SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 6, 1996
------------------------------
ERD WASTE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-76200 13-3121813
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
937 East Hazelwood Avenue, Rahway, New Jersey 07065
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 381-9226
----------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
The Exhibit Index is on Page 4
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 3, 1996, the Registrant, its wholly owned subsidiary
ENSA Acquisition Corp. ("EAC") and Environmental Services of America, Inc.
("ENSA") entered into an Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"). In order to facilitate the acquisition of ENSA, pursuant to
the terms of the Amended and Restated Agreement and Plan of Merger, the
Registrant, through EAC, launched a tender offer (the "Offer") on April 4, 1996
for the purchase of shares of common stock of ENSA at a purchase price of $1.66
per share. On May 1, 1996, the Registrant closed the tender offer after
receiving in excess of 90% of the outstanding common stock of ENSA, on May 6,
1996 the Registrant purchased those shares for an aggregate purchase price of
$5,865,967. Simultaneously with its entry into the Merger Agreement, the
Registrant entered into a stock purchase agreement with the holders of more than
90% of each class of preferred stock of ENSA (the "Stock Purchase Agreement").
On May 6, 1996 the Registrant closed the Stock Purchase Agreement and purchased
the preferred stock under the Stock Purchase Agreement for an aggregate purchase
price of $1,253,614. The Registrant contemplates the completion of the merger of
EAC into ENSA in the near future.
In order to partially finance the purchase of the common stock
and preferred stock of ENSA, the Registrant obtained a $7.5 revolving credit
facility (the "Revolving Facility") from Chemical Bank (the "Bank") pursuant to
a loan agreement (the "Loan Agreement"), dated March 29, 1996. The Loan
Agreement contains customary covenants, representations, warranties, events of
default and indemnification provisions and customary conditions to the making
advances under the Revolving Facility. The Company used approximately $7.2
million of the Revolving Facility for the purchase of the common stock and
preferred stock of ENSA pursuant to the Offer. The Company will use the
remainder of the Credit Facility and funds from working capital to purchase the
remaining shares of common stock and preferred stock outstanding at the time of
the merger of EAC into ENSA.
The Loan Agreement provides for the granting by the Registrant
and each of its subsidiaries of a first priority security interest in all of the
Registrant's and its subsidiaries' present and future accounts, contract rights,
chattel paper, general intangibles, instruments and documents then owned or
thereafter acquired, and in all machinery and equipment acquired by the
Registrant and its subsidiaries after the date of the Loan Agreement.
The Registrant has no current intention to change the purpose
for which the assets of ENSA are currently used.
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, EXHIBITS
(a) Financial statements of business acquired.
Audited balance sheets of ENSA and subsidiaries as at December
31, 1995 and December 31, 1994 and related statements of
operations and cash flows for the years then ended and the
year ended December 31, 1993.
(b) Pro forma financial information.
It is presently impracticable to provide the pro forma
financial information required to be included in this Current
Report on Form 8-K. Such pro forma financial information will
be filed by amendment as soon as practicable.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ERD WASTE CORP.
BY: /S/ JOSEPH WISNESKI
------------------------------
NAME: JOSEPH WISNESKI
TITLE: PRESIDENT
DATE: May 15, 1996
3
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of April 3, 1996, among
ERD Waste Corp., ENSA Acquisition Corp. and Environmental
Services of America, Inc., incorporated by reference to
Schedule 14d-1 filed by the Registrant on April 4, 1996.
10.1 Loan Agreement, dated March 29, 1996, between the Registrant
and Chemical Bank, incorporated by reference to Form 8K filed
the Registrant on April 17, 1996 .
99.1 Press release dated May 2, 1996 with respect to the purchase
of tendered shares of common stock of Environmental Services
of America, Inc.
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
Environmental Services of America, Inc.
