as across all of our markets;
o Combine extensive market research with an assessment of our
competitors' vulnerabilities in order to identify significant and
sustainable customer development and retention;
o Seek to acquire existing testing sites where significant volume
potential exists, where an existing lease for either facility or
land may be advantageous, or where new increased volumes may exist
as a result of our operating strategy when compared to that of the
prior owner; and
o Tailor the facilities, advertising, products and services we offer
to appeal to the broadest range of consumers and establish a
long-term buying pattern with our customers.
Use the Internet to differentiate our services from that of our
competitors, provide additional products and services to our customers, promote
our sites effectively and remind our clients to visit us repeatedly and generate
nominal increased revenues and profits over and above that of the testing
activity itself.
MANAGEMENT OF THE COMPANY: The day-to-day operations of the Company will be led
by Richard A. Parlontieri, our President/CEO. Mr. Parlontieri has 30 years of
experience in the financial services, real estate, health care and capital goods
industries, service industry, together with management and marketing experience.
We anticipate that, as the Company's operations expand and the burdens of
managing the daily business of the Company increase, we will find it
47
necessary to recruit and employ additional executives to support Mr.
Parlontieri. However, no such persons are being actively recruited at this time.
COMPETITION: The Company believes that the principal competitive factors
affecting the market for emissions testing services are location of the test
site, successful marketing, timely and professional completion of the testing
process, a high volume of vehicles passing through the site, established and
heavy traffic patterns, increasing population of residents, favorable
governmental laws and regulations and the ability to develop new locations or
renovate existing properties in a timely and cost-effective manner.
The Company has many competitors, ranging from individual service station
operators to multi-unit dedicated emissions testing station operators. While few
of the Company's competitors have addressed the need for marketing and volume
oriented locations, there can be no assurance that the Company will be able to
compete successfully against current or future competitors, many of whom may
have substantially more capital, resources and access to additional financing
than the Company. Nor can there be any assurance that competitive pressures
faced by the Company will not result in increased marketing costs, decreased
traffic or loss of market share or other factors will not materially and
adversely affect its business, results of operations and financial condition.
EMPLOYEES, EMPLOYMENT CONTRACTS AND CONSULTANTS: As of September 18, 2000, the
Company employed 6 persons. We do not expect to maintain a large staff of
employees. We will utilize consultants where possible to provide solutions to
our needs while maintaining a small staff. The Company expects to request
shareholder approval for the initiation of an employee stock ownership plan (the
"Employee Plan"), consisting of 500,000 shares of Common Stock of the Company.
The purpose of the Employee Plan will be to provide persons employed by the
Company the opportunity to increase their ownership interest in the Company.
On September 18, 2000 the Company entered into an employment agreement
with Richard A. Parlontieri, the President/CEO of the Company. Mr. Parlontieri
will assume this position following the resignation of our prior President/CEO,
William Estroff. Mr. Estroff resigned from the Company on September 15, 2000 for
personal reasons. Mr. Parlontieri's employment agreement calls for a base salary
of $60,000, with additional compensation in the form of performance bonuses. Mr.
Parlontieri also receives a automobile allowance of $500 per month and will be
reimbursed for certain necessary, customary and usual expenses incurred by him
in connection with the Company's business. Mr. Parlontieri is a co-founder of
the Company and received 200,000 shares of our Common Stock upon the formation
of the Company. See "Recent Transactions - Consulting and Employment Agreements
between the Company and Others."
We have no employment agreements with any other employees at this time.
Based on future employment decisions the Company may enter into such agreements
as necessary to recruit and retain the talent required for business management
or programming.
As of June 2, 2000, the Company, engaged certain consultants to provide
specialized assistance and advice in connection with its business. The
consulting agreements are described in the preceding sections of this
Prospectus. See "Recent Transactions - Consulting and Employment Agreements
between the Company and Others" above.
PROPERTIES AND FACILITIES: We rent our general corporate offices, which consist
of 1,240 square feet of office space in Cumming, Georgia. The rent for this
space is $1,195 per month, including utilities, with a remaining lease term of
12 months.
48
We also rent the land and buildings used by the Company in connection with
its two existing emissions testing facilities. Our lease for the Gwinnett County
facility obligates us to pay rent at the monthly rate of $ 1,700 and has a
remaining term of 44 months on a 60 month term. The Company has the option of
renewing the lease for another 5 year term prior to May 31, 2004. Our lease for
the Forsyth County facility requires us to pay monthly rent equal to the greater
of $500 per month or $1 per automobile tested at the facility each that
particular month and has a remaining term of 11 months remaining on a 12 month
term, but may be terminated by either party with 30 days notice. The Company has
the option of renewing the lease for another 12 month term. We do not have any
options to purchase the land or buildings subject to these leases.
LEGAL PROCEEDINGS, ETC. We are not currently involved in litigation, arbitration
or other proceedings in connection with the ownership or operation of our
business.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS:
The following table sets forth the names, ages and positions of our
directors and executive officers:
AGE AS OF
NAME JUNE 1, 2000 POSITION
Dr. Sidney E. Brown 61 Chairman of the Board and
Director
Dr. William L. Ross 54 Director
Dr. Richard D. Downey 62 Director
Richard A. Parlontieri 54 President/CEO and Director
OUR BOARD OF DIRECTORS
Our Board of Directors is currently comprised of four members:
DR. SIDNEY E. BROWN - Dr. Brown holds a B.S. from Georgia Southern University
and a B.B.A., M.E.D., E.D.S. and E.D.D., from the University of Georgia. He
recently retired from his position as the dean of Graduate and Off-Campus
Programs at Piedmont College, where he was on staff since April 1998. Prior to
April 1998, Dr. Brown was employed as the Associate Vice President of Academic
Affairs of the University of Georgia, where he was on staff from July 1969 to
June 1998. Dr. Brown remains active in small business development activities in
an advisory role to a number of growth companies. Dr. Brown is the father of
Michael Brown, a director of the Fund.
DR. WILLIAM L. ROSS - Dr. Ross is a graduate of Howard University's Graduate
Program graduating with his Ph.D. in 1977, and his MS in 1969, both in
Psychology. He has been in private practice since 1981. Dr. Ross has been
involved in clinical psychology, child development, professional counseling and
management training in the Miami, Florida area from
49
1977 until moving to Amelia Island, Florida in 1993. His management consulting
experience includes executive development, recruiting and communication skills
development.
DR. RICHARD D. DOWNEY -Dr. Downey is the Director of Special Services and
Psychological Services for the Gwinnett County Public Schools, Lawrenceville,
Georgia, a suburb of Atlanta. Prior to joining Gwinnett County in 1988, Dr.
Downey worked in a similar role at Marana School System, Marana, Arizona, from
1986 through 1988. His other experience includes extensive management of
programs for various hospitals, school systems and research organization. Dr.
Downey's business experience in both governmental and private business includes
budget development and administration, recruiting and reporting.
RICHARD A. PARLONTIERI - Mr. Parlontieri is the President and Chief Executive
Officer of the Company. Prior to joining the Company, Mr. Parlontieri served as
the Founder, Chairman and Chief Executive Officer of ebank.com, Inc., a publicly
held bank holding company headquartered in Atlanta, Georgia. Prior to starting
ebank.com, Mr. Parlontieri was President and Chief Executive Officer of
Habersham Resource Management, Inc., a consulting firm with over 16 years of
experience in the financial services, real estate, health care and capital goods
industries.
Each of our directors holds office until the next annual meeting of
stockholders or until his successor has been elected and qualified.
DIRECTOR COMPENSATION AND SHARES OF COMMON STOCK: The Company's
non-employee (or outside) directors will receive $1,000 per meeting attended in
person and a $500 per attended telephonic meeting fee for service on the
Company's Board of Directors or any committee thereof. Our outside directors may
be reimbursed for certain expenses incurred in connection with attendance at
board and committee meetings. Any employee who serves on our Board of Directors
(including Richard A. Parlontieri) will not be entitled to receive such fees
(though expenses incurred to attend meetings of our board may be reimbursed).
Further, each outside director is a co-founder of the Company. Each
outside director has been issued 50,000 shares of the Company's Common Stock
(for a total of 150,000 shares). Of the 150,000 shares issued to our outside
directors, 75,000 shares are being registered for resale in this filing (25,000
shares for each such director).
COMMITTEES OF THE BOARD OF DIRECTORS: In June 2000, our Board of Directors
established the following committees: (a) a Compensation Committee, consisting
of three members, Dr. Sidney E. Brown, Dr. William L. Ross and Dr. Richard D.
Downey (none of the members of the Compensation Committee is an employee of the
Company); and (b) Audit Committee, consisting of three members, Dr. Sidney
Brown, Dr. William L. Ross and Dr. Richard D. Downey (none of the members of the
Audit Committee is an employee of the Company).
OUR MANAGEMENT.
The day-to-day operations of the Company will be led by Richard A.
Parlontieri, our President.
EXECUTIVE COMPENSATION: On September 18, 2000, the Company entered into an
employment agreement with Richard A. Parlontieri. The agreement has an initial
term of one year, which may be extended for up to three one-year periods. Mr.
Parlontieri's base compensation is $60,000 per year (which increases by ten
percent per year). In addition, Mr. Parlontieri is entitled to a receive a
quarterly bonus of up to $10,000 per quarter if the Company achieves certain
performance
50
criteria as specified by the Board of Directors from time to time. He will
receive a monthly automobile allowance of $500 and reimbursement of certain
necessary, customary and usual business related expenses. Mr. Parlontieri is a
member of our board of directors and will receive from the Company no additional
compensation while serving as a board member or as a member of any board
committee.
Mr. Parlontieri, who is a founder of the Company, has been issued a total
of 200,000 shares of our Common Stock. Of these 200,000 shares, 100,000 shares
are being registered for Mr. Parlontieri in this offering. See "Selling
Shareholders".
