SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 8-K/A
(Amendment No. 1)
_____________________
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 0-28887
Date of Report: October 27, 2004
TELCO-TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3328734
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(State of other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
111 Howard Street, Suite 108, Mt. Arlington New Jersey 07856
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(Address of principal executive offices) (Zip Code)
(973) 398-8183
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(Registrant's telephone number including area code)
68 Skyview Terrace, Clifton New Jersey 07013
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(Former address, if changed since last report) (Zip Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
AMENDMENT NO. 1
- ----------------
This amendment has been filed in order to include the financial statements
listed in Item 9.01 below.
Item 2.01 COMPLETION OF ACQUISITION OF ASSETS
Item 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Item 5.02 DEPARTURE OF DIRECTORS; ELECTION OF DIRECTORS; APPOINTMENT OF
PRINCIPAL OFFICERS
On October 27, 2004, Telco-Technology, Inc. ("Telco") acquired from
GreenSpace Capital, L.L.C., and Acutus Capital, L.L.C. the outstanding
capital stock of GreenWorks Corporation ("GreenWorks"). In exchange for the
GreenWorks shares, Telco issued to each of the selling shareholders 500,000
shares of Series A Convertible Preferred Stock (the "Preferred Stock") and a
demand promissory note in the principal amount of $100,000. The Preferred
Stock is entitled to vote with the common stock on all matters. Each share
of Preferred Stock is convertible into 100 shares of common stock at any time
after December 31, 2005. The number of votes which may be cast by a holder
of shares of Preferred Stock will be equal to the number of shares of the
common stock into which the Preferred Stock could be converted (an aggregate
of 100,000,000 prior to any adjustment).
On October 27, 2004 Telco entered into a Consulting Agreement with Donalson
Capital Corporation. Donalson Capital Corporation is owned by Donald
McKelvey, who was the President and majority shareholder of Telco until
October 27, 2004, when he sold the majority of his shares to GreenSpace
Capital and Acutus Capital. The Consulting Agreement provides that Mr.
McKelvey will render financial and management advisory services to Telco
until October 27, 2005. In compensation for his services, Telco will issue
shares of common stock to Mr. McKelvey once each month for the first eight
months in the term of the contract. The number of shares issued each month
will equal the product of $24,375 divided by the average closing market price
of Telco common stock for the thirty trading days preceding the date of
issuance. The number of shares issued in the first monthly allotment will be
902,778.
On October 21, 2004 Telco sold to Cornell Capital Partners, LP a 5% Secured
Convertible Debenture in the principal amount of $500,000 (the "Debenture").
Telco obtained net proceeds of $425,000, after payment of a $60,000
commitment and structuring fee to Cornell Capital Partners as well as a
$15,000 fee relating to the Standby Equity Distribution Agreement discussed
below. Interest that accrues on the Debenture is payable at maturity. The
principal amount of the Debenture is payable on October 21, 2007. However
the principal amount of the Debenture will be automatically converted into
Telco common shares on October 21, 2006. Prior to that date, the holder of
the Debenture has the option to convert the accrued interest and principal
amount of the Debenture into Telco common shares at any time. Whenever the
principal amount of the Debenture is converted into common shares, whether
automatically or by the holder, the conversion price will equal the lesser of
(a) 120% of the closing bid price on the conversion date or (b) 80% of the
lowest closing bid price for the five trading days preceding the conversion
date.
On October 27, 2004 Telco utilized a portion of the proceeds of the
Debenture to satisfy its $200,000 in notes payable to GreenSpace Capital and
Acutus Capital, which were issued as partial consideration for Telco's
acquisition of GreenWorks.
On October 21, 2004 Telco entered into a Standby Equity Distribution
Agreement ("SEDA") with Cornell Capital Partners, LP. The SEDA will become
effective on the date on which the Securities and Exchange Commission
declares effective a registration statement containing a prospectus that will
permit Cornell Capital Partners to resell to the public any common shares
that it acquires from Telco. The SEDA provides that during the two years
commencing on the effective date of the SEDA Telco may demand that Cornell
Capital Partners purchase shares of common stock from Telco. Telco may make
a demand no more than once every eight trading days. The maximum purchase
price on each demand is $250,000. The aggregate maximum that Telco may
demand from Cornell Capital Partners is $5,000,000. The number of shares
that Cornell Capital Partners will purchase after a demand will be determined
by dividing the dollar amount demanded by a per share price. The per share
price used will be 95% of the lowest daily volume-weighted average price
during the five trading days that follow the date a demand is made by Telco.
Cornell Capital Partners is required by the Agreement to pay each amount
demanded by Telco, unless (a) there is no prospectus available for Cornell
Capital Partners to use in reselling the shares, (b) the purchase would
result in Cornell Capital Partners owning over 9.9% of Telco's outstanding
shares, or (c) the representations made by Telco in the Agreement prove to be
untrue.
In consideration for the execution of the SEDA, Telco issued to Cornell
Capital Partners a non-interest-bearing Convertible Debenture in the
principal amount of $250,000. The principal amount of the Debenture is
payable on October 21, 2007. However the principal amount of the Debenture
will be automatically converted into Telco common shares on that date. Prior
to October 21, 2007, the holder of the Debenture has the option to convert
the principal amount of the Debenture into Telco common shares at any time.
Whenever the principal amount of the Debenture is converted into common
shares, whether automatically or by the holder, the conversion price will
equal the lowest volume weighted average price for the common stock during
the five trading days preceding the conversion date.
Security Ownership of Certain Beneficial Owners and Management
Upon the closing of the acquisition of GreenWorks by Telco, there were
28,974,944 shares of Telco common stock issued and outstanding as well as
1,000,000 shares of Series A Preferred Stock convertible into 100,000,000
common shares, or 128,974,944 common shares on a fully-diluted basis. The
following table sets forth the number of Telco shares beneficially owned by
each person who, as of the closing, will own beneficially more than 5% of
either class of Telco's voting stock, as well as the ownership of such shares
by each director of Telco and the shares beneficially owned by the new
directors as a group.
Amount of
Name and Beneficial Aggregate
Address of Ownership Percent of Class Percent of
Beneficial -------------------- ---------------- Voting
Owner Common Preferred Common Preferred Power
- -----------------------------------------------------------------------------
James L. Grainer -- (1) -- 0%(1) 0% 0%
All directors as a group
(1 person) -- (1) -- 0%(1) 0% 0%
Greenspace Capital, LLC 7,033,938 500,000 24.3% 50% 44.2%
P.O. Box 284
Mt. Arlington, NJ 07856
Acutus Capital, LLC 7,033,938 500,000 24.3% 50% 44.2%
411 Hackensack Ave.
Hackensack, NJ 07601
_________________________________
(1) Mr. Grainer has an understanding with GreenWorks that shortly after the
closing of the acquisition of GreenWorks by Telco, Telco will issue common
shares to Mr. Grainer to compensate him for services rendered in connection
with GreenWorks' acquisition of Enviro-Sciences, Inc. The number of shares
that will be issued has not yet been determined.
Directors and Executive Officers
On October 27, 2004 Donald McKelvey and Robert McKelvey resigned from their
positions as the officers and directors of Telco. Their resignations were a
condition for the acquisition of GreenWorks by Telco.
This table identifies the officers and the members of Telco's Board of
Directors after its acquisition of GreenWorks. Directors serve until the
next annual meeting of shareholders and until their successors are elected
and qualify. Officers serve at the pleasure of the Board of Directors.
Director
Name Age Position with the Company Since
- ------------------------------------------------------------------------------
James L. Grainer 50 Director, Chief Executive 2004
Officer, Chief Financial Officer
James L. Grainer. Mr. Grainer has made his career in the fields of
investment banking and financial management and accounting. Since June 2004
Mr. Grainer has been a consultant to GreenWorks Corporation, assisting
GreenWorks in connection with its acquisition of Enviro-Sciences, Inc. From
2003 until June 2004 Mr. Grainer was the Chief Financial Officer of Polo
Linen, where he was responsible for that company's financial management and
was involved in all aspect of strategic management. From 2001until 2003 Mr.
Grainer was the Managing Director of Investment Banking and Head of the
Investment Banking Group at Zanett Securities, a merchant banking firm
located in New York City. From 1992 until 2001 Mr. Grainer was a Managing
Director in the Investment Banking Group at Prudential Securities, where he
served as a member of the Management Committee for the Prudential Securities
Private Equity Fund and held other financial management positions. Prior to
joining Prudential Securities, Mr. Grainer was employed by Deloitte & Touche,
Mr. Grainer is licensed as a certified public accountant in the State of New
York.
Nominating and Audit Committee
The Board of Directors does not have an audit committee or a nominating
committee, due to the small size of the Board. Mr. Grainer, however, is an
"audit committee financial expert" within the definition given by the
Regulations of the Securities and Exchange Commission, by reason of his
experience in public accounting and as a financial officer.
Code of Ethics
Telco does not have a written code of ethics applicable to its executive
officers. The Board of Directors has not adopted a written code of ethics
because there is only one member of management.
Shareholder Communications
The Board of Directors will not adopt a procedure for shareholders to send
communications to the Board of Directors until it has reviewed the merits of
several alternative procedures.
Executive Compensation
Mr. Grainer has not received compensation from either Telco, GreenWorks,
Enviro-Sciences, Inc. or any affiliate of any of them.