Rahway, New Jersey
We have audited the accompanying consolidated balance sheets of
Environmental Services of America, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 consolidated financial position of
Environmental Services of America, Inc. and subsidiaries as of December 31, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
COOPER, SELVIN & STRASSBERG LLP
CERTIFIED PUBLIC ACCOUNTANTS
Great Neck, New York
March 30, 1996, except as to
Note 10(c), the date of
which is April 4, 1996
F-1
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
DECEMBER 31,
------------
1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 661,192 $ 600,272
Accounts receivable, net of
allowance for doubtful accounts
of $447,605 and $469,605,
respectively (Notes 4 and 5) 8,754,953 10,821,411
Prepaid expenses and deposits 647,626 771,666
Prepaid and refundable income taxes 370,286 -
Other current assets 218,560 348,024
----------- -----------
Total Current Assets 10,652,617 12,541,373
----------- -----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and
amortization (Notes 3 and 5) 6,950,870 7,319,713
----------- -----------
GOODWILL, net of accumulated
amortization of $288,303 and
$232,818, respectively 1,500,234 1,555,719
----------- -----------
OTHER ASSETS:
Deferred permit costs 233,225 290,809
Customer list 111,638 151,838
Deferred income taxes (Note 8) 425,900 90,900
Other 277,987 362,766
----------- -----------
Total Other Assets 1,048,750 896,313
----------- -----------
$ 20,152,471 $ 22,313,118
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
------------
1995 1994
---- ----
CURRENT LIABILITIES:
Current portion of long-term
debt (Note 5) $ 2,089,290 $ 1,148,149
Notes payable - bank (Note 4) 2,470,000 1,650,000
Accounts payable and accrued expenses 6,754,497 8,127,843
Income taxes payable 25,907 140,909
----------- -----------
Total Current Liabilities 11,339,694 11,066,901
----------- -----------
LONG-TERM DEBT, less current
portion (Note 5) 1,004,058 2,459,052
----------- -----------
OTHER LONG-TERM LIABILITIES 273,000 273,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 2, 6, and 7):
Preferred stock, $.01 par value -
authorized 2,000,000 shares:
"Series B" - 10,258 shares
issued and outstanding 103 103
"Series C" - 3,200 shares
issued and outstanding 32 32
Common stock, $.02 par value -
authorized 10,000,000 shares, issued
and outstanding 3,806,722 and
3,801,722 shares, respectively 76,135 76,035
Paid-in capital in excess of par 5,828,079 5,819,579
Retained earnings 1,631,370 2,618,416
----------- -----------
Total Stockholders' Equity 7,535,719 8,514,165
----------- -----------
$ 20,152,471 $ 22,313,118
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
Net sales $ 36,559,170 $ 32,784,213 $ 23,766,311
Cost of sales 23,571,670 20,839,810 14,579,650
----------- ----------- -----------
Gross profit on sales 12,987,500 11,944,403 9,186,661
----------- ----------- -----------
Selling, general and admini-
strative expenses 12,298,330 9,812,296 8,114,628
Depreciation and amortization 1,777,443 1,311,502 921,345
----------- ----------- -----------
14,075,773 11,123,798 9,035,973
----------- ----------- -----------
Income (loss) from operations ( 1,088,273) 820,605 150,688
----------- ----------- -----------
Other income (expenses):
Non-operating income 73,776 67,766 103,333
Interest expense ( 555,743) ( 358,084) ( 167,437)
----------- ----------- -----------
( 481,967) ( 290,318) ( 64,104)
----------- ----------- ------------
Income (loss) before
provision for income taxes ( 1,570,240) 530,287 86,584
Provision (benefit) for
income taxes (Note 8) ( 588,000) 237,400 54,500
----------- ----------- -----------
Net income (loss) $( 982,240) $ 292,887 $ 32,084
=========== =========== ===========
Earnings (loss)
per common share: $( .22) $ .07 $ .01
=========== =========== ===========
Weighted average number of
common shares and equiv-
alent shares outstanding 4,446,811 4,312,465 3,963,601
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-4
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Preferred Stock Treasury Stock
------------ --------------- -------------- Paid in
Number Number Number Capital in Retained
of Shares Amount of Shares Amount of Shares Amount Excess of Par Earnings
--------- ------ --------- ------ --------- ------ ------------- --------
Balance - January 1, 1993 3,031,411 $ 60,629 14,952 $ 150 (35,000) $ (66,729) $5,121,852 $ 2,309,768
Issuance of common
stock in connection with
acquisitions 15,000 300 - - - - 22,200 -
Cancellation of shares
previously issued in
connection with acquisi-
tion of TRI-S, Inc. (46,425) (929) - - - - (91,921) -
Redemption of preferred
and common stock (8,682) (174) (552) (6) - - (107,013) -
Dividends - preferred stock - - - - - - - (9,194)
Net income - year ended
December 31, 1993 - - - - - - - 32,084
--------- -------- ------ ------ ------- ---------- ---------- -----------
2,991,304 $59,826 14,400 $144 (35,000) $(66,729) $4,945,118 $2,332,658
========= ======== ====== ====== ======= ========== ========== ===========
See Notes to Consolidated Financial Statements.