Under the terms of the employment agreement, the Company retains the right
to terminate Mr. Parlontieri's services with or without cause. In the event of a
termination by us without cause, the Company is obligated to pay Mr. Parlontieri
severance pay equal to one month's base compensation. See "Recent Transactions -
The Consulting and Employment Agreements with Others" above.
OUR EMPLOYEES.
In addition to our president, Richard A. Parlontieri, we currently employ
five persons. Four of our employees are certified by the State of Georgia to
conduct vehicles emissions tests. We also employ a person with bookkeeping
experience to maintain the books and records of the Company. Our plan is to
utilize consultants whenever possible to provide solutions to our business
needs, so as to maintain a relatively small group of employees. The Company does
not currently have any stock options or warrants outstanding (except for the
Warrants issued in connection with the Series A Debentures described above), or
any stock option, stock bonus or similar plan. The Company does not currently
have an employee stock ownership plan. Management does intend on establishing
such a plan upon approval by the shareholders and by the Board of Directors of
the Company. At this time, management intends to utilize up to 500,000 shares of
the Company's common stock in such a plan.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock and the Series A Debenture as of the close of business on June 1,
2000, and as adjusted to reflect the issuance of 2,500,000 shares of Common
Stock to the holder of the Company's Series A Debentures and the related
Warrants, of (i) each person known by the Company to own beneficially five
percent or more of the Company's Common Stock, (ii) each of the Company's
directors, and (iii) all of the Company's officers and directors as a group. The
number of shares that may actually be sold by the current holder of the Series A
Debenture and the related Warrants and by each of the selling shareholders will
be determined by such shareholders and holder and may depend upon a number of
factors, including, among other things, the market price of the Common Stock.
51
Percentage
of Common Stock(c)
Total Shares of -------------------------
Common Stock Before After Registered
Beneficially Owned(a) Offering Offering in Offering
----------------------------------------------------------------------
GCA Strategic
Investment Fund
Limited 2,000,000 40.4%(b) 40.1% 2,000,000
GCA Strategic
Investment Fund
Limited 500,000 10.1% (b) 10.1% 500,000
Porter Lane
Investments, Inc.(d) 310,000 12.65% 6.26% 155,000
Irish Investments, LLC(e) 310,000 12.65% 6.26% 155,000
Emerald Marine(f) 310,000 12.65% 6.26% 155,000
Westhurst, Ltd.(g) 310,000 12.65% 6.26% 155,000
Bolling Investments,
LLC.(h) 310,000 12.65% 6.26% 155,000
Richard A. Parlontieri 200,000 8.16% 4.04% 100,000
All officers and directors
as a group 350,000 14.29% 7.07% 175,000
(a) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13(d)-3 of the Securities Exchange
Act of 1934, as amended (the "Securities Act"), under which, in general, a
person is deemed to be the beneficial owner of a security if such person
has or shares the power to vote or to direct the voting of the security or
the power to dispose or to direct the disposition of the security, or if
that person has the right to acquire beneficial ownership of such security
within 60 days through the exercise of any option or warrant or through
the conversion of a security.
(b) In accordance with Rule 13(d)-3 of the Securities Act, the shares of
Common Stock to be issued upon conversion of the Series A Debentures and
the related Warrants are deemed to be outstanding for the purposes of
computing the percentage of outstanding shares owned by the holder of such
debentures and warrants, but are not deemed to be outstanding for the
purpose of computing the percentage of the Shares by any other person.
(c) The shares beneficially owned after the offering are calculated assuming
the conversion of the Series A Debenture into 2,000,000 shares of the
Common Stock and the exercise of the related Warrants into 500,000 shares
of Common Stock by GCA Strategic Investment Fund Limited. The actual
number of shares to be issued by the Company upon the conversion and the
52
exercise of such securities may differ. See "Series A Debentures and
Warrants - Terms and Conditions.
(d) - (h), inclusive. See footnotes (a) - (f) following "Selling Shareholders"
below.
SELLING SHAREHOLDERS
This Prospectus concerns, in part, the registration of an aggregate of
1,345,000 shares of Common Stock owned by the selling shareholders. The selling
shareholders may transfer the Common Stock at those prices that they are able to
obtain in the market or as otherwise negotiated. In addition, the selling
shareholders may transfer the shares in exchange for consideration other than
cash, or for no consideration, as determined by the selling shareholders in
their sole discretion. This Prospectus may be used by the selling shareholders
to transfer shares of the Common Stock to affiliates of the selling
shareholders. We will receive no proceeds from the sale of Common Stock by the
selling shareholders.
The following table sets forth the name of the selling shareholders,
the number of shares of Common Stock owned by the selling shareholders before
this offering, the number of shares of Common Stock being registered, and the
number and percentage of shares of Common Stock owned after this offering. Of
the selling shareholders, Mr. Estroff previously served as President/CEO of
the Company; Drs. Brown, Ross and Downey currently serve as members of the
Company's board of directors; Mr. Parlontieri currently serves as the
President/CEO of the Company and a member of the Company's board of
directors; and Karen Vickers currently serves as the Company's secretary.
None of the other selling shareholders has held any position or office, or
had any marital relationship with our officers or directors since the
Company's formation on May 5, 2000.
Beneficial Ownership Beneficial Ownership
Prior to the After the
Offering Number of Offering(1)
--------------------- SHARES --------------------
SELLING SHAREHOLDER Number Percent Registered Number Percent
- ------------------- ------ ------- ---------- -------- ---------
Porter Lane Investments,
Inc.(a) 310,000 12.65% 155,000 310,000 6.26%
Irish Investments, LLC.(b) 310,000 12.65% 155,000 310,000 6.26%
Emerald Marine, Ltd.(d) 310,000 12.65% 155,000 310,000 6.26%
Westhurst, Ltd.(e) 310,000 12.65% 155,000 310,000 6.26%
Bolling Investments, LLC(f) 310,000 12.65% 155,000 310,000 6.26%
Richard A. Parlontieri(c) 200,000 8.16% 100,000 200,000 4.04%
William S. Estroff 110,000 4.49% 55,000 110,000 2.22%
Gant Alumni Associates,
LLC (k) 100,000 4.08% 100,000 100,000 2.00%
ARM & Associates, LLC 100,000 4.08% 100,000 100,000 2.00%
Karen Vickers(g) 50,000 2.04% 25,000 50,000 1.01
Dr. Sidney E. Brown(h) 50,000 2.04% 25,000 50,000 1.01%
Dr. William L. Ross(i) 50,000 2.04% 25,000 50,000 1.01%
Dr. Richard D. Downey(j) 50,000 2.04% 25,000 50,000 1.01%
John J. McManus 50,000 2.04% 25,000 50,000 1.01%
Robert Evans 140,000 5.71% 90,000 140,000 2.83%
--------- ------ --------- --------- -----
Total 2,450,000 100% 1,345,000 2,450,000 100%
========= ====== ========= ========= =====
(1)Assumes that the holder(s) of the Series A Debentures and the related warrant
convert and exercise these securities into 2,500,000 shares of Common Stock.
53
(a) Porter Lane Investments, Inc., is a corporation beneficially owned by Gerald
F. Sullivan, a resident of Gainesville, Georgia. Mr. Sullivan's address is 5255
Porter Lane, Gainesville, Georgia 30506. Mr. Sullivan served as our sole
director from May 5, 2000 to May 31, 2000.
(b) Irish Investments, LLC, is a limited liability company whose managing member
is Joseph Powell. Mr. Powell's address is 2900 Atlantic Avenue, Suite 900,
Fernandina Beach, Florida 32034.
(c) Richard A. Parlontieri is the President/CEO and a director of the Company.
Mr. Parlontieri's address is 400 Colony Park, Building 104, Suite 600, Cumming,
Georgia 30041.
(d) Emerald Marine, Ltd., is a company beneficially owned by Gordon Mundy. Mr.
Mundy's address is P.O. Box 175 12-14 Finch Douglas, Isle of Man, IM 991TT.
(e) Westhurst Ltd., is a company beneficially owned by Gordon Mundy. See note
(d) above for Mr. Mundy's address.
(f) Bolling Investments, LLC, is a limited liability company beneficially owned
by Wayne Shortridge. Mr. Shortridge's address is 257 Bolling Road, NE, Atlanta,
Georgia 30305.
(g) Karen Vickers is our corporate secretary and controller.
(h) Dr. Sidney E. Brown is a director of the Company. Dr. Brown is the father of
Michael Brown, one of the directors of the Fund.
(i) Dr. William L. Ross is a director of the Company.
(j) Dr. Richard D. Downey is a director of the Company.
(k) Gant Alumni Associates, LLC is a limited liability company beneficially
owned by Carlo Corizine. Mr. Corizine is an investment advisor with Steling
Financial in Boca Raton, Florida. Mr. Corizine's address is 665 Hasting Street,
Boca Raton, Florida 33487.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 2, 2000, the Company loaned to Beachside Commons 1, LLC
("Beachside") a principal amount of $94,833.35 and received from Beachside
that certain Promissory Note (the "Note") dated as of June 2, 2000 by which
Beachside is obligated to repay to the Company the principal amount of
$94,833.35 plus interest calculated at 12% per annum and with an additional
fee of 2% of the principal amount, all to be paid on August 2, 2000 (the
"Maturity Date"). The proceeds from this loan were used in their entirety by
Beachside to make certain past, current and future payments on the primary
mortgage of certain real property owned by Beachside. In addition, if the
Note is not paid in full on the Maturity Date, the interest rate will become
18% from that date until that time at which the Note is paid in full. As of
the date of this Prospectus, the Note has not been repaid by Beachside.
Pursuant to a letter agreement delivered by the Company dated September
15, 2000, and in consideration of that certain Purchase Agreement entered into
by the Company and Irish
54
Investments, LLC ("Irish") and the grant of additional collateral by Beachside
under the Note, the Company waived the Maturity Date under the Note, until the
45th day following the effective date of this Prospectus with the Commission.