Related Party Transactions
Since June 2004 Mr. Grainer has been acting as a consultant to GreenWorks
Corporation. In that role, he has assisted in negotiating the acquisition by
GreenWorks of the business and certain assets of Enviro-Sciences, Inc., and
has performed due diligence for GreenWorks in connection with that
acquisition. The acquisition of Enviro-Sciences, Inc. by GreenWorks was
completed immediately prior to the acquisition of GreenWorks by Telco. In
compensation for his services, GreenWorks has agreed that after the
acquisition Telco will issue shares of common stock to Mr. Grainer. The
number of shares to be issued will be determined by agreement among Mr.
Grainer and the shareholders of GreenWorks.
Business of the Company
Telco today has one asset: the outstanding shares of GreenWorks.
GreenWorks was recently organized for the purpose of acquiring Enviro-Sciences,
Inc. ("ESI"). It acquired the business and assets of ESI immediately prior
to the acquisition of GreenWorks by Telco. As a result, the business of
Telco is now the business carried on prior to this date by ESI.
Since 1975 ESI has been engaged in the business of providing consulting,
technical, engineering and construction services to alleviate the
environmental problems of its clients. ESI's clients include Fortune 100 and
other industrial companies, commercial firms, engineering and construction
contractors, law firms, utilities, real estate developers and government
entities. Among the services currently provided by ESI are:
* Environmental Auditing. ESI's audits typically involve the
identification of areas of potential environmental problems that should be
addressed in connection with regulatory compliance, property transactions,
or business divestitures or acquisitions. ESI couples the results of its
audits with recommendations for a remedial program to resolve the outstanding
issues identified in the audit.
* Site Assessment Services. ESI provides assessment services to delineate
and model the location, extent and migration of contaminated media. These
services are often provided subsequent to an ESI site audit.
* Environmental Compliance Services. Among the environmental compliance
services provided by ESI are air quality permitting, monitoring and
modelling, preparation of compliance plans, stormwater and wastewater
permitting, and TSDF audits.
* Toxicology and Risk Assessment Services. These services are often
provided to satisfy regulatory requirements for product advocacy and
defence. ESI also offers epidemiological research to provide defensible
solutions to chemical exposures or releases.
* Engineering Services. ESI engineers have successfully designed,
permitted and implemented environmental remediation systems using a wide
array of technologies.
In addition, ESI has developed an active Brownfields program designed to
take properties through cleanup to redevelopment. In some cases, ESI purchases
the contaminated property for its own account, performs the remediation, and
redevelops the property. Telco intends to devote substantial efforts to
expanding this aspect of ESI's business plan.
ESI markets its services directly to prospective clients. A great portion
of ESI's business is generated by referrals from existing clients. ESI competes
in an industry populated by a multitude of large and small environmental
companies. ESI's strategy for achieving competitive advantage is to offer
complete turnkey solutions that it implements within a fixed budget and on
time.
ESI currently has 19 full time employees. Five are involved in
administration. The remainder perform technical functions in connection with
ESI's service projects.
Item 9.01 Financial Statements and Exhibits
Financial Statements
Audited Financial Statements of Enviro-Sciences, Inc. for the years ended
December 31, 2003 and 2002.
Financial Statements of Enviro-Sciences, Inc. for the nine months ended
September 30, 2004 and 2003 (unaudited)
Telco-Technology, Inc. Pro Forma Combined Financial Statements
Exhibits
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10.1 Share Purchase and Sale Agreement by and among GreenWorks Corporation,
GreenSpace Capital, L.L.C. , Acutus Capital, L.L.C. and the Company,
dated September 24, 2004 - filed as an exhibit to the Registrant's
Current Report on Form 8-K dated September 24, 2004.
10.2 Certificate of Designation of Series A Convertible Preferred Stock
10.3 Consulting Agreement dated October 21, 2004 between Telco-Technology,
Inc. and Donalson Capital Corporation.
10.4 5% Secured Convertible Debenture dated October 21, 2004 issued to
Cornell Capital Partners, LP
10.5 Standby Equity Distribution Agreement dated October 21, 2004 between
Telco-Technology, Inc. and Cornell Capital Partners, LP
10.6 Convertible Debenture dated October 21, 2004 issued to Cornell Capital
Partners, LP
99.1 Press Release dated October 28, 2004.
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 hereunto duly authorized.
TELCO TECHNOLOGY, INC.
Dated: December 21, 2004 By: /s/ James L. Grainer
-------------------------
James L. Grainer, Chief
Executive Officer
To the Board of Directors and Stockholders
of Enviro Sciences, Inc.
We have audited the accompanying balance sheet of Enviro
Sciences, Inc. as of December 31, 2003, and the related
statements of operations and retained earnings (deficit) and
cash flows for the years ended December 31, 2003 and 2002.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
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 Enviro Sciences, Inc. as of December 31, 2003 and
the results of their operations and cash flows for the years
ended December 31, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations and is
in a working capital deficit position that raises substantial
doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
------------------------------------------
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
September 15, 2004
F-1
ENVIRO-SCIENCES, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current Assets
Accounts receivable (Net of allowance
for doubtful accounts) (Notes 1 and 3) $ 580,267
Unbilled revenues (Note 1) 55,685
Prepaid expenses and other current assets 164,328
Costs and estimated earnings in excess of billings
on uncompleted projects (Notes 1 and 15) 81,040
Assets to be disposed of (Note 9) 1,250,197
---------
Total Current Assets 2,131,517
Property & Equipment, net (Notes 1 and 4) 279,775
Costs and estimated earnings in excess of
billings (Notes 1 and 15) 223,500
Property held for sale (Note 17) 59,298
Security and other deposits 46,474
---------
Total Assets $ 2,740,564
=========
LIABILITIES
Current Liabilities
Accounts payable $ 784,226
Accrued salary costs 140,664
Accrued other 180,839
Payroll taxes payable (Note 7) 183,320
Billings in excess of costs and estimated earnings
on uncompleted projects (Notes 1 and 15) 51,307
Line of credit (Note 10) 1,350,000
Notes payable to non-affiliated parties (Note 6) 265,000
Installment loans payable (Note 8) 177,098
Capital lease obligations (Note 19) 30,965
Deferred revenues (Note 16) 125,000
Liabilities to be disposed of (Note 9) 1,450,369
---------
Total Current Liabilities 4,738,788
Accrued employee benefits (Note 20) 81,241
Notes payable to shareholders (Note 5) 1,214,982
Notes payable to non-affiliated parties,
net of current portion (Note 6) 100,000
Installment loans payable, net of current
portion (Note 8) 26,259
Capital lease obligations, net of current
portion (Note 19) 21,335
Deferred revenues (Note 16) 194,844
Accrued rent expense (Note 11) 9,465
---------
Total Liabilities 6,386,914
---------
Commitments and Contingencies (Notes 11 and 21) -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 2,500 shares
authorized, 1,676 issued and outstanding 749,117
Retained earnings (Deficit) (4,395,467)
---------
Total Stockholders' Equity (Deficit) (3,646,350)
---------
Total Liabilities and Stockholders' Equity $ 2,740,564
=========
See notes to the financial statements.
F-2
ENVIRO-SCIENCES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years Ended December 31,
------------------------
2003 2002
----------- -----------
Revenue (Notes 1 and 2) $ 4,274,480 $ 8,981,743
Direct costs (Note 2) 2,160,082 5,680,966
---------- ----------
Gross Profit 2,114,398 3,300,777
Selling, general and administrative expenses 3,180,384 6,241,880
---------- ---------
Loss from operations (1,065,986) (2,941,103)
Interest Income (Note 18) - 44,100
Interest Expense (129,289) (106,109)
Gain (loss) on sale or disposal of equipment 25,657 (8,947)
--------- ---------
Loss from continuing operations (1,169,618) (3,012,059)
Loss from discontinued operations
(Notes 1 and 9) (513,044) (658,882)
--------- ---------
Net Loss (1,682,662) (3,670,941)
Retained earnings (deficit), beginning
of year (2,712,805) 958,136
--------- ---------
Retained earnings (deficit), end of year $ (4,395,467) $ (2,712,805)
========= =========
See notes to the financial statements.
F-3
ENVIRO-SCIENCES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Continuing Operations
Loss from continuing operations $ (1,169,618) $ (3,012,059)
Adjustments to Reconcile Loss to
Net Cash Provided by (Used in)
Operating Activities:
Badd Debt - affiliated party - 1,138,985
Bad Debt - customer 355,438 2,002,968
Depreciation & Amortization 126,293 179,220
(Gain) loss on sale or disposal
of equipment (5,657) 5,260
(Increase) Decrease in Assets:
Accounts receivable 1,259,315 (2,585,557)
Unbilled revenues 3,901 274,941
Prepaid expenses and other current
assets (3,087) 2,354
Costs and estimated earnings in excess
of billings on uncompleted projects 225,132 251,621
Security and other deposits (14,710) 13,985
Increase (Decrease) in Liabilities:
Accounts payable and accrued expenses 92,991 12,095
Billings in excess of costs and estimated
earnings on uncompleted projects 38,287 (687,264)
Deferred revenues (201,170) (129,931)
Accrued rent 9,465 (54,438)
--------- ---------
Cash Provided by (Used in) Continuing
Operations 716,580 (2,587,820)
--------- ---------
Discontinued Operations
Loss from Discontinued Operations (513,044) (658,882)
(Increase) Decrease in Net Assets of
Discontinued Operations (537,694) 2,505,023
--------- ---------
Cash (Used in) Provided by Discontinued
Operations (1,050,738) 1,846,141
--------- ---------
Net Cash Used in Operating Activities (334,158) (741,679)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property & equipment 40,065 20,912
Purchase of property & equipment (930) (123,651)
--------- ---------
Net Cash Provided by (Used in) Investing
Activities 39,135 (102,739)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayment of) advances
to related parties - 300,000
Lease obligations (203,093) (128,013)
Loans from stockholders 619,000 959,116
Repayments of Stockholder loans (491,018) (336,433)
Loans from non-affiliated parties 240,000 125,000
Advances from lines of credit - 95,000
Repayments of credit line advances (95,000) -
Collection of stock subscriptions
receivable - 2,000
--------- ---------
Net Cash Provided by Financing Activities 69,889 1,016,670
--------- ---------
Net (Decrease) Increase in Cash (225,134) 172,252
Cash - Beginning of Year 225,134 52,882
--------- ---------
Cash - End of Year $ - $ 225,134
========= =========
See notes to the financial statements.