F-5
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Preferred Stock Treasury Stock
------------ --------------- -------------- Paid in
Number Number Number Capital in Retained
of Shares Amount of Shares Amount of Shares Amount Excess of Par Earnings
--------- ------ --------- ------ --------- ------ ------------- --------
Balance - January 1, 1994 2,991,304 $ 59,826 14,400 $ 144 (35,000) $ (66,729) $4,945,118 $ 2,332,658
Issuance of common stock
in connection
with acquisitions 312,500 6,250 - - - - 574,375 -
Issuance of preferred stock - - 3,200 32 - - 319,968 -
Cancellation of shares
previously issued in
connection with asset
acquisition (15,000) (300) - - - - (22,200) -
Retirement of treasury stock (35,000) (700) - - 35,000 66,729 (66,029) -
Conversion of preferred stock 452,543 9,051 (4,142) (41) - - (9,010) -
Exercise of warrants 91,875 1,838 - - - - 70,037 -
Dividends - preferred stock - - - - - - - (7,129)
Other 3,500 70 - - - - 7,320 -
Net income - year ended
December 31, 1994 - - - - - - - 292,887
--------- -------- ------ ------ ------- ---------- ----------- ----------
3,801,722 $76,035 13,458 $135 - $ - $5,819,579 $2,618,416
========= ======== ====== ====== ======= ========== =========== ===========
See Notes to Consolidated Financial Statements.
F-6
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Preferred Stock Treasury Stock
------------ --------------- -------------- Paid in
Number Number Number Capital in Retained
of Shares Amount of Shares Amount of Shares Amount Excess of Par Earnings
--------- ------ --------- ------ --------- ------ ------------- --------
Balance - January 1, 1995 3,801,722 $ 76,035 13,458 $ 135 - $ - $5,819,579 $ 2,618,416
Issuance of common
stock in connection
with consulting services 5,000 100 - - - - 8,500 -
Dividends - preferred stock - - - - - - - (4,806)
Net (loss) - year ended
December 31, 1995 - - - - - - - ( 982,240)
--------- -------- -------- ------ --------- --------- ---------- ----------
3,806,722 $76,135 13,458 $135 - $ - $5,828,079 $1,631,370
========= ======== ======== ====== ========= ========= ========== ==========
See Notes to Consolidated Financial Statements.
F-7
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $( 982,240) $ 292,887 $ 32,084
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,777,443 1,311,502 921,345
Deferred income taxes ( 335,000) ( 90,900) -
Decrease (Increase) in accounts
receivable 2,066,458 (1,555,696) (2,089,934)
Decrease (Increase) in prepaid
expenses and deposits 124,040 (252,404) 38,743
(Increase) in prepaid and refundable
income taxes ( 370,286) - -
Decrease (Increase)in other
current assets 129,464 414,837 ( 770,132)
(Decrease) Increase in accounts
payable and accrued expenses (1,373,346) 856,045 1,944,371
(Decrease) Increase in income
taxes payable ( 115,002) 135,838 ( 22,683)
---------- ---------- ----------
Total Adjustments 1,903,771 819,222 21,710
---------- ---------- ----------
Net Cash Provided by Operating
Activities 921,531 1,112,109 53,794
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (1,027,445) ( 836,670) (1,116,791)
(Increase) in customer list - ( 62,500) ( 105,000)
Decrease (Increase) in other assets 84,779 ( 328,771) ( 33,995)
Acquisition of subsidiaries - (1,063,451) -
---------- ---------- ----------
Net Cash (Used In) Investing
Activities ( 942,666) (2,291,392) (1,255,786)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,870,519) (1,319,451) ( 401,537)
Increase in notes payable-bank 820,000 175,000 1,325,000
Redemption of stock - - ( 107,193)
Exercise of warrants and other 8,600 56,766 -
Dividends ( 4,806) ( 7,129) ( 9,194)
Insurance of preferred stock - 320,000 -
Increase in long-term debt 1,128,780 2,040,000 133,962
---------- ---------- ----------
Net Cash Provided by
Financing Activities 82,055 1,265,186 941,038
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 60,920 85,903 (260,954)
CASH AND CASH EQUIVALENTS - Beginning 600,272 514,369 775,323
---------- ---------- ----------
CASH AND CASH EQUIVALENTS - Ending $ 661,192 $ 600,272 $ 514,369
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-8
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------
1995 1994 1993
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes $ 170,371 $ 103,446 $ 39,467
======== ======== ========
Interest $ 552,972 $ 330,302 $ 167,104
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