On September 15, 2000, the Company entered into a certain Purchase
Agreement with Irish. Irish is a shareholder of the Company, beneficially owning
310,000 shares of Common Stock of the Company (155,000 shares of which are being
registered in conjunction with this Offering). Pursuant to the Purchase
Agreement, if the Note has not been paid in full by Beachside as of the 45th
date following the date on which this Prospectus is effective with the
Commission, Irish shall purchase the Promissory Note from the Company for a
purchase price equal to the aggregate cash proceeds received by Irish in
connection with the sale of the first 100,000 shares of the Company's Common
Stock owned by Irish. In addition, pursuant to that Purchase Agreement,
Beachside agreed to grant to the Company a security interest in certain real
property and improvements owned by Beachside.
A relationship exists with respect to the Company's interaction with Irish
and Beachside as a result of certain family relationships between Gerald
Sullivan and his daughter Mrs. Margaret Ryder. In particular, Mr. Sullivan is
the beneficial owner of 310,000 shares of the Company's common stock and as the
President of Porter Lane Investments, Inc., was instrumental in the formation of
the Company. Porter Lane Investments has also entered into a Consulting
Agreement with the Company. The Consulting Agreement has a term of five years
and obligates the Company to pay Porter a monthly fee of $8,000, increasing at a
rate of ten percent per year, plus a finder's fee on debt and/or equity
acquisition transactions procured through the efforts of Porter equal to two and
one-half percent of the value of the transaction. Mr. Sullivan is also the
manager of Beachside. Mrs. Ryder is an attorney and serves as the Trustee for
eight certain limited trusts (the "Trusts").
The Trusts previously contributed their holdings to form Beachside Commons
Holding, LLC ("Beachside Holdings"). Beachside Holdings subsequently contributed
certain assets to form Beachside. As noted above, the Company has loaned certain
funds to Beachside and has subsequently and temporarily waived the due date for
repayment of those funds, in return for additional collated pledged by Beachside
and additional consideration provided as a result of that certain Purchase
Agreement between the Company and Irish.
This loan by the Company was in violation of the terms of the Securities
Purchase Agreement as an unauthorized use of the proceeds and at such time the
Company was in Default under the terms of the Purchase Agreement. This default
has not been waived by the Fund. See "Series A Debentures and Warrants."
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133), was issued in June
1998. SFAS 133 establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement of Financial
Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT 133 (SFAS 137),
was issued in June 1999. SFAS 137 delays the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. The Company's convertible
55
debenture is considered to be a derivative; however, the Company does not
believe that adoption of SFAS 133 will have a material impact on its financial
statements.
DESCRIPTION OF CAPITAL STOCK
GENERAL: Our authorized capital stock consists of 30,000,000 shares, consisting
of 20,000,000 shares of Common Stock, no par value per share, and 10,000,000
shares of preferred stock, no par value per share. As of the date of this
Prospectus, and without giving effect to the conversion of our Series A
Debentures and its related Warrants into shares of Common Stock, the Company has
outstanding 2,450,000 fully paid and non-assessable shares of Common Stock and
no preferred stock. Immediately following this offering and the conversion of
our Series A Debenture and the related Warrants into shares of Common Stock (and
assuming that 2,500,000 shares of Common Stock are issued upon such conversion
and exercise), there will be 4,950,000 shares of Common Stock, and no shares of
preferred stock, outstanding.
VOTING RIGHTS OF COMMON STOCK: Holders of our Common Stock are entitled to one
vote per share on all matters submitted to a vote of our shareholders.
DIVIDENDS ON COMMON STOCK: The holders of our Common Stock are entitled to
receive, pro rata, dividends as may be declared by our Board of Directors out of
funds legally available for the payment of dividends.
OTHER PROVISIONS APPLICABLE TO THE COMMON STOCK: There are no preemptive rights
to subscribe for any additional securities that we may issue. There are no
redemption provisions or sinking fund provisions applicable to our Common Stock,
nor is our Common Sock subject to calls or assessments by us.
LIQUIDATION AND DISSOLUTION: In the event of any liquidation, dissolution or
winding up of our affairs, holders of our Common Stock will be entitled to share
ratably in our assets remaining after payment or provision for payment of all of
our debts and obligations (including, without limitation, the debt evidenced by
the Series A Debentures) and liquidation payments to holders of any outstanding
shares of presently undesignated preferred stock that has a liquidation
preference.
UNDESIGNATED PREFERRED STOCK: Our Board of Directors has the authority, subject
to the limitations prescribed by law and the provisions of our articles of
incorporation, to provide for the issuance of up to 10,000,000 shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each of these series, and to fix the designations, powers,
preferences and rights of the shares of each series and the qualifications,
limitations or restrictions thereof. Among the specific matters that may be
determined by the Board of Directors are the number of shares constituting each
series and the distinctive designation thereof; the dividend rate, whether
dividends will be cumulative, and the relative rights of priority, if any, on
the payment of dividends; whether the series will have voting rights in addition
to the voting rights provided by law, and, if so, the terms of those voting
rights; whether the series will have conversion privileges, and if so, the terms
of the conversion, including provision for adjustment of the conversion rate;
redemption rights and the terms thereof; whether the series will have a sinking
fund and if so, the terms and amount of the sinking fund; and the rights of the
shares of the series in the event of our voluntary or involuntary liquidation,
dissolution or winding up, and the relative rights of priority, if any, of
payment of shares of these series. Any undesignated preferred stock issued by us
may:
o RANK PRIOR TO THE COMMON STOCK AS TO DIVIDEND RIGHTS, LIQUIDATION
PREFERENCE OR BOTH;
56
o HAVE FULL OR LIMITED VOTING RIGHTS; AND
o BE CONVERTIBLE INTO SHARES OF COMMON STOCK.
The issuance of undesignated preferred stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring or seeking to acquire, a significant portion of our outstanding
Common Stock.
INDEMNIFICATION: Our bylaws provide for indemnification rights to any person who
was or is threatened to be a party to any proceeding by reason of the fact that
such person is or was a director, officer, employee or agent of the Company,
against expenses (including reasonable attorneys' fees), reasonably incurred by
such person in connection with such proceeding, if such person acted in a manner
he or she believed in good faith to be in or not opposed to the best interests
of the Company (and with respect to any criminal action or proceeding, if such
person had no reasonable cause to believe such person's conduct was unlawful),
to the maximum extent permitted by, and in the manner provided by, the Georgia
Business Corporation Code.
In addition, to the extent that a director, officer, employee or agent of
the Company has been successful, on the merits or otherwise, in the defense of
any proceeding to which such person was a party, in the defense of any claim,
issue, or matter therein, because that individual is or was a director, officer,
employee or agent of the Company, the Company shall indemnify such person
against reasonable expenses incurred by that person in connection therewith. The
Company may not indemnify a director, officer, employee or agent under our
bylaws unless a determination has been made by our disinterested members of the
board of directors (or alternatively by disinterested shareholders or by special
legal counsel, as provided in the bylaws), in each specific case that such
person has met the standard of care required under the bylaws for
indemnification.
Furthermore, the Company may pay for or reimburse the reasonable expenses
incurred by a director, officer, employee or agent of the Company who is a party
to a proceeding in advance of final disposition of the proceeding if (a) such
person furnishes the Company a written affirmation of such person's good faith
believe that he or she has met the standard of conduct required for
indemnification by the Company, and (b) such person furnishes to the Company a
written undertaking to repay any advances if its is ultimately determined that
such person is not entitled to indemnification by the Company.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore, unenforceable.
The Company does not maintain directors' and officers' liability
insurance.
THE ABSENCE OF PREVENTATIVE ANTI-TAKEOVER MEASURES: The Company has not elected
at this time to adopt any preventative anti-takeover, "shark repellant," or
"porcupine" measures to defend against a tender offer of the Company's Common
Stock. The Company may elect such measures in the future, at the direction of
the Board of Directors.
GEORGIA'S FAIR PRICE REQUIREMENTS - NOT AVAILABLE TO THE COMPANY OR ITS
SHAREHOLDERS: The Georgia Business Corporation Code includes certain provisions
designed to protect shareholders of Georgia corporations against the inequities
of certain tactics that may be used in hostile
57
takeover attempts. In so-called two-tier transactions, the acquiring party
usually tenders in cash at a substantial premium for a major stock interest in
the target corporation. After acquiring this initial interest in the
corporation, the acquiring party may acquire total ownership of the corporation
by effecting a so-called freeze-out merger that forces minority shareholders to
receive cash or other consideration for their common stock in the acquired
corporation. The result is that minority shareholders that do not participate in
the initial tender may receive a lower price or less desirable form of
consideration than was received by shareholders in tender. The provisions of
O.C.G.A. Sections 14-2-1110-1113 are designed to discourage transactions of this
type and to encourage negotiated acquisitions in which all of the shareholders
will be more likely to receive equal treatment. However, unlike other states,
notable Delaware, the Georgia statutes provide that these provisions do not
apply unless the corporation, through its bylaws, elects to activate these
provisions. Here, the Company has not elected to have these provisions apply to
it.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company is the transfer agent and
registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our Common Stock in the public market
could adversely affect prevailing market prices of our Common Stock.
Furthermore, since certain shares will not be available for sale shortly after
this offering because of certain legal restrictions on resale described below,
sales of substantial amounts of Common Stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, and assuming conversion of the Series A
Debentures and the related Warrants into 2,500,000 shares of Common Stock, we
will have outstanding an aggregate of 4,950,000 shares of our common stock. Of
these shares, all of the shares registered in this offering (I.E., 3,845,000
shares) will be freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Act"), unless such shares are
purchased by "affiliates" as that term is defined in Rule 144 under the Act (the
"Affiliates"). The remaining 1,455,000 shares of Common Stock held by existing
shareholders are "restricted securities" as that term is defined in Rule 144
under the Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
promulgated under the Act, which rules are summarized below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person who has beneficially owned shares of our
Common Stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
* One percent of the number of shares of common stock then outstanding, or
* the average weekly trading volume of the common stock on the OTC Bulletin
Board during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
58
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been one of our
Affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an Affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Since the
Company was formed on May 5, 2000, none of our shareholders have held any of our
Common Stock for a two-year period.