F-4
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Operations
Enviro-Sciences, Inc. ("ESI" or "the Company"), headquartered in Mt.
Arlington, New Jersey, performs environmental consulting and engineering
services, primarily the evaluation and remediation of contaminated
properties. Project sites are located throughout the country and
internationally. In 2001, ESI formed a construction division, adding
significant equipment and personnel. In 2003, ESI eliminated this division
in favor of a greater focus on its core consulting business. The
construction division has been included in discontinued operations. (See
Note 9).
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The
Company has had recurring operating deficits and is in default under the
terms of its line of credit agreement, thus, raising substantial doubt about
the Company's ability to continue as a going concern.
Management of the Company is in negotiations to sell the assets of ESI in a
reverse merger acquisition. Subsequent to the reverse merger acquisition,
the Company plans to raise capital through the sale of a debenture and its
stock via an equity line of credit, which will be established upon the filing
of a registration of the Company's securities with the Securities and Exchange
Commission.
In view of these matters, realization of the assets of the Company
is dependent upon the Company's ability to meet its financial requirements
and the success of future operations. These financial statements do not
include adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions in preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could differ
from those estimates.
Property and Equipment
Property and equipment are recorded at cost. Major renewals and
betterments are charged to the asset accounts; maintenance and minor
repairs and replacements, which do not improve or extend the life of the
respective assets are expensed as incurred. When properties are
retired or otherwise disposed of, the asset and accumulated depreciation
accounts are adjusted accordingly, and the gain or loss, if any, arising
from their disposal, is credited or charged to earnings.
Depreciation is calculated using both straight line and accelerated
methods over the estimated useful lives of the assets.
Income Taxes
ESI elected to be treated as a Subchapter S Corporation for Federal
income tax purposes and for most states, thus income is taxed to the
shareholders personally.
F-5
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Revenue and Cost Recognition
Revenues from fixed price projects are recognized on the percentage-of-
completion method, measured by management's estimates of the progress made
on each project. Accordingly, revenue is recognized in the ratio that
costs incurred bears to estimated total costs utilizing the most recent
estimates of costs and funding. Since many contracts extend over a long
period of time, revisions in cost and funding estimates during the progress
of work have the effect of adjusting earnings applicable in performance in
prior periods in the current period. When the current contract
estimate indicates a loss, provision is made for the total anticipated loss
in the current period.
Revenues from cost-plus-fee projects (time and material jobs) are recognized
at billable hourly rates as the services are rendered.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expenses as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
projects" represents revenues recognized in excess of amounts billed on
fixed-price contracts. Revenues on time and material projects for services
rendered but not yet invoiced are shown as "Unbilled revenues." The
liability "Billings in excess of costs and estimated earnings on uncompleted
projects" represents billings in excess of revenues earned.
Advertising
Advertising expenses are expensed as incurred and amounted to $412 and
$2,100 for the years ended December 31, 2003 and 2002, respectively.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. The Company has
not identified any such impairment losses.
NOTE 2 - New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". This Statement establishes standards for
how a company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires a company to
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the firms interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption
of this statement did not have an impact on the Company's results of
operations or financial position.
F-6
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - New Accounting Pronouncements (Continued)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15,
2003. The adoption of FIN 46 did not have an impact on the Company' results
of operations or financial position.
NOTE 3 - Concentrations and Accounts Receivable
At times through out the year the Company may have bank balances in excess
of Federal Deposit Insurance Corporation limits.
Concentration of credit risks with respect to accounts receivable is limited
by the imposition of retainers for new customers, the monitoring of credit
balances for all customers, and the withholding of data reports where
payment appears in jeopardy. An allowance for doubtful accounts of $60,000
was recorded as of December 31, 2003.
A small number of customers will often account for a significant portion of
revenues, however, the specific customers and projects may change from year
to year. One customer accounted for approximately 43 percent and 50 percent
of the Company's revenues for the years ended December 31, 2003 and 2002,
respectively.
At December 31, 2003 no single customer accounted for more than 10% of the
outstanding accounts receivable.
NOTE 4 - Equipment
Major classes of equipment at December 31, 2003 are summarized below:
Useful Lives-
Years 2003
--------------- ---------
Office and computer equipment 3-7 $ 767,134
Field equipment 5-10 343,997
Vehicles 5 316,743
Furniture and fixtures 10 77,147
Leasehold improvements 21-39 103,848
---------
1,608,869
Less: Accumulated depreciation (1,329,094)
---------
$ 279,775
=========
Depreciation expense for years ended December 31, 2003 and December
31, 2002 was $126,293 and $179,220 respectively.
F-7
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - Notes Payable to Shareholders
Notes payable to shareholders at December 31, 2003 was $1,214,982.
Interest on the notes, aggregating $64,325 and $22,435 for years ended
December 31, 2003 and December 31, 2002, respectively, has been forgiven.
Further, as a result of the Company's continued liquidity problems, the
four shareholders to whom the notes are payable have agreed to waive
principal payments for at least one year.
NOTE 6 - Notes Payable to Non-Affiliated Parties
Notes payable to non-affiliated parties includes a loan of $125,000, which bears
interest of 3% commencing January 1, 2004. The note requires repayment of
principal and interest in five installments commencing December 31, 2004, with
successive payments each year through December 31, 2008.
In 2003, $225,000 of financing and $15,000 of accrued interest were provided by
an additional non-affiliated party. A promissory note was issued bearing
interest at 6% and requiring repayment of $100,000 on or before September 30,
2004 with the balance of principal and interest payable on or before September
30, 2005. Subsequent to December 31, 2003, the note holder agreed to modify the
terms of repayment of the note requiring a payment of $100,000 prior to
September 15, 2004 plus 36 monthly installments of $4,580 commencing November
30, 2004.
NOTE 7 - Payroll Taxes Payable
Payroll taxes classified as short-term liability represent fourth
quarter 2003 delinquent 941 payroll taxes. The Company is currently
negotiating a payment plan with the IRS.
NOTE 8 - Installment Loans
A summary of installment loans outstanding as of December 31, 2003 is as
follows:
Loans payable, secured by vehicles,
construction equipment, and computer
equipment, payable in monthly installments
including interest at 4.8 to 9.75 percent, due
from March to May 2006 $ 43,639
Loans for financing of insurance premiums,
payable in monthly installments including
interest varying from 3.8% to 7.5%,
due within the next fiscal year 126,678
Bank loans payable in fixed monthly principal
amounts plus interest at the bank's base rate
plus three-quarters of one percent, secured by
all corporate asset, due March 2004 33,040
--------
203,357
Less: Current portion 177,098
--------
Non-current portion $ 26,259
========
The total maturity of these installment loans as of December 31,
2003 is as follows:
2004 $177,098
2005 18,746
2006 7,513
-------
$203,357
=======
F-8
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - Discontinued Operations
During 2003, the Company discontinued the operations of its construction
division. The decision to dispose of the component was based on significant
losses incurred and a desire for a greater focus on its consulting division.
Net sales of the construction division were $5,500,210 and $5,121,620 at
December 31, 2003 and 2002, respectively.
Assets and Liabilities to be disposed of are comprised of the
following at December 31, 2003:
Cost and earnings in excess of billings $ 165,981
Accounts receivable 566,069
Prepaid expenses 198,817
Property and equipment (net) 317,330
Security deposits 2,000
---------
$1,250,197
=========
Accounts payable $ 904,204
Accrued expense 130,315
Payroll taxes payable 71,291
Current portion of long-term debt 204,314
Long-term debt 140,245
---------
$1,450,369
=========
NOTE 10 - Line of Credit
At December 31, 2003 the Company has a credit line of $1,350,000 bearing
interest at the bank's base rate plus three-quarters of one percent.
The line is secured by all corporate assets and is subject to renewal on
January 16, 2004.
The line of credit remains orally extended since January 2004. The
business loan agreement document underlying the credit line agreement has
the following required financial covenants, none of which are met as of
December 31, 2003.
Tangible Net Worth - Minimum of $ 1,000,000
Net Worth Ratio - Minimum Ratio of 1.75 to 1
Working Capital - Minimum Ratio of $ 100,000
Current Ratio - Minimum Ratio of 1.25 to 1
Income - Minimum $ 250,000
Cash Flow Requirement - Minimum of $ 350,000
Fixed Charge Ratio - Minimum Ratio of 2 to 1
Other Ratio - Cash flow to Current maturity
of LT Debt of 1.25 to 1
F-9
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - Operating Lease Commitments
The Company leases certain office space and equipment under operating leases.