YEAR ENDED DECEMBER 31, 1995:
The Company purchased property and equipment for $232,870, a portion of which
purchase price was financed. The purchases were accounted for as follows:
Cost of property and equipment $ 232,870
Cash paid at time of acquisition 4,984
----------
Debt incurred $ 227,886
==========
F-9
YEAR ENDED DECEMBER 31, 1994:
The Company purchased property and equipment for $529,015, a portion of which
purchase price was financed. The purchases were accounted for as follows:
Cost of property and equipment $ 529,015
Cash paid at time of acquisition 15,520
----------
Debt incurred $ 513,495
==========
Preferred shareholders converted 3,376 shares of Series A preferred stock and
766 shares of Series B preferred stock into a total of 452,543 shares of
common stock. The transactions were accounted for as follows:
Common stock $ 9,051
Preferred stock ( 41)
Paid-in capital in excess of par ( 9,010)
----------
$ -
==========
The Company retired 35,000 shares of common stock previously held as treasury
stock. The transaction was accounted for as follows:
Common stock $( 700)
Paid-in capital in excess of par ( 66,029)
Treasury stock 66,729
----------
$ -
==========
During the year, the Company acquired substantially all of the assets, subject
to certain liabilities, of two treatment, storage and disposal facilities and an
environmental consulting and remediation business. The aggregate purchase price
was $2,010,320 consisting of cash and shares of stock. The transactions are
summarized as follows:
Working capital acquired, other than cash $( 549,088)
Property and equipment acquired 3,059,173
Permits acquired 213,291
Goodwill acquired 430,854
Long-term debt acquired (1,237,154)
Other long-term liabilities acquired ( 273,000)
Common stock issued ( 580,625)
----------
Net cash used in acquisition $ 1,063,451
==========
YEAR ENDED DECEMBER 31, 1993:
The Company purchased property and equipment for $400,590, a portion of which
purchase price was financed. The purchases were accounted for as follows:
Cost of property and equipment $ 400,590
Cash paid at time of acquisition 21,055
----------
Debt incurred $ 379,535
==========
F-10
YEAR ENDED DECEMBER 31, 1993: (Continued)
The Company refinanced existing debt during the year realizing cash proceeds
in excess of previously existing debt. The transaction was accounted for as
follows:
Total new debt$ 251,250
Cash received ( 133,962)
Debt refinanced $ 117,288
==========
During the year, the Company acquired property and equipment and customer
lists in exchange for the issuance of 15,000 shares of common stock, the
assumption of long-term debt and cash. The transaction was accounted for as
follows:
Cost of property and equipment $ 107,550
Cash paid at time of acquisition 9,021
----------
Debt incurred $ 98,529
==========
Cost of customer list $ 127,500
Common stock issued ( 22,500)
----------
Cash paid $ 105,000
In connection with the former owners of TRI-S having guaranteed the
collectibility of certain assets, such individuals agreed to a reduction of
notes payable due them as well as to the cancellation of 46,425 shares of
stock previously issued to them in connection with the acquisition of TRI-S.
The transaction was accounted for as follows:
Cancellation of common stock $ 92,850
Cancellation of debt 65,409
----------
Reduction of other current assets $ 158,259
==========
F-11
ENVIRONMENTAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the major accounting policies followed by the
Company in the preparation of the accompanying financial
statements is set forth below:
(a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the
accounts of Environmental Services of America, Inc. and
its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been
eliminated.
(b) BUSINESS:
The Company is engaged in the business of providing for
the control, cleanup, removal, transportation and
disposal of hazardous waste; related geological testing
and consulting; and air monitoring and testing services
for private and public entities.
(c) REVENUE RECOGNITION:
The Company's policy is to record revenue as earned and
expenses are recognized as incurred.
(d) CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the
Company considers cash and cash equivalents to include
cash on hand, amounts due from banks, and any other
highly liquid debt instruments purchased with a
maturity of three months or less.