PLAN OF DISTRIBUTION
It is anticipated that the selling shareholders (and the holder(s) of the
Common Stock to be issued upon conversion of the Series A Debentures and the
exercise of the related Warrants) will offer the shares of Common Stock in
direct sales to private persons and in open market transactions. The selling
shareholders and holder(s) of shares issuable upon conversion of the Series A
Debentures and upon exercise of the related Warrants may offer such shares to or
through registered broker-dealers who will be paid standard commissions or
discounts by the selling security holders. We believe that no selling security
holders have any arrangements or agreements with any underwriters or
broker/dealers to sell such shares, and that they may contact various
broker/dealers to identify prospective purchasers. Additionally, agents, brokers
or dealers may acquire shares of Common Stock or interests in such shares and
may, from time to time, effect distributions of such shares or interests in such
capacity.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Epstein, Becker & Green, P.C., Atlanta, Georgia.
EXPERTS
The financial statements of eMissions Testing, Inc. as of June 2, 2000 and
for the period from inception (May 5, 2000) through June 2, 2000 and the
combined financial statements of Lake Holdings, LLC and R. V. Evans Enterprises,
Inc. for the years ended December 31, 1999 and 1998 appearing in this Prospectus
and Registration Statement have been audited by Bennett Thrasher & Co. P.C.,
independent auditors, as set forth in its reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Act concerning the shares of Common Stock being offered hereby. This
Prospectus does not contain all the information set forth in the registration
statement, parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information concerning us and our
Common Stock, we refer you to the registration statement and the documents filed
as exhibits to the registration statement. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract, agreement or other document listed
59
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. We also file annual, quarterly and special
reports and other information with the Commission.
The registration statement and any document we file with the Commission
can be read and copied at the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the registration statement and
any document we file with the Commission can be obtained from the Public
Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20459, at prescribed rates. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330, or
at the Commission website located at WWW.SEC.GOV.
We are not currently a reporting company under the Securities Exchange Act
of 1934, and therefore we have not filed any reports with the Securities and
Exchange Commission. Upon completion of this offering we intend to file reports
with the Securities and Exchange Commission under the Securities Act of 1933,
and to furnish to our security holders annual reports containing audited
financial statements reported on by our independent auditors.
60
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Form S-1 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Cumming, State of Georgia, on September 28, 2000, 2000.
eMISSIONS TESTING, INC.
/s/ Richard A. Parlontieri
--------------------------------------
(Signature)
President
--------------------------------------
(Title)
September 28, 2000
---------------------------------------
(Date)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE
- --------- -----
/s/ Richard A. Parlontieri
President and Chief Executive
- ---------------------------------------- Officer
Richard A. Parlontieri
/s/ Richard A. Parlontieri Chief Financial and Accounting
- ---------------------------------------- Officer
Richard A. Parlontieri
The Board of Directors
/s/ Sidney E. Brown Director and Chairman of the Board
- ---------------------------------------- of Directors
Dr. Sidney E. Brown
/s/ William L. Ross
- ---------------------------------------- Director
Dr. William L. Ross
/s/ Richard D. Downey
- ---------------------------------------- Director
Dr. Richard D. Downey
61
/s/ Richard A. Parlontieri
- ---------------------------------------- Director
Richard A. Parlontieri
62
EMISSIONS TESTING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PRO FORMA COMBINING, CONDENSED FINANCIAL
INFORMATION (UNAUDITED):
Introduction F - 2
Pro Forma Combining, Condensed Statement of Operations -
For the Five Months Ended May 31, 2000 F - 3
Pro Forma Combining, Condensed Statement of Operations -
For the Year Ended December 31, 1999 F - 4
Notes to Pro Forma Combining, Condensed Financial Information F - 5
EMISSIONS TESTING, INC.
Independent Auditors' Report F - 6
Balance Sheet - June 2, 2000 F - 8
Statement of Operations - For the Period from Inception
(May 5, 2000) through June 2, 2000 F - 9
Statement of Stockholders' Deficit - For the Period from
Inception (May 5, 2000) through June 2, 2000 F - 10
Statement of Cash Flows - For the Period from Inception
(May 5, 2000) through June 2, 2000 F - 11
Notes to Financial Statements F - 12
Schedule II - Valuation and Qualifying Accounts F - 24
LAKE HOLDINGS, LLC AND R. V. EVANS ENTERPRISES, INC.
Independent Auditors' Report F - 25
Combined Statements of Operations - For the Five Months
Ended May 31, 2000 and 1999 (Unaudited) and the Years
Ended December 31, 1999 and 1998 (Audited) F - 26
Combined Statements of Owners' Deficit - For the Years
Ended December 31, 1999 and 1998 (Audited) and the Five
Months Ended May 31, 2000 (Unaudited) F - 27
Combined Statements of Cash Flows - For the Five Months
Ended May 31, 2000 and 1999 (Unaudited) and the Years
Ended December 31, 1999 and 1998 (Audited) F - 28
Notes to Combined Financial Statements F - 29
F-1
EMISSIONS TESTING, INC.
PRO FORMA COMBINING, CONDENSED FINANCIAL INFORMATION
INTRODUCTION
The accompanying unaudited pro forma combining, condensed statements of
operations combine the results of operations of eMissions Testing, Inc., Lake
Holdings, LLC and R. V. Evans Enterprises, Inc. for the periods as indicated in
the statements, as if the acquisition of certain assets and assumption of
liabilities of Lake Holdings, LLC by eMissions Testing, Inc. were completed on
January 1, 1999 (beginning of the earliest period presented) under the purchase
method of accounting and based upon the assumptions as included in the notes to
pro forma combining, condensed financial information.
The pro forma statements are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition been consummated
at the beginning of the period indicated.
The unaudited pro forma combining, condensed financial statements should be read
in conjunction with the historical financial statements and notes thereto,
included elsewhere in this document.
F-2
EMISSIONS TESTING, INC.
PRO FORMA COMBINING, CONDENSED STATEMENT OF OPERATIONS
FOR THE FIVE MONTHS ENDED MAY 31, 2000
(UNAUDITED)
LAKE HOLDINGS, LLC/R. V.
EMISSIONS TESTING, INC. EVANS ENTERPRISES, INC.
----------------------- -------------------------
INCEPTION (MAY 5, 2000) FIVE MONTHS ENDED PRO FORMA PRO FORMA
TO JUNE 2, 2000 MAY 31, 2000 ADJUSTMENTS COMBINED
----------------------- ------------------------- ---------------- -----------
Revenue $ -- $ 134,000 $ (18,000)(a) $ 116,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of emissions certificates -- 35,000 (5,000)(a) 30,000
Operating expenses 144,000 82,000 (26,000)(a)(d) 117,000
2,000 (b)
10,000 (e)
(95,000)(f)
----------- ----------- ----------- ------------
Income (loss) before income taxes (144,000) 17,000 96,000 (31,000)
Income tax benefit -- -- 7,000 (c) 7,000
----------- ----------- ----------- ------------
Net income (loss) $ (144,000) $ 17,000 $ 103,000 $ (24,000)
=========== =========== =========== ============
Basic and diluted net loss per share $ (0.06) $ (0.01)
=========== ============
Weighted average shares outstanding,
basic and diluted 2,411,000 2,430,000(g)
=========== ============
See accompanying notes to pro forma combining, condensed financial information.
F-3
EMISSIONS TESTING, INC.
PRO FORMA COMBINING, CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
LAKE HOLDINGS, LLC/
R. V. EVANS PRO FORMA PRO FORMA
EMISSIONS TESTING, INC. ENTERPRISES, INC ADJUSTMENTS COMBINED
------------------------- -------------------- ----------- -----------
COMBINED
Revenue $ -- $ 339,000 $ (127,000)(a) $ 212,000
------------ --------- ---------- -----------
Costs and expenses:
Cost of emissions certificates -- 60,000 (38,000)(a) 22,000
Operating expenses -- 265,000 (114,000)(a)(d) 180,000
5,000 (b)
24,000 (e)
------------ --------- ---------- -----------
Income before income taxes -- 14,000 (4,000) 10,000
Provision for income taxes -- -- 2,000 (c) 2,000
------------ --------- ---------- -----------
Net income $ -- $ 14,000 $ (6,000) $ 8,000
============ ========= ========== ===========
Basic and diluted net income per share $ 0.003
===========
Weighted average shares outstanding:
Basic 2,430,000 (g)
===========
Diluted 2,450,000 (g)
===========
See accompanying notes to pro forma combining, condensed financial information.
F-4
EMISSIONS TESTING, INC.
NOTES TO PRO FORMA COMBINING, CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(a) To reduce revenue, cost of emissions certificates and operating expenses
directly associated with emission testing stations which were not included
as part of the Lake Holdings, LLC acquisition.
(b) To reflect amortization of goodwill of $45,000 arising from the purchase
price allocation which is being amortized over 10 years.
(c) To reflect a provision (benefit) for income taxes on the pro forma
combined results of operations at the effective federal and state
statutory income tax rates for the applicable periods.
(d) The pro forma effect of depreciation related to certain assets acquired
from Lake Holdings, LLC as compared to the assets' treatment as capital
leases prior to the acquisition was insignificant and therefore no
adjustment was made to the pro forma financial statements.
(e) To reflect interest expense and amortization of deferred financing costs
associated with the convertible debenture assuming the net proceeds from
the debenture would have been $220,000 (the purchase price in the Lake
Holdings, LLC acquisition) and assuming the debenture was issued at the
beginning of the earliest period presented.