The following is a schedule of future minimum rental payments on office space
(exclusive of common area charges) required under operating leases that have
initial or remaining non-cancellable lease terms in excess of one year as of
December 31, 2003:
2004 $104,989
2005 82,896
2006 82,896
2007 82,896
-------
$353,677
=======
Rent expense of $275,940 and $324,434 was recorded by ESI for the years ended
December 31, 2003 and 2002, respectively, and was net of sub-rents received of
$47,420 and $115,763 respectively. For some leases, in addition to the base
rent, ESI also pays for utilities and for its share of increases, over a base
period, in real estate taxes and building operating costs.
Although the headquarters lease calls for annual increases in the rent payments,
ESI has recorded rent expense on a straight-line basis. Therefore, at December
31, 2003 the Company has a liability for accrued rent expense of $9,465. This
accrual will be reduced during the remaining years of the lease, as actual rent
payments exceed the rent expense recognized on the financial statements. This
liability is calculated only on the net space leased by the Company. (See
subsequent events under Note 22).
The Company has several operating leases on office equipment and
transportation vehicles. The following is a schedule of future minimum
rental payments on operating leases that have initial or non-cancellable lease
terms in excess of one year as of December 31, 2003:
2004 $ 72,640
2005 30,004
2006 19,020
2007 9,948
2008 876
2009 876
--------
$ 133,364
========
NOTE 12 - Retirement Plan
The Company has a deferred compensation plan (401(k) plan) under which eligible
employees are permitted to elect the amount of their salary deferrals, subject
to certain statutory limitations. The Company can match a percentage of the
employee deferrals. The Company's 401(k) expense for the years ended December
31, 2003 and 2002 was $11,108 and $68,427, respectively.
NOTE 13 - Supplemental Disclosures of Cash Flow Information
The following is presented to supplement the statements of cash flows:
Cash paid during the year ended December 31, for:
2003 2002
--------- ---------
Interest $ 160,245 $ 158,233
======= =======
Income taxes $ - $ 900
======= =======
F-10
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Employee Stock Purchase Plan
During 1998, ESI adopted an Employee Stock Purchase Plan, under which certain
employees are eligible to purchase stock at a price based on an annual valuation
determined by the Company. Employees can withdraw from the plan and the Company
must repurchase their shares. There were no purchases or sales that were made
by the Company during 2003.
The stockholders have an agreement, which outlines their various rights and
obligations. This agreement specifies that a portion of the Company's annual
net income, subject somewhat to management's discretion, will be distributed to
the stockholders in the following year. No profits were available for
distribution in either year.
A stockholder and former employee has notified the Company of his desire to sell
all of his stock (approximately 6% of the issued and outstanding stock) to the
Company, or to other stockholders. As of December 31, 2003 no other stockholder
has exercised the option to purchase these shares and the Company has not been
able to reach an agreement for an appropriate valuation of the stock. The
Company has, however, advanced this shareholder $21,752 toward the purchase
while an acceptable repurchase agreement is negotiated.
NOTE 15 - Uncompleted Projects
Costs and billings on uncompleted projects as of December 31, 2003 are
summarized as follows:
Costs incurred on uncompleted projects $ 1,599,332
Estimated earnings 60,839
---------
1,660,171
Less: Billings to date 1,406,938
---------
Totals $ 253,233
=========
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted Projects $ 304,540
Billings in excess of costs and estimated earnings
on uncompleted Projects (51,307)
--------
Totals $ 253,233
========
NOTE 16 - Deferred Revenues
The total deferred revenues at December 31, 2003 are $319,844, of which $125,000
is shown as a current liability based on management's estimate of progress that
will be made in the next twelve months.
Deferred revenues at December 31, 2003 include $157,994 for a fixed price
project where payments were made by a customer in advance. Deferred revenues
also include $161,850, for the remediation of the Northvale property (see Note
18).
F-11
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 17 - Property Held for Sale
ESI purchased an industrial property in Cleveland, Ohio from its major customer
for $59,298. The site requires remediation costs before the property can be
sold. Management estimates the remediation liability to approximate the cost of
property. As such a remediation liability in the amount of $59,298 has been
recorded and is included in "accrued other" of the balance sheet. Management
plans to either transfer the property back to the seller as part of an overall
settlement of all matters or to sell the property for a nominal amount to a
buyer who will bear the cost of the remaining remediation.
NOTE 18 - Related Party Transactions
Northvale Properties, Inc. ("Northvale") owned a building and land in
Northvale, New Jersey, which has an environmental contamination. Northvale is
owned by ESI stockholders and current and former employees.
The Northvale property was sold in 2001 for $1.8 million, of which $1.5 million
was paid at closing and applied to the amount owed to ESI. The $300,000 balance
due from the buyer of the property was paid in August 2002 ($200,000) and
October 2002 ($100,000), and was assigned to ESI as final payment for all
remaining remediation costs. The property is eligible for the brownfield rebate
from the state. As part of the sale agreement, the buyer has assigned the right
to the brownfield rebate to be received to ESI.
Kearny Properties, LLC ("Kearny") is an entity, which was formed to pursue
acquisition of property in Kearny, New Jersey. Kearny is owned by ESI
stockholders and current and former employees. Kearny currently has an option to
purchase a property. The property has an environmental contamination, and
management is working with the current owners, state regulatory authorities, and
a prospective purchaser/developer to secure approval of a remedial action work-
plan (RAW) to deal with the environmental contamination.
Kearny and the current property owner have agreed to allow the purchaser to
exercise Kearny's option to purchase the property if and when they are able to
get all necessary approvals. In return, the purchaser has agreed to provide
Kearny with a finder's fee sufficient to cover all of the development costs
incurred by Kearny with funding and services provided by ESI. since the
inception of this project. Although ESI management feels that the purchaser will
ultimately succeed in obtaining the necessary approvals, it has been decided to
write-off all previously recorded accounts receivable from Kearny as of December
31, 2002.
Revenues recognized by ESI related to the Northvale and Kearny projects for the
years ended December 31, were as follows:
2003 2002
---------- ----------
Professional services $ 114,617 $ 388,653
Interest - 44,100
------- -------
$ 114,617 $ 432,753
======= =======
F-12
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 - Capital Leases
The Company leases certain equipment under capital leases expiring in various
years through 2006. The assets and liabilities under capital leases are recorded
at the lower of the present value of minimum lease payments or the fair values
of the asset at the inception of the lease. The assets are amortized over the
lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in expense for the year
ended December 2003.
Properties under capital leases are as follows as of December 31, 2003:
Office & Computer Equipment $ 90,307
Software 43,210
-------
Total 133,517
Less: Accumulated depreciation
and amortization (81,217)
-------
$ 52,300
=======
Future minimum lease payments are as follows:
2004 $33,557
2005 11,882
2006 11,882
------
Total payments 57,321
Less: amount representing interest 5,021
------
Present value of minimum lease payments 52,300
Less: current portion 30,965
------
Non-current portion $21,335
======
NOTE 20 - Medical Benefits Program
The Company self-insures a portion of their employee medical benefits. The
Company's exposure is limited on both an individual employee and aggregate
basis. Employees contribute a portion of the insurance costs and the program is
administered by a third party. Expenses for the company's portion of claims
plus insurance premiums for the years ended December 31, 2003 and 2002, were
approximately $457,000 and $641,000, respectively, net of amounts contributed by
employees.
Accrued expense of $81,241 at December 31,2003, has been recorded for the cost
of the "tail" for the semi self-insured plan. This "tail" only becomes payable
when the current plan is terminated. Management has no immediate plans to
terminate the plan and therefore the liability has been recorded as non-
current.
F-13
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 21 - Litigation
The Company is a defendant in this lawsuit where a vendor is seeking damages for
non-payment of materials in the amount of $251,291. Satisfaction of this
obligation is expected to be paid by the end-user, a customer of the Company.
The Company expects the matter to be resolved without any further obligation by
Enviro-Sciences, Inc.
The Company is a defendant in this lawsuit where a vendor is seeking payment for
trucking services in the amount of $56,591. Judgment has been entered against
the Company in this matter and has been accrued in the financial statements.
The Company and a customer have outstanding claims against each other in
connection with remediation services, which were provided by the Company.
No action has been filed and both parties are in the process of executing a
settlement whereby the customer will make payments directly to the Company's
third party vendors for services provided on the customer's sites. The
amount currently under consideration is $659,487, which has been offset
against accounts payable. The agreement has not been executed at this time.
The two lawsuits referenced above of $251,291 and $56,591 respectively are
included in the $659,487. If the Company and the customer are unable to settle
this matter directly, the Company expects that a claim and counterclaim will
be filed alleging nonpayment and negligence in providing services, both of
which could result in material damages.
The Company is a defendant in this action where a customer filed claiming the
Company was negligent in a failure to recognize asbestos contamination in its
Phase I Environmental report and is seeking damages of $650,000. Enviro-Sciences
insurance carrier is vigorously defending the matter and the amount appears to
be within policy limits.
The Company is a defendant in this litigation where a third party is claiming
injuries at a Company job site. The suit claims the injuries were the result of
the Company's negligence, however the amount of damages has not yet been
determined. Enviro-Sciences insurance carrier is vigorously defending the matter
and the amount appears to be within policy limits.
The Company is a defendant in this litigation where the plaintiff is seeking to
recover a bankruptcy preference payment from the Company in the amount of
$16,875. The Company believes it will be required to pay this amount and has
been accrued in the financial statements.