(e) PROPERTY AND EQUIPMENT:
Depreciation of property and equipment is computed
using the straight-line and double declining balance
methods over the estimated useful lives of the related
assets. Costs and related accumulated depreciation are
deducted from the accounts on retirement or disposal
and any resulting gain or loss is reflected in income.
Betterments and major renewals or replacements are
capitalized; expenditures for repairs and maintenance
are charged against income.
(f) GOODWILL:
Goodwill represents the excess of cost over the fair
value of net assets of acquired businesses, and is
being amortized on a straight-line basis over periods
ranging from twenty to forty years.
F-12
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) DEFERRED PERMIT COSTS:
Deferred permit costs, representing costs incurred in
connection with obtaining permits required by
regulatory agencies, are amortized over the period for
which the permits are effective.
(h) INCOME TAXES:
The provision for income taxes is based on elements of
income and expense as reported in the statement of
operations. Deferred income taxes are provided for
timing differences between financial statement and
income tax reporting.
The Company has recorded a deferred tax asset of
$425,900 principally reflecting the availability of
alternative minimum tax credits. Realization is
dependent on generating taxable income in amounts
sufficient to utilize such credits. Although
realization is not assured, management believes it is
more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the
near term if estimates of future taxable income are
reduced.
(i) EARNINGS PER SHARE:
Earnings per share of common stock is calculated based
on the weighted average number of shares and equivalent
shares outstanding during the period.
(j) ESTIMATES:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
NOTE 2 - ACQUISITIONS
Effective April 1, 1994, ENSA of Indiana, Inc. ("ENSA-IN") and
ENSA of Missouri, Inc. ("ENSA-MO"), newly formed subsidiaries
of the Company, acquired substantially all of the assets of
Industrial Fuels and Resources, Inc. and Industrial Fuels and
Resources of Missouri, Inc., respectively, which operated two
treatment, storage, and disposal facilities. The total cost of
the acquisition was $1,336,126 which approximated the fair
value of the net assets acquired. The transaction was accounted
for as a purchase and, accordingly, the financial statements
include the operations of ENSA-IN and ENSA-MO beginning April
1, 1994.
F-13
NOTE 2 - ACQUISITIONS (Continued)
On August 12, 1994, ENSA Environmental, Inc., a newly formed
subsidiary of the Company, acquired certain assets and assumed
certain liabilities of Earth Science Technologies, Inc., an
environmental consulting and remediation business. The total
cost of the acquisition was $674,194, which exceeded the fair
value of the net assets acquired by $430,854. The excess is
being amozitized on the straight-line method over twenty years.
The financial statements include the operations of ENSA
Environmental, Inc. beginning August 12, 1994.
The following summarized pro forma information assumes the
acquisitions had occurred at the beginning of the periods
presented and does not purport to be indicative of what would
have occurred had the acquisitions been made as of those dates.
Year ended December 31,
-----------------------
1994 1993
---- ----
Net sales $ 35,747,924 $ 36,164,697
=========== ===========
Net income (loss) $ 142,390 $( 76,449)
=========== ===========
Earnings (loss)
per Common Share $ .03 $( .02)
=========== ===========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is reflected at cost, net of accumulated
depreciation and amortization, and is summarized as follows:
December 31,
------------ Depreciable
1995 1994 Lives
---- ---- -----------
Land $ 199,126 $ 199,126 -
Buildings and improvements 4,026,128 3,548,361 31.5 Years
Equipment and vehicles 6,032,822 5,237,282 3-7 Years
Furniture, fixtures and office
equipment 1,212,458 1,327,859 3-7 Years
Leasehold improvements 7,543 309,257 Lease term
----------- -----------
11,478,077 10,621,885
Accumulated depreciation and
amortization ( 4,527,207) ( 3,302,172)
----------- -----------
$ 6,950,870 $ 7,319,713
=========== ===========
F-14
NOTE 4 - NOTES PAYABLE - BANK
Represents borrowings under a revolving credit line, expiring
April 30, 1996 (see Note 10(b)), pursuant to the terms of
which, the Company may borrow up to $3,000,000, including a
maximum of $1,000,000 which may be utilized for standby letters
of credit. Borrowings bear interest at one-half percent above
the bank's base lending rate (9.0 percent at December 31,
1995). The borrowing agreement, among other things, requires
the Company to maintain specified levels of tangible net worth,
a specified minimum current ratio and limits the annual capital
expenditures the Company may make. Borrowings under the
revolving credit line, including outstanding letters of credit,
plus the outstanding balance of the Company's term loan (Note
5(a)) may not exceed seventy percent of eligible accounts
receivable. The revolving credit line and term loan are
collateralized by the Company's accounts receivable.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------
1995 1994
---- ----
Term loan-bank (a) $ 1,575,000 $ 1,875,000
Term loan (b) 780,214 -
Term loan-bank (c) 229,167 -
Term loan-bank (d) 57,000 -
Notes payable - equipment (e) 399,784 1,639,870
Notes payable - individual (f) 52,183 92,331
---------- ----------
3,093,348 3,607,201
Less current portion 2,089,290 1,148,149
---------- ----------
$ 1,004,058 $ 2,459,052
========== ==========
(a) TERM LOAN-BANK:
Represents the balance of a $2,000,000 term loan
repayable in equal monthly principal installments of
$25,000, plus interest at one percent above the bank's
base rate (9.5 percent at December 31, 1995), through
April 30, 1996 (see Note 10(b)) at which date all
remaining unpaid principal is due.