(f) To reduce operating expenses for nonrecurring provision for uncollectible
note receivable associated with a note receivable from related party.
(g) The pro forma basic weighted average shares outstanding for both the five
months ended May 31, 2000 and the year ended December 31, 1999 was assumed
to be the number of shares outstanding on June 2, 2000. The pro forma
diluted weighted average shares outstanding for the year ended December
31, 1999 includes an additional 20,000 shares to be issued under a
restricted stock arrangement. The effect of all other potentially dilutive
securities was antidilutive and therefore not included in diluted weighted
average shares outstanding.
F-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
eMissions Testing, Inc.
We have audited the accompanying balance sheet of eMissions Testing, Inc. as of
June 2, 2000 and the related statements of operations, stockholders' deficit and
cash flows for the period from inception (May 5, 2000) through June 2, 2000.
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 eMissions Testing, Inc. as of
June 2, 2000 and the results of its operations and its cash flows for the period
from inception (May 5, 2000) through June 2, 2000 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a start-up enterprise with limited
operations and has not generated significant amounts of revenue. In addition, as
of and subsequent to June 2, 2000, the Company committed technical violations of
certain provisions under its convertible debenture agreement and did not obtain
a waiver from the convertible debenture holder. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
F-6
- 2 -
In connection with our audit of the financial statements referred to above, we
audited Schedule II for the period from inception (May 5, 2000) through June 2,
2000. In our opinion, this financial schedule, when considered in relation to
the financial statements taken as a whole, presents fairly, in all material
respects, the information stated therein.
BENNETT THRASHER & CO. P.C.
Atlanta, Georgia
September 20, 2000
F-7
EMISSIONS TESTING, INC.
BALANCE SHEET
JUNE 2, 2000
ASSETS
Current assets:
Cash $ 381,000
Note receivable from related party, less
allowance of $95,000 --
Prepaid expenses 1,000
---------
Total current assets 382,000
Property and equipment, at cost less accumulated depreciation 179,000
Other assets 90,000
---------
$ 651,000
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible debenture, less unamortized original issue
discount of $26,000 $ 499,000
Due to Lake Holdings, LLC 220,000
Accrued financing costs 43,000
Other accrued liabilities 9,000
---------
Total current liabilities 771,000
---------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, 10,000,000 shares authorized,
no shares issued or outstanding --
Common stock, no par value, 20,000,000 shares
authorized, 2,450,000 shares issued 24,000
Less 20,000 shares held under restricted stock arrangement --
Accumulated deficit (144,000)
---------
Total stockholders' deficit (120,000)
---------
$ 651,000
=========
See accompanying notes to financial statements.
F-8
EMISSIONS TESTING, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MAY 5, 2000)
THROUGH JUNE 2, 2000
Revenue $ --
-----------
Costs and expenses:
General and administrative expenses 21,000
Organizational and start-up costs 28,000
Provision for uncollectible note receivable 95,000
-----------
144,000
Net loss $ (144,000)
===========
Basic and diluted net loss per share $ (0.06)
===========
Weighted average shares outstanding,
basic and diluted 2,411,000
===========
See accompanying notes to financial statements.
F-9
EMISSIONS TESTING, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MAY 5, 2000)
THROUGH JUNE 2, 2000
STOCK HELD UNDER
COMMON STOCK RESTRICTED STOCK ARRANGEMENT
---------------------------------- ------------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT
------------- ------------------- -------------- -------------- ------------
Balance at inception (May 5, 2000) -- $ -- -- $ -- $ --
Issuance of shares to founders
for services 2,410,000 24,000 -- -- --
Issuance of shares for services 40,000 -- 20,000 -- --
Net loss -- -- -- -- (144,000)
--------- --------- --------- --------- ---------
Balance at June 2, 2000 2,450,000 $ 24,000 20,000 $ -- $(144,000)
========= ========= ========= ========= =========
See accompanying notes to financial statements.
F-10
EMISSIONS TESTING, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MAY 5, 2000)
THROUGH JUNE 2, 2000
Cash flows from operating activities:
Net loss $(144,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Issuance of common stock for services 24,000
Provision for uncollectible note receivable 95,000
Changes in assets and liabilities:
Increase in prepaid expenses (1,000)
Increase in other assets (45,000)
Increase in accrued liabilities 52,000
---------
Net cash used in operating activities (19,000)
---------
Cash flows from investing activities:
Purchases of property and equipment (4,000)
Advance on note receivable from affiliate (95,000)
---------
Net cash used in investing activities (99,000)
---------
Cash flows from financing activities:
Proceeds from issuance of convertible debenture 499,000
---------
Net cash provided by financing activities 499,000
---------
Net increase in cash 381,000
Cash at beginning of period --
---------
Cash at end of period $ 381,000
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ --
=========
Cash paid during the period for income taxes $ --
=========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the period from inception (May 5, 2000) through June 2, 2000, the Company
purchased certain assets and assumed certain liabilities of Lake Holdings, LLC.
The purchase price totaled $220,000 which was payable at June 2, 2000 (see Note
3).
During the period from inception (May 5, 2000) through June 2, 2000, the Company
issued common stock to its founding stockholders and an individual for services
valued at $24,000.
See accompanying notes to financial statements.
F-11
EMISSIONS TESTING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 2, 2000
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
eMissions Testing, Inc. (the Company) was formed for the primary business
purpose of acquiring, developing and operating vehicle emission testing
stations. The federal government and a number of state and local governments
across the United States (and in certain foreign countries) mandate vehicle
emission testing as a method of improving air quality.
On June 1, 2000, the Company acquired emission testing equipment and assumed
lease obligations for two emission testing stations (both land and buildings) in
the metropolitan Atlanta, Georgia area and acquired emission testing equipment
to support two and one-half other stations (see Note 3). In conjunction with the
acquisition, the Company assumed agreements to lease emission testing equipment
to support one and one-half stations to unrelated station operators. At its
emission testing stations, the Company uses computerized emission testing
equipment that tests vehicles for compliance with emissions standards; in the
emissions testing industry, such stations are known as decentralized facilities.
The Company utilizes both "basic" testing systems that test a motor vehicle's
emissions while in neutral and "enhanced" testing systems that test a vehicle's
emissions under simulated driving conditions.
The current short-term business objective of the Company is to assemble a number
of stations within the metropolitan Atlanta area in order to achieve operating
efficiencies, equipment purchasing advantages and marketing leverage. The
current long-term business objective is to develop a presence in a number of
other markets, both in the United States and, possibly, in certain foreign
countries.
Revenue levels of the Company (i.e., testing volumes at the stations) depend,
upon other things, on the number of customers visiting the station on a given
day. Additionally, competition from other station operators, rain, heat, trends
in traffic volume and in shopping and housing destinations, economic downturns
and access to (or lack thereof) testing stations may impact revenue levels.
Finally, the impact of federal, state and local governmental regulation can have
a significant impact on the Company (see REGULATORY IMPACT below).
The Company was incorporated on May 5, 2000 under the laws of the state of
Georgia. Revenue during the period from May 5, 2000 through June 2, 2000 was not
significant (see Note 2).
The Company tentatively plans to adopt a December 31 fiscal year end.
F-12
USE OF ESTIMATES IN FINANCIAL STATEMENTS
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.
REVENUE RECOGNITION
Revenue is recognized as the testing services are performed. Under current state
of Georgia law, the price that a testing station may charge is limited to $25.00
per vehicle, with $7.40 of that amount due to the state as a fee for the
certificate issued to the operator of the station. The balance of the current
charge ($17.60) is retained by the station operator. Payment by the customer
must be made with cash or check; accordingly, the Company does not anticipate
significant levels of accounts receivable.
Under current state of Georgia law, if a vehicle fails an emissions test, it may
be retested at no additional charge for up to 30 days after the initial test, as
long as the subsequent test is performed at the same facility. At the time of
testing, the Company provides an allowance for retests, based on prior retest
experience and information furnished by the state of Georgia.
Revenue from operating leases is recognized on a straight-line basis over the
life of the leases.
METHODS OF DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets of five years. Repair and
maintenance costs are charged to expense as incurred. Gains or losses on
disposals are reflected in operations.
Goodwill is amortized on a straight-line basis over a ten year period.
Financing costs are deferred and amortized on a straight-line basis over the
life of the agreement.
IMPAIRMENT
Property and equipment and certain intangibles, including goodwill, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When indicators of
impairment are present, the Company evaluates the carrying amount of such assets
in relation to the operating performance and future estimated undiscounted net
cash flows expected to be generated by the assets or underlying businesses. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. The assessment of the recoverability of assets will be
F-13
impacted if estimated future operating cash flows are not achieved. In the
opinion of management, no assets were impaired as of June 2, 2000.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting basis and tax basis of assets and liabilities.
ORGANIZATION COSTS
Organization costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was not
significant during the period from inception (May 5, 2000) through June 2, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, note receivable from related
party and accrued liabilities approximate their fair value because of their
short-term nature. The convertible debenture is recorded at its amortized cost
which approximates fair value due to its interest rate approximating the market
rate of similar instruments.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for the period by
the weighted-average number of common shares outstanding for the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common and potential common shares outstanding during
the period, if the effect of the potential common shares is dilutive. As a
result of the Company's net loss, all potentially dilutive securities would be
antidilutive and are excluded from the computation of diluted loss per share.
The following table lists the number of shares which could be issued related to
all potentially dilutive securities as of June 2, 2000:
Convertible debenture 1,050,000
Warrant 250,000
Shares held under restricted stock arrangement 20,000
---------
1,320,000
=========
The above table assumes a conversion price under the terms of the convertible
debenture of one share for every $.50 of outstanding debt. However, if the
Company successfully completes its proposed registration of securities and its
shares are traded on the public markets, the conversion price and the number of
potentially dilutive securities related to the convertible debenture may change
significantly.