Enviro-Sciences, Inc. is a plaintiff in this action where the Company has filed
to recover $225,000 for services performed. The customer has filed a counter-
claim for certain alleged damages, which the Company believes is without merit.
A trial date has yet to be determined, however the Company strongly believes it
will successfully litigate this matter.
F-14
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - Subsequent Events
In June 2004, the Company began discussions with the managing agents for the Mt
Arlington headquarters space regarding the need to reduce the office rent
expense in light of the reduced revenue base and reduced staffing. In July, a
revised lease was signed effective August 1, 2004 thru the end of the original
lease term wherein the Company reduced the space it occupies and received a
corresponding reduction in the office rent charged.
On June 3, 2004, the Company entered into an agreement to sell certain assets
and transfer certain liabilities to Enviro-Sciences (of Delaware) Inc., a wholly
owned subsidiary of GreenWorks Corporation with no operations. GreenWorks is a
privately held real estate development company, which has not engaged in any
business to date. Pursuant to the terms of the agreement Enviro-Sciences (of
Delaware) Inc. will acquire certain assets, assume certain liabilities and pay
a portion of the line of credit on behalf of the Company at closing. In
addition, the shareholders of the Company will convert amounts due them in
exchange for restricted shares of common stock of the publicly traded company
(described below) of similar value. Enviro-Sciences (of Delaware), Inc. will
become GreenWork's primary operating division. GreenWork's immediate-term plans
are to expand the Enviro-Science operations as it seeks to negotiate and
acquire distressed, environmentally contaminated properties.
On September 24, 2004, GreenWorks Corporation entered into an agreement (the
"Telco Agreement") with Telco-Technology, Inc. ("Telco"), a publicly traded
company. Pursuant to the terms of the Telco Agreement, Telco will acquire 100%
of the outstanding capital stock of GreenWorks in exchange for 1,000,000 newly
issued shares of Telco's Series A Convertible Preferred Stock (the "Preferred
Stock") and two demand promissory notes, each in the principal amount of
$100,000. The Preferred Stock will vote with the common stock on all matters.
Each share of Preferred Stock is convertible into 100 shares of Telco common
stock at any time after December 31, 2005. The number of votes which may be
cast by a holder of shares of Preferred Stock will be equal to the number of
shares of the common stock into which the Preferred Stock could be converted
(an aggregate of 100,000,000 prior to any adjustment).
For accounting purposes, the acquisition will be treated as a reverse
acquisition or merger of Telco by GreenWorks and as a recapitalization of
GreenWorks.
F-15
ENVIRO-SCIENCES, INC.
BALANCE SHEET
SEPTEMBER 30, 2004
ASSETS
Current Assets
Accounts receivable (Net of allowance
for doubtful accounts ) (Notes 1 and 3) $ 405,655
Unbilled revenues (Note 1) 157,165
Prepaid expenses and other current assets 161,401
Acquisition Costs 52,000
Costs and estimated earnings in excess of
billings on uncompleted projects
(Notes 1 and 15) 101,169
Assets to be disposed of (Note 9) 341,394
---------
Total Current Assets 1,218,784
Property & Equipment, net (Notes 1 and 4) 168,501
Costs and estimated earnings in excess of
billings (Notes 1 and 15) 228,151
Property held for sale (Note 17) 59,298
Security and other deposits 30,642
---------
Total Assets 1,705,376
=========
LIABILITIES
Current Liabilities
Accounts payable 564,480
Accrued salary costs 65,364
Accrued other 502,282
Payroll taxes payable (Note 7) 353,587
Notes payable to shareholders (Note 5) 1,628,217
Billings in excess of costs and estimated
earnings on uncompleted projects
(Notes 1 and 15) 60,081
Line of credit (Note 10) 1,346,972
Notes payable to non-affiliated parties (Note 6) 77,663
Installment loans payable (Note 8) 98,981
Capital lease obligations (Note 19) 16,083
Deferred revenues (Note 16) 135,000
Liabilities to be disposed of (Note 9) 577,927
---------
Total Current Liabilities 5,426,637
Accrued employee benefits (Note 20) 55,500
Notes payable to non-affiliated parties,
net of current portion (Note 6) 200,000
Installment loans payable, net of current
portion (Note 8) 12,389
Capital lease obligations, net of current
portion (Note 19) 14,177
Deferred revenues (Note 16) 160,705
---------
Total Liabilities 5,869,408
Commitments and Contingencies (Notes 11 and 21) -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 2,500 shares
authorized, 1,676 issued and outstanding 749,117
Retained earnings (deficit) (4,913,149)
---------
Total Stockholders' Equity (Deficit) (4,164,032)
---------
Total Liabilities and Stockholders' Equity $ 1,705,376
=========
See notes to the financial statements.
F-16
ENVIRO-SCIENCES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the Nine Months Ended
September 30,
2004 2003
-------------------------
Revenues (Notes 1 and 2) $ 2,281,488 $ 3,699,512
Cost of Sales (Note 2) 1,096,493 1,880,292
--------- ---------
Gross Profit 1,184,995 1,819,220
Selling, general and administrative
expenses 1,382,966 2,598,708
--------- ---------
Loss from operations (197,971) (779,488)
Other income (expense):
Gain on disposal of equipment 30,245 23,550
Interest expense (120,722) (92,806)
--------- ---------
Total other income (expense) (90,477) (69,256)
--------- ---------
Loss from continuing operations (288,448) (848,744)
Loss from discontinued operations
(Notes 1 and 9) (229,234) (363,073)
--------- ---------
Net loss (517,682) (1,211,817)
Retained earnings (deficit), beginning
of year (4,395,467) (2,712,805)
Retained earnings (deficit), end of --------- ---------
period $(4,913,149) $(3,924,622)
========= =========
See notes to the financial statements
F-17
ENVIRO-SCIENCES, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2004 2003
----------------------------
Cash flows from operating activities:
Continuing Operations
Net loss from continuing operations $ (288,448) $ (848,744)
Adjustments to Reconcile Loss to Net
Cash Provided by operating activities:
Bad debt - customer - 285,000
Depreciation & Amortization 92,489 74,258
(Gain) loss on sale or disposal of
equipment (30,245) -
(Increase) Decrease in Assets:
Accounts receivable 174,612 949,070
Unbilled revenues (101,480) 24,204
Prepaid expenses and other current assets 2,927 108,144
Costs and estimated earnings in excess of
billings on uncompleted projects (24,780) (161,806)
Security and other deposits 15,832 (16,373)
Increase (Decrease) in Liabilities:
Accounts payable and accrued expenses 161,458 (121,805)
Billings in excess of costs and estimated
earnings on uncompleted projects 8,774 (13,020)
Deferred revenues (24,139) (139,605)
-------- --------
Cash Provided By (Used In) Continuing
Operations (13,000) 139,323
-------- --------
Discontinued Operations
Loss from Discontinued Operations (229,234) (363,073)
(Increase) Decrease in Net Assets of
Discontinued Operations 36,361 60,483
-------- --------
Cash Used in Discontinued Operations (192,873) (302,590)
-------- --------
Net Cash Used in Operating Activities (205,873) (163,267)
-------- --------
Cash flows from investing activities:
Acquisition Costs accrued (52,000) -
Purchase of property & equipment - (741)
Proceeds from sale of property &
equipment 49,030 -
-------- --------
Net Cash Used in Investing Activities (2,970) (741)
-------- --------
Cash flows from financing activities:
Repayment of lease obligations (22,040) (23,849)
Loans from stockholders 414,060 544,000
Loans from non-affiliated parties 12,663 240,000
Proceeds from installment loans 132,705 41,776
Repayments of stockholder loans (825) (468,738)
Repayment of loans from non-affiliated
parties (100,000) -
Repayment of credit line (3,028) (95,000)
Repayment of installment loans (224,692) (299,315)
-------- --------
Net Cash Provided By (Used In) Financing
Activities 208,843 (61,126)
-------- --------
F-18
ENVIRO-SCIENCES, INC.
STATEMENTS OF CASH FLOWS (Continued)
Net (Decrease) Increase in Cash - (225,134)
Cash - Beginning of Period - 225,134
-------- --------
Cash - End of Period $ - $ -
======== ========
See notes to the financial statements.
F-19
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Operations
Enviro-Sciences, Inc. ("ESI" or "the Company"), headquartered in Mt. Arlington,
New Jersey, performs environmental consulting and engineering services,
primarily the evaluation and remediation of contaminated properties. Project
sites are located throughout the country and internationally. In 2001, ESI
formed a construction division, adding significant equipment and personnel.
In 2003, ESI eliminated this division in favor of a greater focus on its core
consulting business. The construction division has been included in
discontinued operations (See Note 9).
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. The Company has had
recurring operating deficits and is in default under the terms of its line of
credit agreement, thus, raising substantial doubt about the Company's ability to
continue as a going concern.
On June 3, 2004, the Company entered into an agreement to sell certain assets
and transfer certain liabilities to Enviro-Sciences (of Delaware) Inc., a wholly
owned subsidiary of GreenWorks Corporation with no operations. GreenWorks is a
privately held real estate development company, which has not engaged in any
business to date. Pursuant to the terms of the agreement Enviro-Sciences (of
Delaware) Inc. will acquire certain assets, assume certain liabilities and pay
a portion of the line of credit on behalf of the Company at closing. In
addition, the shareholders of the Company will convert amounts due them in
exchange for restricted shares of common stock of the publicly traded company
(described below) of similar value. Subsequent to the reverse merger
acquisition, the Company plans to raise capital through the sale of a
debenture and its stock via an equity line of credit, which will be
established upon the filing of a registration of the Company's securities
with the Securities and Exchange Commission. Enviro-Sciences (of Delaware),
Inc. will become GreenWork's primary operating division. GreenWork's
immediate-term plans are to expand the Enviro-Sciences operations as it seeks
to negotiate and acquire distressed, environmentally contaminated properties.