(b) TERM LOAN:
Represents a term loan due in equal monthly installments
of $21,757 through July 1999 including interest at 10.25
percent per annum. The obligation is collateralized by
property and equipment.
(c) TERM LOAN-BANK:
Represents a term loan repayable in equal monthly
principal installments of $5,729, plus interest at 9.25
percent through April 1999. The obligation is
collateralized by property and equipment.
F-15
NOTE 5 - LONG-TERM DEBT (Continued)
(d) TERM LOAN-BANK:
Represents a term loan repayable in equal monthly
principal installments of $1,583, plus interest at one
percent above the bank's base rate (9.5 percent at
December 31, 1995), through December 1998. The
obligation is collateralized by property and equipment.
(e) NOTES PAYABLE - EQUIPMENT:
Represents various equipment installment notes payable,
with current monthly payments aggregating approximately
$19,800 including interest at rates ranging from 7.25 to
11.75 percent, which are collateralized by the
equipment. The terms of payment of these installment
notes range between 36 and 60 months.
(f) NOTES PAYABLE - INDIVIDUAL: Represents notes payable to
an individual due in equal monthly installments of
$3,965, including interest at 10 percent, through
February 1997. The obligation is collateralized by the
accounts receivable of Northeast Environmental Services,
Inc.
Aggregate annual maturities applicable to long-term debt
are as follows:
1996 $ 2,089,290
1997 421,087
1998 373,963
1999 182,339
2000 13,342
Thereafter 13,327
----------
$ 3,093,348
===========
NOTE 6 - CAPITAL STOCK
(a) PREFERRED STOCK:
In connection with a private placement in December 1989,
the Company issued 4,000 shares of its $.01 par value
preferred stock, as Series A, 5 percent cumulative,
convertible, fully participating preferred stock. Each
Series A preferred share was convertible into 125 common
shares at any time by preferred stockholders.
In connection with a private placement in June 1990, the
Company issued 12,000 shares of its $.01 par value
preferred stock, as Series B, 6 percent cumulative,
convertible, fully participating preferred stock. Each
Series B preferred share was originally convertible into
33 1/3 common shares at any time by preferred
stockholders. In May 1991, a number of Series B
shareholders elected to have each Series B preferred
share they owned become convertible into 41 2/3 common
shares instead of 33 1/3 common shares in exchange for,
among other things, agreeing to give up the right to
receive dividends. During 1994, in consideration of a
one year extension of the due date of the Series B
preferred shares, the conversion rates were increased by
10 percent to 45.83 and 36.67 shares, respectively.
F-16
NOTE 6 - CAPITAL STOCK (Continued)
In connection with a private placement in April, 1994,
the Company issued 3,200 shares of $.01 par value
convertible preferred stock, Series C, at $100 per
share, realizing proceeds of $320,000. Holders of Series
C preferred stock shall be entitled to dividends as and
when and only in the event that, dividends are declared
and paid on common stock. The amount of the Series C
dividends would be based on the common stock dividend
declared as if such shares of Series C preferred stock
had been converted to common stock. Each Series C
preferred share is convertible into 55 common shares at
any time by preferred shareholders.
During the year ended December 31, 1993, the Company
redeemed 413 shares of Series A preferred stock, 139
shares of Series B preferred stock and 8,682 shares of
common stock for total consideration of $107,193.