F-14
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments that are
readily convertible into cash and have a maturity of ninety days or less when
purchased. At times, cash and cash equivalent balances may exceed federally
insured amounts. The Company believes it mitigates any risks by depositing cash
and investing in cash equivalents with major financial institutions.
REGULATORY IMPACT
The current and future demand for the Company's services is substantially
dependent upon federal, state, local and foreign legislation and regulations
mandating air pollution controls and emissions testing. If any or all of these
governmental agencies should change their positions or eliminate or revise their
requirements related to air pollution controls and emissions testing (including
a shift to centralized facilities versus decentralized facilities), the Company
could experience a significant adverse impact on its financial position and
results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133), was issued in June 1998. SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement of Financial Accounting Standards No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT 133 (SFAS 137), was issued in June 1999.
SFAS 137 delays the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. The Company's convertible debenture is considered to be a
derivative; however, the Company has not determined whether adoption of SFAS 133
will have a material impact on its financial statements.
STOCK-BASED COMPENSATION
Stock-based compensation is determined using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the estimated market
price of the common stock at the date of grant over the amount an employee must
pay to acquire the stock.
RESTRICTED STOCK ARRANGEMENT
The Company has issued 20,000 shares of common stock to an individual which is
being held under a restricted stock arrangement. The assigned value of these
shares is reflected as a contra-equity account on the accompanying balance
sheet. Compensation expense associated with this arrangement will be recognized
ratably over the performance period (see Note 10).
F-15
NOTE 2: FACTORS AFFECTING OPERATIONS
The Company is a start-up enterprise with limited operations and has not
generated significant amounts of revenue. In addition, as discussed in Notes 4
and 7, the Company committed technical violations of certain provisions under
its convertible debenture agreement and did not obtain a waiver from the
convertible debenture holder. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The continuation of the
Company's business as a going concern is contingent upon, among other things,
the ability to: achieve and maintain satisfactory levels of profitable
operations; obtain waivers from the convertible debenture holder, or otherwise
have the holder not demand immediate repayment of the debenture, related to the
technical violations of certain provisions under the convertible debenture
agreement; obtain and maintain adequate levels of debt and/or equity financing;
and provide sufficient cash from operations to meet current and future
obligations.
The Company has prepared financial forecasts which indicate that, based on its
current business plans and strategies, it will achieve profitable operations and
generate positive cash flows during the next few years. However, the ultimate
ability of the Company to achieve these forecasts and to meet the objectives
discussed in the preceding paragraph cannot be determined at this time. Although
there are no assurances, management believes the Company will be able to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
NOTE 3: ACQUISITION
On June 1, 2000, the Company entered into an asset purchase agreement with Lake
Holdings, LLC (Lake Holdings), a company engaged in the emissions testing
business in Georgia. Pursuant to the agreement, the Company acquired certain
assets and assumed certain liabilities of Lake Holdings. The majority owners of
Lake Holdings also own an entity which manages GCA Strategic Investment Fund
Limited (GCA Fund), which has entered into a securities purchase agreement with
the Company (see Note 7). Lake Holdings owned emissions testing equipment and
leased and operated two emission testing stations in Georgia at the date of the
acquisition (see Note 9).
Assets purchased by the Company consisted primarily of emission testing
equipment for three emission testing stations plus emission testing equipment
for one and one-half stations that is leased to unrelated station operators,
together with all licenses and permits held by Lake Holdings. Liabilities
assumed by the Company consisted primarily of the real estate leases for the two
existing emission testing stations. The purchase price consisted of cash of
$220,000 (exclusive of the real estate lease obligations), and was funded by
proceeds from a debenture sold pursuant to the securities purchase agreement
between GCA Fund and the Company (see Note 7). The $220,000 purchase price was
paid subsequent to June 2, 2000 and is reflected as due to Lake Holdings, LLC on
the accompanying balance sheet.
F-16
The acquisition was accounted for using the purchase method of accounting,
whereby a new basis of accounting for the assets acquired and liabilities
assumed was established.
The purchase price was allocated as follows:
Emission testing equipment $175,000
Goodwill 45,000
--------
$220,000
========
In the opinion of management, the value of the acquired licenses, permits and
other intangible assets was not significant. The accompanying financial
statements include the results of operations of the acquired business from June
1, 2000 through June 2, 2000, which were not significant.
The following unaudited pro forma information presents the effect of the
acquisition as if it occurred on January 1, 1999:
FOR THE FIVE FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2000 DECEMBER 31, 1999
------------ -----------------
Revenue $ 116,000 $ 212,000
Net income (loss) $ (24,000) $ 8,000
Net income (loss) per share:
Basic $ (0.01) $ 0.003
Diluted $ (0.01) $ 0.003
Common shares outstanding:
Basic 2,430,000 2,430,000
=========== ===========
Diluted 2,430,000 2,450,000
=========== ===========
The above pro forma information is not necessarily indicative of the financial
results which would have occurred if such acquisition had taken place at the
earlier date, nor of future operating results.
NOTE 4: NOTE RECEIVABLE FROM RELATED PARTY
At June 2, 2000, the Company had a note receivable from an entity managed by,
and otherwise related to, a stockholder in the amount of $95,000. The note was
originally unsecured and carried interest at 12%. Principal and accrued interest
plus an additional fee of 2% of the principal were due on the August 2, 2000
maturity date, but were not repaid, at which time the interest rate increased to
18% from that date until the note is paid in full. The Company has extended the
maturity date to 45 days subsequent to the date as of which the Company's
registration statement is declared effective by the Securities and Exchange
Commission (SEC). Furthermore, the
F-17
Company has entered into an agreement with a second stockholder of the
Company whereby if the note receivable is not repaid within the
above-stipulated 45 day period, the stockholder will purchase the note
receivable from the Company for a purchase price equal to the aggregate cash
proceeds received by the stockholder upon the sale of 100,000 shares of
common stock of the Company. In addition, the Company intends to obtain a
security interest in certain property and improvements owned by the entity.
Due to the uncertainty of the collectibility of this note receivable, the
Company has placed an allowance of $95,000 on this note as of June 2, 2000. The
execution of this note was a technical violation of the use of proceeds
specified in the securities purchase agreement with GCA Fund (see Note 7) and
the Company did not obtain a waiver from GCA Fund.
NOTE 5: PROPERTY AND EQUIPMENT
A summary of property and equipment at June 2, 2000 is as follows:
Emission testing equipment $175,000
Furniture, fixtures and office equipment 4,000
--------
179,000
Less accumulated depreciation --
--------
$179,000
========
NOTE 6: OTHER ASSETS
Other assets at June 2, 2000 were as follows:
Goodwill $45,000
Deferred financing costs 43,000
Deposits 2,000
-------
90,000
Less accumulated amortization --
-------
$90,000
=======
NOTE 7: DEBENTURES
On June 1, 2000, the Company entered into a Securities Purchase Agreement, as
amended, (the Agreement) with GCA Fund, pursuant to which GCA Fund agreed to
purchase certain convertible debentures (collectively, the Series A debentures)
and certain related stock warrants of the Company (collectively, the warrants).
The Agreement contemplates the purchase by GCA Fund
F-18
(on or before June 1, 2001), in one or more tranches, of up to an aggregate
principal amount of $1,000,000 of the Series A debentures at a price equal to
95% of the principal amount. The Agreement also contemplates the issuance, in
one or more tranches, of warrants (entitling GCA Fund to purchase up to 500,000
shares of the Company's common stock at a price of $1.00 per share, with such
price subject to adjustment in certain circumstances as outlined in the
Agreement) concurrently with the purchase of the debentures.
On June 1, 2000, GCA Fund purchased a Series A debenture in the original
principal amount of $525,000, for a price equal to 95% thereof, or approximately
$499,000; concurrently, the Company issued to GCA Fund a warrant to purchase up
to 250,000 shares of the Company's common stock at any time over a five year
period commencing June 1, 2000 at a price of $1.00 per share.
Based upon the fair value methodology prescribed under Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), the Company did not assign a value to the warrant at the time of issuance.
The fair value of the warrant was estimated using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest rate of
6.7%; expected life of five years; no expected volatility; and no dividend
yield.
The outstanding principal amount of the Series A debenture is due on June 1,
2002. However, since the Company committed technical violations of certain
provisions under the Agreement and did not obtain a waiver from GCA Fund, GCA
Fund may demand immediate repayment of the principal amount of the debenture.
Accordingly, the outstanding balance under the Series A debenture has been
included in current liabilities on the accompanying balance sheet. Series A
debentures issued under the Agreement bear interest at 7% (payable, at the
Company's option, in cash or shares of common stock) and are secured by all
emission testing equipment owned by the Company. The Company elected to pay
interest under the currently outstanding Series A debenture in cash.
The Agreement contemplates the purchase of the Series A debentures by GCA Fund
in accordance with criteria outlined in the Agreement, up to the expiration date
of the commitment of June 1, 2001. The Company is subject to a commitment fee of
1.5% of any portion of the commitment not used.
The Series A debentures are convertible, at the option of GCA Fund, into shares
of common stock of the Company. The conversion price is generally equal to the
lesser of (a) $.50 or (b) 75% of the average trading price of the common stock,
as defined in the Agreement. The conversion price is subject to adjustment in
certain circumstances as outlined in the Agreement. Due to immateriality, the
Company did not assign a value to the beneficial conversion feature of the
Series A debenture at the time of the issuance.
The Series A debentures are redeemable, at the option of the Company, as long as
there is no event of default, as defined. The redemption price is generally
equal to the number of shares of
F-19
common stock into which the Series A debentures are convertible times the
average trading price of the common stock, as defined in the Agreement. The
redemption price is subject to adjustment in certain circumstances as outlined
in the Agreement.
Additionally, the Series A debentures are mandatorily redeemable, at the option
of GCA Fund, under circumstances as outlined in the Agreement, including but not
limited to a change in control, as defined.