On October 21, 2004 Enviro-Sciences (of Delaware), Inc. completed the
acquisition of the Company (See subsequent events under Note 22).
In view of these matters, realization of the assets of the Company is dependent
upon the Company's ability to meet its financial requirements and the success of
future operations. These financial statements do not include adjustments
relating to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
preparing financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost. Major renewals and betterments are
charged to the asset accounts; maintenance and minor repairs and replacements,
which do not improve or extend the life of the respective assets, are expensed
as incurred. When properties are retired or otherwise disposed of, the asset
and accumulated depreciation accounts are adjusted accordingly, and the gain or
loss, if any, arising from their disposal, is credited or charged to earnings.
Depreciation is calculated using both straight line and accelerated methods over
the estimated useful lives of the assets.
F-20
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Income Taxes
ESI elected to be treated as a Subchapter S Corporation for Federal income tax
purposes and for most states, thus income is taxed to the shareholders
personally.
Revenue and Cost Recognition
Revenues from fixed price projects are recognized on the percentage-of-
completion method, measured by management's estimates of the progress made on
each project. Accordingly, revenue is recognized in the ratio that costs
incurred bears to estimated total costs utilizing the most recent estimates
of costs and funding. Since many contracts extend over a long period of time,
revisions in cost and funding estimates during the progress of work have the
effect of adjusting earnings applicable in performance in prior periods in
the current period. When the current contract estimate indicates a loss,
provision is made for the anticipated loss in the current period.
Revenues from cost-plus-fee projects (time and material jobs) are recognized at
billable hourly rates as the services are rendered.
Contract costs include all direct material and labor costs, subcontracting
costs, and those indirect costs related to contract performance, such as
supplies, tools, repairs, and depreciation costs. Selling, general and
administrative costs are charged to expenses as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and income and are recognized in the
period in which the revisions are determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
projects" represents revenues recognized in excess of amounts billed on fixed-
price contracts. Revenues on time and material projects for services rendered
but not yet invoiced are shown as "Unbilled revenues." The liability "Billings
in excess of costs and estimated earnings on uncompleted projects" represents
billings in excess of revenues earned.
Advertising
Advertising expenses are expensed as incurred and amounted to $355 and $350 for
the nine month periods ended September 30, 2004 and 2003, respectively.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. The Company has not identified
any such impairment losses.
NOTE 2 - New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". This Statement establishes standards for how a company
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires a company to classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances).
F-21
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - New Accounting Pronouncements (Continued)
This statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the firms
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities, if applicable. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
The adoption of this statement did not have an impact on the Company's results
of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have an impact on the Company' results of operations or financial position.
NOTE 3 - Concentrations and Accounts Receivable
At times through out the year the Company may have bank balances in excess of
Federal Deposit Insurance Corporation limits.
Concentration of credit risks with respect to accounts receivable is limited by
the imposition of retainers for new customers, the monitoring of credit balances
for all customers, and the withholding of data reports where payment appears in
jeopardy. An allowance for doubtful accounts of $52,613 was recorded as of
September 30, 2004.
A small number of customers will often account for a significant portion of
revenues, however, the specific customers and projects may change from year to
year. Two customers accounted for approximately 26 % (16 % and 10 %) of the
Company's revenues for the nine months ended September 30, 2004 and one customer
accounted for approximately 42% of the Company's revenues for the nine months
ended September 30, 2003.
At September 30, 2004, one customer accounted for 10 percent of the outstanding
accounts receivable.
NOTE 4 - Equipment
Major classes of equipment at September 30, 2004 are summarized below:
Useful Lives-
Years
---------------
Office and computer equipment 3-7 $ 712,620
Field equipment 5-10 312,664
Vehicles 5 124,936
Furniture and fixtures 10 69,594
Leasehold improvements 21-39 103,848
---------
1,323,662
Less: Accumulated depreciation (1,155,161)
---------
$ 168,501
=========
F-22
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Equipment (Continued)
Depreciation expense was $92,489 and $74,258 for the nine month periods ended
September 30, 2004 and 2003, respectively.
NOTE 5 - Notes Payable to Shareholders
Notes payable to shareholders at September 30, 2004 was $1,628,217. Interest on
the notes has been waived by the shareholders for the nine month period ended
September 30, 2004.
In accordance with an agreement entered into on June 3, 2004, the shareholders
have agreed to convert their loans in exchange for restricted shares of common
stock of a publicly traded company at closing. See Note 1 for further details
on this transaction and Note 22 for subsequent events.
NOTE 6 - Notes Payable to Non-Affiliated Parties
Notes payable to non-affiliated parties includes a loan of $125,000, which bears
interest of 3% commencing January 1, 2004. The note requires repayment of
principal and interest in five installments commencing December 31, 2004, with
successive payments each year through December 31, 2008. Interest in the
amount of $ 2,813 has been recognized for the nine month period ended September
30, 2004.
In 2003, $225,000 of financing and $15,000 of accrued interest were provided by
an additional non-affiliated party. A promissory note was issued bearing
interest at 6% and requiring repayment of $100,000 on or before September 30,
2004 with the balance of principal and interest payable on or before September
30, 2005. Subsequent to December 31, 2003 the note-holder agreed to modify the
terms of repayment of the note requiring a payment of $100,000 prior to
September 15, 2004 plus 36 monthly installments of $ 4,580 commencing November
30, 2004.
Interest in the amount of $9,850, has been recognized for the nine month period
ended September 30, 2004.
NOTE 7 - Payroll Taxes Payable
Current payroll taxes ($16,547) and delinquent Federal & NJ State payroll taxes
($337,040) from the first and second quarter 2004 and fourth quarter 2003 are
represented as a current liability on the September 30, 2004 balance sheet. The
Company is currently negotiating a payment plan with the IRS.
NOTE 8 - Installment Loans
A summary of installment loans outstanding as of September 30, 2004 is as
follows:
Loans payable, secured by vehicles, construction equipment
and computer equipment, payable in monthly installments
including interest at 4.8% to 9.75%, due from October to
May 2006 $ 30,729
Loans for financing of insurance premiums, payable in
monthly installments including interest varying
from 3.8% to 7.5%, due within the next fiscal year 80,641
--------
111,370
Less: Current portion 98,981
--------
Non-current portion $ 12,389
========
F-23
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - Installment Loans, Continued
The total maturity of the non-current portion of these installment loans as
of September 30, 2004 is as follows:
October 2005 - September 2006 $ 12,389
NOTE 9 - Discontinued Operations
During 2003, the Company discontinued the operations of its construction
division. The decision to dispose of the component was based on significant
losses incurred and a desire for a greater focus on its consulting division. Net
sales of the construction division were approximately $361,000 and $1,485,000
for the nine month periods ended September 30, 2004 and 2003, respectively.
Assets and Liabilities to be disposed of are comprised of the following at
September 30, 2004:
Cost and earnings in excess of billings $ 155,234
Accounts receivable 157,359
Property and equipment (net) 28,801
--------
$ 341,394
========
Accounts payable $ 453,015
Accrued expense 39,299
Payroll taxes payable 71,291
Current portion of long-term debt 14,322
Long-term debt -
--------
$ 577,927
========
NOTE 10 - Line of Credit
At September 30, 2004 the Company has a credit line of $1,350,000 bearing
interest at the bank's base rate plus three-quarters of one percent. The
line is secured by all corporate assets and was subject to renewal on
January 16, 2004.The line remains orally extended since January 2004.
The business loan agreement document underlying the credit line agreement has
the following required financial covenants, none of which are met as of
September 30, 2004.
Tangible Net Worth - Minimum of $ 1,000,000
Net Worth Ratio - Minimum Ratio of 1.75 to 1
Working Capital - Minimum Ratio of $ 100,000
Current Ratio - Minimum Ratio of 1.25 to 1
Income - Minimum $ 250,000
Cash Flow Requirement - Minimum of $ 350,000
Fixed Charge Ratio - Minimum Ratio of 2 to 1
Other Ratio - Cash flow to Current maturity
of LT Debt of 1.25 to 1
F-24
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - Operating Lease Commitments
The Company leases certain office space and equipment under operating leases.
In June 2004, the Company began discussions with the managing agents for the
Mt. Arlington headquarters space regarding the need to reduce the office rent
expense in light of the reduced revenue base and reduced staffing. In July, a
revised lease was signed effective August 1, 2004 thru the end of the original
lease term wherein the Company reduced the space it occupies and received a
corresponding reduction in the office rent charged.
The following is a schedule of future minimum rental payments on office space
(exclusive of common area charges) required under current operating lease:
October 2004 - September 2005 $ 82,897
October 2005 - September 2006 82,897
October 2006 - September 2007 82,897
October 2007 - September 2008 20,724
-------
$269,415
=======
Rent expense of $122,428 and $153,188 were recorded by ESI for the nine month
periods ended September 30, 2004 and 2003, respectively. In addition to the base
rent, ESI also pays for utilities and for its share of increases over a base
period, in real estate taxes and building operating costs.