During the year ended December 31, 1994, 3,376 shares of
Series A preferred stock and 766 shares of Series B
preferred stock were converted into a total of 452,543
shares of common stock. As of December 31, 1994, no
Series A preferred stock remained outstanding.
As of December 31, 1995, of the 10,258 shares of Series
B Preferred Stock outstanding, 545 shares are
convertible at 36.67 common shares per preferred share
and are entitled to receive dividends and 9,713 shares
are convertible at 45.83 common shares per preferred
share.
Under a mandatory redemption provision, the Company is
required to redeem the Series B and Series C preferred
stocks for $100 per share in June 1996 and April 1999,
respectively.
(b) COMMON STOCK:
During the year ended December 31, 1995, the Company
issued 5,000 shares of common stock in consideration of
consulting services.
(c) TREASURY STOCK:
In August 1992, the Company purchased 35,000 shares of
its common stock on the open market for $66,729. Such
shares were retired in September 1994.
NOTE 7 - WARRANTS AND STOCK OPTIONS
(a) WARRANTS:
Pursuant to its December 1989 and June 1990 private
placements the Company issued 187,500 Series A Warrants
and 419,038 Series B Warrants, respectively. Such
warrants entitled the holders to purchase a like number
of common shares at an exercise price of $1.00 per share
as to the Series A Warrants and $1.70 as to the Series B
Warrants. The warrants expired five years from their
dates of issuance.
F-17
NOTE 7 - WARRANTS AND STOCK OPTIONS (Continued)
During the year ended December 31, 1994, 71,875 Series A
Warrants were exercised and an additional 37,500 series
A Warrants were cancelled in exchange for 20,000 shares
of common stock.
As of December 31, 1995, all warrants had either been
exercised or had expired.
(b) STOCK OPTIONS:
On October 12, 1987, the Company's Incentive Stock
Option Plan became effective, pursuant to which options
for up to 50,000 shares of common stock may be granted.
In November 1991, options were granted for 50,000 shares
of common stock at an exercise price of $3.3125 per
share. During the year ended December 31, 1992, options
to purchase 19,000 shares were cancelled. On February
16, 1993, the remaining 31,000 options were converted to
options under the 1990 Performance Incentive Stock
Option Plan.
On August 8, 1990, the 1990 Performance Incentive Stock
Option Plan was approved by the Board of Directors,
pursuant to which options for up to 150,000 shares of
common stock could be granted. On February 18, 1992, the
Plan was amended to increase the number of shares for
which options can be granted to 400,000. Generally,
options expire three years from their date of vesting.
Information with respect to options under this plan
follows:
Option Price
------------
Shares Per Share Aggregate
------ --------- ---------
Outstanding
January 1, 1993 217,500 $3.00 to $3.25 $ 681,250
Issued 150,000 $2.00 to $3.00 335,000
Cancelled (137,000) $3.00 to $3.25 ( 439,750)
Transfer from 1987 Plan 31,000 $3.00 93,000
-------------- ------------- ----------
Outstanding
December 31, 1993 261,500 $2.00 to $3.00 669,500
Cancelled ( 30,500) $3.00 ( 91,500)
-------------- ------------- ----------
Outstanding
December 31, 1994 231,000 $2.00 to $3.00 578,000
Cancelled ( 9,500) $3.00 (28,500)
-------------- ------------- ----------
Outstanding
December 31, 1995 221,500 $2.00 to $3.00 $ 549,500
============== ============= ==========
At December 31, 1995, options were exercisable for a total of
221,500 shares and options for the purchase of 178,500 shares
were available for future grant.
NOTE 8 - INCOME TAXES
The Company files a consolidated Federal income tax return with
its subsidiaries.