The Agreement contemplates the issuance of warrants in conjunction with each
purchase by GCA Fund of a Series A debenture. The term of each warrant is five
years from its respective issue date. The warrants are mandatorily redeemable
for cash whenever the Company is obligated to redeem the Series A debentures; in
that case, the redemption price would be based on the value of the warrants, the
number of warrants being redeemed and the average trading price of the common
stock, all as outlined in the Agreement.
The Agreement contains provisions granting GCA Fund certain registration rights,
including a requirement that the Company file a registration statement with the
SEC which must become effective by August 30, 2000. At September 20, 2000, the
Company had not complied with this provision of the Agreement. Under the terms
of the Agreement, the Company is subject to liquidated damages of 2% of the
outstanding principal amount of the convertible debentures, prorated, for each
thirty day period the registration statement is not declared effective by the
SEC. If not declared effective by the SEC by September 29, 2000, the liquidated
damages increase to 3% of the outstanding principal amount of the convertible
debentures. In addition, if the registration statement is not declared effective
by the SEC by October 29, 2000, the conversion price of the convertible
debenture will decrease by 1% for each thirty day period in which the
registration statement is not declared effective. Finally, if the registration
statement is not declared effective by November 28, 2000, the Company will be
required to redeem the convertible debentures and warrants as set forth in the
Agreement. As of September 20, 2000, such liquidated damages approximated
$7,000. The Company did not obtain a waiver of such liquidated damages from GCA
Fund.
Interest expense, including amortization of the discount, was not significant
during the period from June 1, 2000 through June 2, 2000.
In September 2000, GCA Fund purchased a second Series A debenture in the
original principal amount of $100,000, for a price equal to 95% thereof, or
$95,000; concurrently, the Company issued to GCA Fund a warrant to purchase up
to 50,000 shares of the Company's common stock at any time over a five year
period at a price of $1.00 per share. The terms of the debenture are described
above.
NOTE 8: INCOME TAXES
As of June 2, 2000, the Company had a net operating loss carryforward of
approximately $49,000 which will expire in 2020.
F-20
Differences between the income tax benefit reported in the statement of
operations and the amount reported by applying the statutory federal income tax
rate (15%) to the loss before income taxes for the period from inception (May 5,
2000) through June 2, 2000 were as follows:
Expected rate (15.0)%
State income taxes, net of federal deduction (5.1)
Valuation allowance 20.1
------
-- %
======
Noncurrent deferred income tax assets at June 2, 2000 consisted of the
following:
Allowance for note receivable from related party $ 20,000
Net operating loss carryforward 10,000
Less valuation allowance (30,000)
--------
Net deferred tax asset $ --
========
NOTE 9: LEASING ACTIVITIES
OPERATING LEASES
The Company leases office space and land and buildings for the emissions testing
stations. The leases for the emission testing stations are renewable, at the
option of the Company, for specified periods. One of the leases for an emission
testing station is cancelable by either the lessor or the Company at any time.
Future minimum rental payments required under the noncancelable operating leases
were as follows at June 2, 2000:
YEAR ENDING JUNE 2
------------------
2001 $35,000
2002 20,000
2003 20,000
2004 20,000
-------
$95,000
=======
During the period from inception (May 5, 2000) through June 2, 2000, rent
expense was not significant.
LEASE REVENUE
The Company leases certain emission testing equipment for one and one-half
stations under operating leases, one of which is cancelable at the Company's
option and the other of which is noncancelable, to
F-21
two unrelated station operators. Such equipment has a cost of $65,000 and is
included in property and equipment on the accompanying balance sheet. The
remaining lease term under the noncancelable lease at June 2, 2000 was
approximately 33 months. The lessees pay the Company monthly rent of
approximately $1,800.
Future estimated receipts under the noncancelable lease were as follows at June
2, 2000:
YEAR ENDING JUNE 2
------------------
2001 $ 6,000
2002 6,000
2003 5,000
-------
$17,000
=======
NOTE 10: EQUITY
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock. No
terms or conditions have been established for any preferred stock which may be
issued.
COMMON STOCK
In conjunction with the formation of the Company, a total of 2,410,000 shares of
common stock were issued to 15 founders. The founders contributed no cash or
other tangible property in exchange for their shares; instead, the founders
contributed organizational and start-up expertise, industry knowledge and
know-how and other such intangible services. The Company has assigned a value of
$0.01 per share to these services, or a total of approximately $24,000 which has
been included in organizational and start-up costs in the accompanying statement
of operations. Management believes that such value of $0.01 per share
approximated fair value as of the date of formation of the Company.
In conjunction with the Lake Holdings acquisition discussed in Note 3, the
Company agreed to pay an advisory fee of $14,000 to an individual who managed
the operations of the two stations which the Company now operates. This amount
is payable over 120 days in exchange for advisory services. The Company also
agreed to issue to that individual 40,000 shares of common stock of which 20,000
shares were issued immediately and assigned a value of $0.01 per share which has
been included in organizational and start-up costs in the accompanying statement
of operations; the remaining 20,000 shares are held by the Company under a
restricted stock arrangement and will be transferred to the individual at the
conclusion of 120 days and have been included in the amount held under
restricted stock arrangement on the accompanying balance sheet. Separately, this
individual was issued 100,000 shares of common stock as a founder of the
Company, which is included in the 2,410,000 shares discussed above.
F-22
NOTE 11: CONSULTING AND EMPLOYMENT AGREEMENTS
In May 2000, the Company entered into a consulting agreement with an entity that
is a founding stockholder of the Company. The agreement has a term of five
years, requires a monthly fee of $8,000, which increases by 10% per year, and
requires finders fees on acquisitions procured, as defined in the agreement.
In June 2000, the Company entered into an employment agreement with one of the
founding stockholders to serve as the Company's president. This individual
resigned from the Company in September 2000.
In September 2000, the Company entered into an employment agreement with another
founding stockholder to serve as the Company's president which, among other
things, provides for an annual base compensation of $60,000 for an initial
period of one year. The agreement may be renewed for up to three additional one
year periods, however, either party may cancel the agreement at any time. The
agreement provides for a 10% increase in the president's annual salary for each
year the agreement is renewed.
F-23
EMISSIONS TESTING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM INCEPTION (MAY 5, 2000)
THROUGH JUNE 2, 2000
BALANCE AT
INCEPTION COSTS AND BALANCE AT
(MAY 5, 2000) EXPENSE DEDUCTIONS JUNE 2, 2000
------------- --------- ---------- ------------
Allowance for note receivable
from related party $ -- $95,000 $ -- $95,000
=========== ======= ========== =======
Note: Schedules other than that above are omitted because they are not required
or are not applicable, or because the information is furnished elsewhere in the
financial statements or the notes thereto.
See accompanying independent auditors' report.
F-24
INDEPENDENT AUDITORS' REPORT
To the Owners of
Lake Holdings, LLC and R. V. Evans Enterprises, Inc.
We have audited the combined balance sheet (not separately included herein) of
Lake Holdings, LLC and R. V. Evans Enterprises, Inc. as of December 31, 1999 and
the combined statements of operations, owners' deficit and cash flows for each
of the two years in the period then ended. These combined financial statements
are the responsibility of the management of the Companies. Our responsibility is
to express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Lake Holdings, LLC
and R. V. Evans Enterprises, Inc. as of December 31, 1999 and the results of
their operations and their cash flows for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
BENNETT THRASHER & CO. P.C.
Atlanta, Georgia
July 7, 2000
F-25
LAKE HOLDINGS, LLC AND R. V. EVANS ENTERPRISES, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS FOR THE YEAR ENDED
ENDED MAY 31 DECEMBER 31
------------------------- ------------------------
2000 1999 1999 1998
----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
Revenue $134,000 $114,000 $339,000 $195,000
Costs and expenses:
Cost of emissions certificates 35,000 28,000 60,000 57,000
Operating expenses 82,000 64,000 265,000 121,000
-------- -------- -------- --------
Net income $ 17,000 $ 22,000 $ 14,000 $ 17,000
======== ======== ======== ========
See accompanying notes to combined financial statements.
F-26
LAKE HOLDINGS, LLC AND R. V. EVANS ENTERPRISES, INC.
COMBINED STATEMENTS OF OWNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (AUDITED) AND THE FIVE
MONTHS ENDED MAY 31, 2000 (UNAUDITED)
LAKE HOLDINGS, LLC R. V. EVANS ENTERPRISES, INC.
-------------------- -----------------------------
COMMON STOCK
----------------------------- ACCUMULATED
MEMBERS' CAPITAL SHARES AMOUNT DEFICIT TOTAL
-------------------- ----------------------------- ----------- ---------
Balance at January 1, 1998 $ -- -- $ -- $(42,000) $(42,000)
Distributions -- -- -- (20,000) (20,000)
Net income -- -- -- 17,000 17,000
---------- ---- ------- -------- --------
Balance at December 31, 1998 -- -- -- (45,000) (45,000)
Issuance of shares -- 100 -- -- --
Distributions -- -- -- (23,000) (23,000)
Net income -- -- -- 14,000 14,000
---------- ----- ------- -------- --------
Balance at December 31, 1999 -- 100 -- (54,000) (54,000)
Distributions -- -- -- (32,000) (32,000)
Net income -- -- -- 17,000 17,000
---------- ---- ------- -------- --------
Balance at May 31, 2000 (Unaudited) $ -- 100 $ -- $(69,000) $(69,000)
========== ==== ======= ======== ========
See accompanying notes to combined financial statements.