The Company has several operating leases on office equipment. The following is a
schedule of future minimum rental payments on operating leases that have initial
or non-cancellable lease terms in excess of one year as of September 30, 2004:
October 2005 - September 2006 $ 36,499
October 2006 - September 2007 25,389
-------
$ 61,888
=======
NOTE 12 - Retirement Plan
The Company has a deferred compensation plan (401(k) plan) under which eligible
employees are permitted to elect the amount of their salary deferrals,
subject to certain statutory limitations. The Company can match a percentage of
the employee deferrals. The Company's gross 401(k) matching contribution
expense (before reductions from forfeitures) for the nine month periods ended
September 30, 2004 and 2003 was $5,389 and $10,307, respectively. Administrative
costs for the nine months September 30, 2004 and 2003 were $1,357 and $4,385,
respectively.
NOTE 13 - Supplemental Disclosures of Cash Flow Information
The following is presented to supplement the statements of cash flows:
Cash paid during the periods ended September 30, 2004 and 2003 for:
Interest $ 88,814 $ 89,979
======= =======
Income taxes $ - $ -
======= =======
F-25
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Employee Stock Purchase Plan
During 1998, ESI adopted an Employee Stock Purchase Plan, under which certain
employees are eligible to purchase stock at a price based on an annual valuation
determined by the Company. Employees can withdraw from the plan and the Company
must repurchase their shares. There were no purchases or sales that were made by
the Company during the nine months ended September 30, 2004.
The shareholders have an agreement, which outlines their various rights and
obligations. This agreement specifies that a portion of the Company's annual
net income, subject somewhat to management's discretion, will be distributed to
the stockholders in the following year.
A stockholder and former employee has notified the Company of his desire to sell
all of his stock (approximately 6% of the issued and outstanding stock) to the
Company, or to other shareholders. As of September 30, 2004 no other
shareholder has exercised the option to purchase these shares and the Company
has not been able to reach an agreement for an appropriate valuation of the
stock (see subsequent events Note 22).
NOTE 15 - Uncompleted Projects
Costs and billings on uncompleted projects as of September 30, 2004 are
summarized as follows:
Costs incurred on uncompleted projects $ 1,663,472
Estimated earnings 12,705
----------
1,676,177
Less: Billings to date 1,406,938
----------
Totals $ 269,239
==========
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted Projects $ 329,320
Billings in excess of costs and estimated earnings
on uncompleted Projects (60,081)
--------
Totals $ 269,239
========
NOTE 16 - Deferred Revenues
The total deferred revenues at September 30, 2004 are $295,705 of which
$135,000 is shown as a current liability based on management's estimate of
progress that will be made in the next twelve months.
Deferred revenues at September 30, 2004 include $134,356 for a fixed price
project, and $40,000 for a time and materials project where payments were made
by each customer in advance. Deferred revenues also include $121,349 for the
remediation of the Northvale property (see Note 18).
F-26
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 17 - Property Held for Sale
ESI purchased an industrial property in Cleveland, Ohio from its major customer
for $59,298. The site requires remediation costs before the property can be
sold. Management estimates the remediation liability to approximate the cost of
property. As such a remediation liability in the amount of $59,298 has been
recorded and is included in "accrued expense" on the balance sheet.
NOTE 18 - Related Party Transactions
Northvale Properties, Inc. ("Northvale") owned a building and land in Northvale,
New Jersey, which has an environmental contamination. Northvale is owned by ESI
stockholders and current and former employees.
The Northvale property was sold in 2001 for $1.8 million, of which $1.5 million
was paid at closing and applied to the amount owed to ESI. The $300,000 balance
due from the buyer of the property was paid in August 2002 ($200,000) and
October 2002 ($100,000), and was assigned to ESI as final payment for all
remaining remediation costs. The property is eligible for the Brownfield
rebate from the state. As part of the sale agreement, the buyer has assigned
the right to the Brownfield rebate to be received to ESI.
Kearny Properties, LLC ("Kearny") is an entity, which was formed to pursue
acquisition of property in Kearny, New Jersey. Kearny is owned by ESI
stockholders and current and former employees. Kearny currently has an option to
purchase a property. The property has an environmental contamination, and
management is working with the current owners, state regulatory authorities, and
a prospective purchaser/developer to secure approval of a remedial action work-
plan (RAW) to deal with the environmental contamination.
Kearny and the current property owner have agreed to allow the purchaser to
exercise Kearny's option to purchase the property if and when they are able to
get all necessary approvals. In return, the purchaser has agreed to provide
Kearny with a finder's fee sufficient to cover all of the development costs
incurred by Kearny with funding and services provided by ESI since the inception
of this project. Although ESI management feels that the purchaser will
ultimately succeed in obtaining the necessary approvals, the Company wrote-off
all previously recorded receivables from Kearny in 2002.
Revenues recognized by ESI related to the Northvale and Kearny projects for the
nine month periods ended September 30, 2004 and 2003 were from professional
services totaling $40,501 and $96,426, respectively.
F-27
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 - Capital Leases
The Company leases certain equipment under capital leases expiring in various
years through 2006. The assets and liabilities under capital leases are recorded
at the lower of the present value of minimum lease payments or the fair values
of the asset at the inception of the lease. The assets are amortized over the
lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in expense for the nine
month periods ended September 30, 2004 and 2003.
Properties under capital leases are as follows as of September 30, 2004:
Office & Computer Equipment $ 98,196
Software 44,312
--------
Total 142,508
Less: Accumulated depreciation
and amortization (105,362)
--------
$37,146
========
Future minimum lease payments are as follows:
October 2004 - September 2005 $19,719
October 2005 - September 2006 11,882
October 2006 - September 2007 2,971
------
Total payments 34,572
Less: amount representing
interest 4,312
------
Present value of minimum lease
payments 30,260
Less: current portion 16,083
------
Non-current portion $14,177
======
NOTE 20 - Medical Benefits Program
The Company self-insures a portion of their employee medical benefits. The
Company's exposure is limited on both an individual employee and aggregate
basis. Employees contribute a portion of the insurance costs and the program
is administered by a third party. Expenses for the company's portion of
claims plus insurance premiums for the nine month periods ended September 30,
2004 and 2003 were $206,479 and $320,837, respectively, net of amounts
contributed by employees.
Accrued expense of $55,500 at September 30, 2004, has been recorded for the
cost of the "tail" for the semi self-insured plan. This "tail" only becomes
payable when the current plan is terminated. Management has no immediate plans
to terminate the plan and therefore the liability has been recorded as non-
current.
F-28
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 21 - Litigation
The Company is a defendant in a lawsuit where a vendor is seeking damages for
non-payment of materials in the amount of $251,291. Satisfaction of this
obligation is expected to be paid by the end-user, a customer of the Company.
The Company expects the matter to be resolved without any further obligation by
Enviro-Sciences, Inc.
The Company is a defendant in this lawsuit where a vendor is seeking payment for
trucking services in the amount of $56,591. Judgment has been entered against
the Company in this matter and has been accrued in the financial statements.
We really do not have this accrued. The Company is believes the action will
be settled pursuant to the following paragraph.
The Company and a customer have outstanding claims against each other in
connection with remediation services, which were provided by the Company. No
action has been filed and both parties are in the process of executing a
settlement whereby a customer will make payments directly to the Company's third
party vendors for services provided on the customer's sites. The amount
currently under consideration is $659,487, which has been offset against
accounts payable. The agreement has been executed at this time. The two
lawsuits referenced above of $251,291 and $56,591 respectively are included in
the $659,487. If the Company and the customer are unable to settle this
matter directly, the Company expects that a claim and counterclaim will be
filed alleging nonpayment and negligence in providing services, both of which
could result in material damages.
The Company is a defendant in this action where a customer filed claiming the
Company was negligent in a failure to recognize asbestos contamination in its
Phase I Environmental report and is seeking damages of $650,000. Enviro-Sciences
insurance carrier is vigorously defending the matter and the amount appears to
be within policy limits. Additionally, the Company has accrued $25,000 which
is the maximum amount for which the Company would be responsible.
The Company is a defendant in this litigation where a third party is claiming
injuries at a Company job site. The suit claims the injuries were the result of
the Company's negligence, however the amount of damages has not yet been
determined. Enviro-Sciences insurance carrier is vigorously defending the
matter and the amount appears to be within policy limits.
The Company is a defendant in litigation where a former employee is seeking
payment of approximately $9,000 in lieu of unused vacation. The Company believes
this claim is without merit based on the Company policy regarding carryover
limits and as such has not accrued this expense.
The Company is a defendant in this litigation where the plaintiff is seeking to
recover a bankruptcy preference payment from the Company in the amount of
$16,875. The Company believes it will be required to pay this amount and
therefore has accrued this in the financial statements.
Enviro-Sciences, Inc. is a plaintiff in this action where the Company has filed
to recover $225,000 for services performed. The customer has filed a counter-
claim for certain alleged damages, which the Company believes is without merit.
A trial date has yet to be determined, however the Company strongly believes it
will successfully litigate this matter.
F-29
ENVIRO-SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 - Subsequent Events
On September 24, 2004, the shareholders of GreenWorks Corporation (see Note 1)
entered into an agreement (the "Telco Agreement") with Telco-Technology, Inc.