F-18
NOTE 8 - INCOME TAXES (Continued)
The provision (benefit) for income taxes consists of the
following:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Federal income taxes:
Current $(292,900) $ 254,300 $ 13,500
Deferred (203,600) ( 90,900) -
State income taxes:
Current 39,900 74,000 41,000
Deferred (131,400) - -
-------- -------- -------
Provision (benefit) for income taxes $(588,000) $ 237,400 $ 54,500
======== ======== =======
A reconciliation of income tax expense (benefit) at the federal
statutory rate to income tax expense (benefit) at the Company's
effective rate is as follows:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Computed tax at the
federal statutory rate $(533,600) $ 180,300 $ 29,400
State income tax -
net of federal tax
benefits ( 60,100) 48,800 27,100
Amortization of goodwill - not
deductible 11,500 11,500 11,500
Other, net ( 5,800) ( 3,200) ( 13,500)
-------- -------- --------
Income tax expense
(benefit) $(588,000) $237,400 $ 54,500
======== ======= ========
The components of the net deferred tax asset as of December 31,
1995 are as follows:
Deferred tax asset:
Alternative minimum tax credit $ 294,500
Net operating loss carryforward 131,400
Allowance for doubtful accounts 155,000
--------
580,900
Deferred tax liability:
Depreciation 155,000
Net deferred tax asset $ 425,900
========
NOTE 9 - COMMITMENTS AND CONTINGENCIES
(a) EMPLOYMENT AGREEMENTS:
The Company has employment contracts with two officers,
both of which expire December 31, 1996. Aggregate annual
compensation pursuant to the contracts is $266,000 plus
cost of living increases.
F-19
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
(b) LEASES:
The Company is obligated under the terms of long-term
leases for office space which expire at various dates
through February 2002. The following is a schedule by
year of future minimum rental payments required under
operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of
December 31, 1995:
Year Ending
December 31,
1996 $ 580,000
1997 446,000
1998 199,000
1999 89,000
2000 89,000
Thereafter 104,000
----------
$ 1,507,000
===========
Certain of these leases contain renewal options ranging
from five to ten years. Additionally, two leases provide
the Company with an option to purchase the properties.
Rent expense for the years ended December 31, 1995, 1994
and 1993 approximated $792,000, $463,000 and $347,000,
respectively.
(c) LEGAL MATTERS:
The Company is a defendant, together with numerous other
parties, in an action by the owner of a building against
the prior owner and all persons and companies hired by
the prior owner to clean-up contaminated oil spills
existing on the property prior to the sale and, in
connection therewith, to conduct certain tests. The suit
contends that the cleanup and/or the testing, some of
which was done by the Company, was conducted
negligently, and that misrepresentations were made by
the prior owner concerning the true level of remaining
contamination, and seeks $3.5 million in damages. Based
on facts obtained during discovery, management believes,
based upon the advice of counsel, that its exposure for
damages to the plaintiff is not material.
The Company and its subsidiaries are also involved in
other litigation arising in the normal course of
business. While the results of such litigation cannot be
predicted with certainty, management, based upon the
advice of counsel, believes that the final outcome will
not have a material adverse effect on the Company's
results of operations or financial position.
F-20
NOTE 10 - SUBSEQUENT EVENTS
(a) On January 25, 1996, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement")
pursuant to which, subject to shareholder
approval, the Company would merge with ENSA
Acquisition Corp. ("EAC"), a wholly-owned
subsidiary of ERD Waste Corp. ("ERD"), thereby
becoming a wholly-owned subsidiary of ERD.
Concurrent with the execution of the Merger Agreement,
the Company and ERD executed a Securities Purchase
Agreement providing for a loan by ERD to the Company
(the "Bridge Loan") of $500,000, and the issuance to
ERD of 500,000 shares (the "Escrow Shares") of common
stock. The Bridge Loan is subordinated in right of
payment to the Company's indebtedness to its principal
bank lender. Repayment of the Bridge Loan is due on
December 31, 1996, together with interest at the prime
rate.
Pursuant to the Securities Purchase Agreement, the
Escrow Shares have been placed in escrow. One half of
such shares will be released to ERD on December 31,
1996 if the Bridge Loan is not repaid on or before
such date, and one half of such shares will be
released to ERD on June 30, 1997 if the Bridge Loan is
not repaid on or before such date.
(b) On March 28, 1996, the Company's principal bank
lender extended the due date of the Company's
notes payable (Note 4) and Term Loan (Note 5(a))
from April 30, 1996 to the earlier of June 15,
1996 or the date that the Company
is acquired by ERD.
(c) On April 4, 1996, EAC offered to purchase all the out-
standing shares of common stock of the Company at $1.66
per share, net to the seller in cash, upon the terms and
conditions set forth in the Offer to Purchase dated
April 4, 1996. The offer is conditional upon, among
other things, there being validly tendered and not
withdrawn prior to the expiration of the Offer, at least
that number of shares which would constitute a majority
of the shares on a fully diluted basis.
F-21