F-27
LAKE HOLDINGS, LLC AND R. V. EVANS ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS FOR THE YEAR ENDED
ENDED MAY 31 DECEMBER 31
---------------------- ----------------------
2000 1999 1999 1998
----------- ---------- ---------- ---------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 17,000 $ 22,000 $ 14,000 $ 17,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,000 9,000 25,000 16,000
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses -- (1,000) 4,000 (4,000)
Increase in other assets -- -- (5,000) --
Increase in accounts payable and
accrued liabilities 21,000 -- -- 4,000
-------- -------- -------- --------
Net cash provided by operating activities 52,000 30,000 38,000 33,000
-------- -------- -------- --------
Cash flows from financing activities:
Distributions (32,000) (7,000) (23,000) (20,000)
Payments on obligations under capital leases (13,000) (6,000) (21,000) (15,000)
Net borrowings (repayments) on revolving
line of credit (2,000) -- 8,000 --
Book overdraft -- (1,000) (1,000) 1,000
-------- -------- -------- --------
Net cash used in financing activities (47,000) (14,000) (37,000) (34,000)
-------- -------- -------- --------
Net increase (decrease) in cash 5,000 16,000 1,000 (1,000)
Cash at beginning of period 1,000 -- -- 1,000
-------- -------- -------- --------
Cash at end of period $ 6,000 $ 16,000 $ 1,000 $ --
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 13,000 $ 8,000 $ 22,000 $ 2,000
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1999 and 1998, the Companies acquired equipment under capital lease
arrangements totaling $65,000 and $60,000, respectively.
See accompanying notes to combined financial statements.
F-28
LAKE HOLDINGS, LLC AND R. V. EVANS ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Lake Holdings, LLC (Lake Holdings) and R. V. Evans Enterprises, Inc. (Evans)
(collectively, the Companies) are engaged primarily in operating vehicle
emission testing stations in the metropolitan Atlanta, Georgia area.
Lake Holdings is primarily engaged in leasing emission testing stations (both
land and buildings) and emission testing equipment from various lessors and
operating these emission testing stations through a management agreement with
Evans. Lake Holdings also leases emission testing equipment to unrelated station
operators. From January 1998 to May 2000, the Companies operated between two and
four emission testing stations, all in the metropolitan Atlanta, Georgia area.
Lake Holdings was incorporated as a limited liability company in January 1997
under the laws of the state of Georgia. Lake Holdings operates under an informal
operating agreement and will continue indefinitely, unless terminated by its
members. Other than the member notes discussed in Note 2, no contributed capital
was received from the members upon formation of Lake Holdings. Evans was
incorporated in June 1999 under the laws of the state of Georgia. Prior to this
date, Evans was operated as a sole proprietorship by its sole stockholder. The
accompanying combined financial statements include the results of operations of
the sole proprietorship for the periods prior to June 1999.
Revenue levels of the Companies (i.e., testing volumes at the stations) depend,
upon other things, on the number of customers visiting the station on a given
day. Additionally, competition from other station operators, rain, heat, trends
in traffic volume and in shopping and housing destinations, economic downturns
and access to (or lack thereof) testing stations may impact revenue levels.
Finally, the impact of federal, state and local governmental regulation can have
a significant impact on the Companies (see REGULATORY IMPACT below).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Lake Holdings and
Evans. Although there is no common ownership between the entities, management
believes the presentation of combined financial statements is considered the
most meaningful due to the operational relationship between the two entities.
All significant intercompany accounts and transactions have been eliminated in
combination.
F-29
USE OF ESTIMATES IN FINANCIAL STATEMENTS
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.
REVENUE RECOGNITION
Revenue is recognized as the testing services are performed. Under current state
of Georgia law, the price that a testing station may charge is limited to $25.00
per vehicle, with $7.40 of that amount due to the state as a fee for the
certificate issued to the operator of the station and reflected as cost of
emissions certificates issued in the accompanying combined statements of
operations. The balance of the current charge ($17.60) is retained by the
station operator. From October 1998 through June 1999, the Companies received
discounts on the cost of emissions certificates from the state of Georgia as
part of a program to assist emission station operators implement changes in
emission testing procedures. The Companies received discounts totaling $46,000
for 1999 and $9,500 for 1998, which have been deducted from cost of emissions
certificates issued in the accompanying combined statements of operations.
Payment by the customer must be made with cash or check; accordingly, the
Companies do not have significant levels of accounts receivable.
Under current state of Georgia law, if a vehicle fails an emissions test, it may
be retested at no additional charge for up to 30 days after the initial test, as
long as the subsequent test is performed at the same facility. At the time of
testing, the Companies provide an allowance for retests, based on prior retest
experience and information furnished by the state of Georgia.
Revenue from operating leases is recognized on a straight-line basis over the
life of the leases.
METHODS OF DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets of five years. Repair and
maintenance costs are charged to expense as incurred. Gains or losses on
disposals are reflected in operations.
IMPAIRMENT
Property and equipment and certain intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. When indicators of impairment are present, the
Companies evaluate the carrying amount of such assets in relation to the
operating performance and future estimated undiscounted net cash flows expected
to be generated by the assets or underlying businesses. If such assets are
considered to be impaired, the
F-30
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The assessment of the
recoverability of assets will be impacted if estimated future operating cash
flows are not achieved. In the opinion of management, no assets were impaired as
of December 31, 1999 or 1998.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was not
significant during 1999 or 1998.
INCOME TAXES
Lake Holdings is treated as a partnership for federal and state income tax
purposes. Evans has elected under the Internal Revenue Code to be taxed as an S
corporation. Accordingly, no provision or benefit for federal or state income
taxes is necessary since income, losses and tax credits are reported on the
owners' individual income tax returns.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments that are
readily convertible into cash and have a maturity of ninety days or less when
purchased. At times, cash and cash equivalent balances may exceed federally
insured amounts. The Companies believe they mitigate any risks by depositing
cash and investing in cash equivalents with major financial institutions.
REGULATORY IMPACT
The current and future demand for the Companies' services is substantially
dependent upon federal, state and local legislation and regulations mandating
air pollution controls and emissions testing. If any or all of these
governmental agencies should change their positions or eliminate or revise their
requirements related to air pollution controls and emissions testing, the
Companies could experience a significant adverse impact on their combined
financial position and results of operations.
UNAUDITED INFORMATION
The combined statements of operations and cash flows of the Companies for the
five-month periods ended May 31, 2000 and 1999 were taken from the Companies'
books and records without audit. However, in the opinion of management, such
information includes all adjustments (consisting only of normal accruals) which
are necessary to properly reflect the results of operations of the Companies for
the five months ended May 31, 2000 and 1999. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles for the interim periods have been condensed or
omitted. The results of operations for the five months ended May 31, 2000 and
1999 are not necessarily indicative of the results to be expected for the full
year.
F-31
NOTE 2: DEBT
REVOLVING LINE OF CREDIT
Lake Holdings has a $30,000 revolving line of credit with a financial
institution. Outstanding borrowings are unsecured, accrue interest at prime
(8.5% at December 31, 1999) plus 1% and mature in July 2000. Accrued interest is
payable monthly and the outstanding principal is due at maturity. The
outstanding balance at December 31, 1999 was $8,000. At December 31, 1999,
$22,000 was available under the line of credit. Interest expense for outstanding
borrowings under the revolving line of credit was insignificant for 1999 and
1998.
MEMBER NOTES
In 1997, the two members of Lake Holdings contributed a total of $40,000 in
capital to Lake Holdings in the form of two demand notes payable. These notes
accrued interest at 6%, were unsecured and principal and accrued interest were
due on demand. Both of these notes were repaid in June 2000. Interest expense
recognized under these notes was $7,000 for 1999 and $5,000 for 1998.
NOTE 3: LEASING ACTIVITIES
OPERATING LEASES
The Companies lease office space and land and buildings for the emissions
testing stations. The leases for the emission testing stations are renewable, at
the option of the Companies, for specified periods. One of the leases for an
emission testing station is cancelable by either the lessor or the Companies at
any time. Future minimum rental payments required under the noncancelable
operating leases were as follows at December 31, 1999:
YEAR ENDING DECEMBER 31
-----------------------
2000 $20,000
2001 20,000
2002 20,000
2003 20,000
2004 9,000
-------
$89,000
=======
Rent expense for 1999 was $54,000 and for 1998 was $18,000.
F-32
CAPITAL LEASES
The Companies lease emission testing equipment under leases which are accounted
for as capital leases. The following is a schedule by year of future minimum
payments under capital leases, together with the present value of minimum lease
payments at December 31, 1999:
YEAR ENDING DECEMBER 31
-----------------------
2000 $ 46,000
2001 46,000
2002 36,000
2003 23,000
2004 9,000
--------
160,000
Less amount representing interest 39,000
--------
Present value of minimum lease payments $121,000
========
LEASE REVENUE
The Companies lease certain emission testing equipment for one and one-half
stations under operating leases, one of which is cancelable at the Company's
option and the other of which is noncancelable, to two unrelated station
operators. The remaining lease term under the noncancelable lease at December
31, 1999 was approximately 38 months. The lessees pay the Companies monthly rent
of approximately $1,800 under both leases.
Future estimated receipts under the noncancelable lease were as follows at
December 31, 1999:
YEAR ENDING DECEMBER 31
-----------------------
2000 $ 6,000
2001 6,000
2002 6,000
2003 1,000
-------
$19,000
=======
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NOTE 4: UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, as if the Companies had been C corporations subject to federal
and state income taxes throughout the periods presented.
YEAR ENDED DECEMBER 31
----------------------
1999 1998
------- -------
Earnings before pro forma adjustment,
per combined statements of operations $14,000 $17,000
Provision for income taxes 3,000 3,000
------- -------
Pro forma net income $11,000 $14,000
======= =======
NOTE 5: SUBSEQUENT EVENTS
On June 1, 2000, Lake Holdings entered into an asset purchase agreement with
eMissions Testing, Inc. (eMissions) whereby eMissions purchased certain assets
and assumed certain liabilities of Lake Holdings. The purchase price was
$220,000 in cash received on June 3, 2000. After the acquisition, Lake Holdings
had no operating activities. Furthermore, the management agreement between Lake
Holdings and Evans was terminated and the sole stockholder of Evans entered into
a consulting agreement with eMissions to assist in the operation of the emission
testing stations.
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