("Telco"), a publicly traded company (NASDAQ: TTXI). Pursuant to the terms of
the Telco Agreement, Telco acquired 100% of the outstanding capital stock of
GreenWorks in exchange for 1,000,000 newly issued shares of Telco's Series A
Convertible Preferred Stock (the "Preferred Stock") and two demand promissory
notes, each in the principal amount of $100,000. The Preferred Stock will vote
with the common stock on all matters. Each share of Preferred Stock is
convertible into 100 shares of Telco common stock at any time after
December 31, 2005. The number of votes which may be cast by a holder of
shares of Preferred Stock will be equal to the number of shares of the common
stock into which the Preferred Stock could be converted (an aggregate of
100,000,000 prior to any adjustment). The agreement was consummated on
October 26, 2004.
For accounting purposes, the acquisition will be treated as a reverse
acquisition or merger of Telco by GreenWorks and as a recapitalization of
GreenWorks.
On October 21, 2004 Enviro-Sciences (of Delaware), Inc acquired the Company.
On October 26, 2004, Telco Technology, Inc. (TTXI NASDAQ) consummated its
agreement (the "Agreement") with GreenSpace Capital, L.L.C., and Acutus
Capital, L.L.C., to acquire GreenWorks Corporation ("GreenWorks"). GreenWorks
is a privately held real estate development company which has not engaged in any
business to date. Its business model is the acquisition, clean-up and
development of environmentally contaminated properties using innovative and
environmentally friendly technologies.
Pursuant to the terms of the Agreement, Telco Technology, Inc. will acquire 100%
of the outstanding capital stock of GreenWorks in exchange for 1,000,000 newly
issued shares of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock") and two demand promissory notes, each in the principal
amount of $100,000. The Preferred Stock shall vote with the common stock on all
matters. Each share of Preferred Stock is convertible into 100 shares of common
stock at any time after December 31, 2005. The number of votes which may be cast
by a holder of shares of Preferred Stock shall be equal to the number of shares
of the common stock into which the Preferred Stock could be converted (an
aggregate of 100,000,000 prior to any adjustment).
The closing of the acquisition of GreenWorks Corporation by Telco Technology,
Inc is subject to certain conditions including the completion by GreenWorks
Corporation, through its wholly-owned subsidiary, Enviro-Sciences (of Delaware),
Inc. ("ESI"), of the acquisition of the business and certain assets from Enviro-
Sciences, Inc., a privately held engineering services company, in exchange for
the assumption of certain liabilities of Enviro-Sciences, Inc. ESI will become
GreenWorks Corporation primary operating division.
F-30
TELCO-TECHNOLOGY, INC.
Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed financial statements of Telco-
Technology, Inc. (the "Company") have been prepared to indicate how the
financial statements of the Company might have looked if the Merger with
GreenWorks Corporation and Subsidiary ("GreenWorks") and transactions related
to that Merger had occurred as of the beginning of the period presented.
The pro forma condensed financial statements have been prepared using the
unaudited historical financial statements of the Company and GreenWorks as of
and for the nine months ended September 30, 2004 and for the year ended
December 31, 2003 (audited). For accounting purposes, because Telco-
Technology, Inc had become a shell company, the Merger will be treated as a
recapitalization of the Company.
The pro forma condensed financial statements should be read in conjunction
with a reading of the historical financial statements of the Company and
GreenWorks Corporation and Subsidiary. The pro forma condensed financial
statements are presented for illustrative purposes only and are not intended
to be indicative of actual financial condition or results of operations had
the Merger been in effect during the periods presented, or of financial
condition or results of operations that may be reported in the future.
F-31
Unaudited Pro Forma Condensed Financial Statements (Continued)
Telco-Technology, Inc.
Unaudited Pro Forma Condensed Balance Sheet
September 30, 2004
Historical
--------------------------
Telco- GreenWorks
Technology Corporation Pro Forma
Inc. and Subsidiary Adjustments Notes Combined
- --------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 26 $ - $ 74,974 (c) $ 75,000
Accounts receivable, net - 405,655 - 405,655
Unbilled revenues - 157,165 - 157,165
Prepaid expenses and other
current assets - 161,401 - 161,401
Acquisition costs - 52,000 (52,000) (a) -
Deferred Financing Fees - - 162,500 (c) 162,500
Costs and estimated earnings
in excess of billings - 101,169 - 101,169
Assets to be disposed of - 341,394 - 341,394
-----------------------------------------------------------
Total Current Assets 26 1,218,784 185,474 1,404,284
Property and equipment, net - 168,501 - 168,501
Deferred Financing Fees - - 162,500 (c) 162,500
Costs and estimated earnings in
excess of billings - 228,151 - 228,151
Property held for sale - 59,298 - 59,298
Security and other deposits - 30,642 - 30,642
-----------------------------------------------------------
Total Assets 26 1,705,376 347,974 2,053,376
===========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 19,714 564,480 - 564,480
Accrued expenses 23,945 567,646 - 591,591
Payroll taxes payable - 353,587 - 353,587
Billings in excess of costs
and estimated earnings - 60,081 - 60,081
Line of credit - 1,346,972 (150,000) (b) 1,196,972
Notes payable 73,253 192,727 250,000 (c) 515,980
Deferred revenue - 135,000 - 135,000
Liabilities to be disposed of - 577,927 - 577,927
Notes payable - officers 45,000 1,628,217 (1,673,217) (a)(b) -
-----------------------------------------------------------
Total Current Liabilities 161,912 5,426,637 (1,573,217) 4,015,332
Accrued employee benefits - 55,500 - 55,500
Notes payable, net of current - 226,566 - 226,566
Deferred revenues - 160,705 - 160,705
Convertible debenture - - 500,000 (c) 500,000
----------------------------------------------------------
Total Liabilities - 5,869,408 (1,073,217) 4,958,103
Stockholders Equity (Deficit):
Preferred Stock, Series A - - 1,000 (a) 1,000
Common Stock 28,975 749,117 (747,916) (a)(b) 30,176
Additional paid-in capital 4,398,266 - (2,720,042) (a)(b) 1,678,224
Retained deficit (4,589,127) (4,913,149) 4,888,149 (a) (4,614,127)
-------------------------------------------------------------
Total stockholders' equity
(deficit) (161,886) (4,164,032) 1,421,191 (2,904,727)
-------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 26 $ 1,705,376 $ 347,974 $ 2,053,376
=============================================================
F-32
Unaudited Pro Forma Condensed Financial Statements (Continued)
Telco-Technology, Inc.
Unaudited Pro Forma Condensed Statement of Operations
For the Nine Months Ended September 30, 2004
Historical
--------------------------
Telco- GreenWorks
Technology Corporation Pro Forma
Inc. and Subsidiary Adjustments Notes Combined
- --------------------------------------------------------------------------------------------
Revenues $ - $ 2,281,488 $ - $ 2,281,488
Cost of Sales - 1,096,493 - 1,096,493
------------------------------------- ---------
Gross Profit - 1,184,995 - 1,184,995
Selling, general and
administrative 573,651 1,382,966 52,000 (a) 2,008,617
------------------------------------- ---------
Loss from operations (573,651) (197,971) (52,000) (823,622)
Other income (expense):
Gain on disposal of equipment - 30,245 - 30,245
Interest expense (4,135) (120,722) - (124,857)
------------------------------------- ---------
Total other income (expense) (4,135) (90,477) - (94,612)
------------------------------------- ---------
Loss from continuing
operations $ (577,786) $ (288,448) $(52,000) $ (918,234)
===================================== =========
Loss Per Common Share, basic
and diluted $ (0.02) $ (324.98) $ (0.03)
========================= =========
Weighted Average Common Shares
outstanding, basic and
diluted 26,968,277 1,676 26,969,816
========================== ==========
F-33
Unaudited Pro Forma Condensed Financial Statements (Continued)
Telco-Technology, Inc.
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2003
Historical
--------------------------
Telco- GreenWorks
Technology Corporation Pro Forma
Inc. and Subsidiary Adjustments Notes Combined
- -----------------------------------------------------------------------------------------------
Revenues $ - $ 4,274,480 $ - $ 4,274,480
Cost of Sales - 2,160,082 - 2,160,082
--------------------------------------- ---------
Gross Profit - 2,114,398 - 2,114,398
Selling, general and
administrative 358,965 3,180,384 - 3,539,349
--------------------------------------- ---------
Loss from operations (368,965) (1,065,986) - (1,434,951)
Other income (expense):
Gain on disposal of equipment - 25,657 - 25,657
Interest expense - (129,289) - (129,289)
--------------------------------------- ---------
Total other income (expense) - (103,632) - (103,632)
--------------------------------------- ---------
Loss from continuing
operations $ (368,965) $ (1,169,618) $ - $(1,538,583)
======================================= =========
Loss Per Common Share,
basic and diluted $ (0.02) $ (1,003.97) $ (0.08)
========================= ==========
Weighted Average Common
Shares outstanding, basic
and diluted 19,337,444 1,676 19,337,444
========================== ==========
(a) These adjustments reflect the issuance of 1,000,000 preferred shares to
the shareholders of GreenWorks Corporation, two demand grid notes issued
to the shareholders of GreenWorks Corporation and the effect of the
recapitalization of Telco Technology.
(b) These adjustments reflect the restricted shares as consideration for the
former shareholders of ESI-NJ forgiveness of shareholder indebtedness.
(c) This adjustment reflects the issuance of two demand notes and a convertible
debenture to Cornell Capital Partners, L.P. at closing and the payment of
fees in connection with the issuance.
F-34