ITEM 1. DESCRIPTION OF BUSINESS.
EVTC, Inc. (the "Company") was incorporated in 1989 under the name "Environmental Technologies Corporation" under the laws of Delaware. In 1997, the Company changed its corporate name to "EVTC, Inc." but continues to trade and do business as "Environmental Technologies Corporation." The Company is currently engaged in the marketing and sale of refrigerants, refrigerant reclaiming services and the recycling of fluorescent light ballasts and lamps. Subsequent to September 30, 1999, the Company also entered into an agreement to purchase an internet marketing firm. The Company also manufactured and distributed refrigerant recycling and recovery equipment prior to the discontinuation of such operations in July 1998 (see Notes to the Consolidated Financial Statements regarding discontinued operations).
The following table sets forth information relating to the approximate dollar amounts and percentages of revenues derived from the Company's sales of refrigerants and ballast recycling services:
YEARS ENDED SEPTEMBER 30, (000'S)
1999 1998 1997
Refrigerants $34,897 90% $34,482 90% $50,606 92% Ballast Recycling 3,835 10% 4,001 10% 4,491 8% ------ ---- ------ ---- ------ ----
$38,732 100% $38,483 100% $55,097 100% ======= ==== ====== ==== ====== ====
REFRIGERANTS
REFRIGERANT INDUSTRY BACKGROUND
In the mid 1980's, increasing concern about damage to the earth's stratospheric ozone layer resulted in significant legislation governing production and use of products containing Chlorofluorocarbons ("CFCs"). CFC refrigerants primarily used include R-11, R-12, and R-502. In 1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer (the "Montreal Protocol"), as amended in 1992, which requires its signatories to reduce and ultimately eliminate production and consumption of certain ozone depleting substances, including refrigerants. The Montreal Protocol has been implemented in the United States through the Clean Air Act and the regulations promulgated thereunder by the Environmental Protection Agency (EPA). Pursuant to the Clean Air Act, which was amended in 1990 in response to additional evidence linking the use of CFCs to damage to the earth's ozone layer, production of CFCs ceased at the end of 1995. The Clean Air Act also requires the recovery or recycling of all refrigerants used in automobile, residential and commercial air conditioning and refrigeration systems.
While CFC production ceased in 1995, continued initiatives of government agencies, primarily the EPA, have placed additional restrictions on other ozone depleting and non-ozone depleting substances.
Hydrochlorflorocarbon refrigerants ("HCFCs") are also considered to be an ozone depleting substance. However, their potential for ozone depletion is substantially less than CFCs.
During the phaseout of CFCs, HCFCs are used as interim CFC substitutes. HCFC refrigerants include R-22, R-123, R-124, R-401, and R-402. Due to HCFCs ozone depletion potential, their production in the United States is scheduled to be phased out over the next 20 years. Several European countries and Canada have already put stringent production and import caps on HCFCs. While no production or import caps are currently in place in the United States, the Environmental Protection Agency is closely monitoring production and importing of HCFCs into the United States.
CFCs are also being replaced by hydrofluorocarbons ("HFCs"). HFCs do not deplete the ozone and are recognized as the long-term replacement for CFCs and HCFCs. Tetrafluoroethane, or R-134a, is currently the primary replacement for R-12, the most common CFC refrigerant. Other HFCs include R-23, R-404, R-407, R-410, R-507, and R-508. HFCs, while not ozone depleting, are considered to be a "green house" gas that contributes to global warming. As a result current regulations also require that they be reclaimed and recycled. The Company, and most other companies in the industry, no longer has readily available access to sources of newly manufactured CFC refrigerants. HCFC and HFC virgin products are readily available to the Company and its competitors in the industry. See "Suppliers" disclosure.
In general, working capital levels for the Company and industry-wide reflect the highly seasonal nature of sales for refrigerants that are significantly related to weather conditions. Sales of the Company's products generally precede warm weather and continue through much of the warm weather months.
PRODUCTS AND SERVICES
REFRIGERANTS
Refrigerants are liquid compounds characterized by their ability to absorb heat and vaporize at low temperatures that can be used in air conditioning and refrigeration systems. Compounds such as R-12 and R-134a serve as refrigerants through the principle of heat transfer by absorbing heat while in a liquid state and releasing heat while in a gaseous state.
The most widely used commercial refrigerants are R-11, R-12, R-22, R-134a and R-502. R-11 is primarily used in commercial air conditioning systems. R-12 and R134a are the predominant refrigerants used in automobile air conditioning systems. R-12 can also be used as a refrigerant in residential air conditioning and refrigeration systems. R-22 is a refrigerant capable of providing extensive cooling of large areas, making it suitable for use in residential and commercial air conditioning. R-502 is used extensively as a refrigerant in commercial refrigeration systems.
The Company's automotive line of refrigerants includes R-12, R-22 and R-134a and is marketed under the Company's "Arctic Air" label to wholesalers and distributors of automobile supplies for use by mechanics and technicians in servicing automobile air conditioning systems.
The Company markets a complete line of reclaimed and virgin refrigerants to HVAC/R wholesalers, mechanical contractors and large institutional and government users of refrigerants.
The Company markets R-134a in spray cans under its customers' private labels for use on dusting moisture-sensitive equipment, including personal computer screens, cabinets, peripherals and photographic equipment.
The Clean Air Act mandated that automobile manufacturers develop new air conditioning systems in vehicles using R-134a, a refrigerant that does not contain ozone depleting CFCs, rather than R-12. The Company commenced marketing R-134a in 1992 as a replacement for R-12 for new automobile air conditioning systems.
The Company acquired Refrigerant Reclaim Services, Inc. ("RRSI") in February 1994 and Global Refrigerant Management, Inc. in February 1995 (collectively by their d/b/a, "Full Circle, Inc."). Full Circle, Inc. provides services for the recovery and reclamation of all refrigerants in response to the requirements of the Clean Air Act, which strictly regulates the use and disposal of refrigerants containing certain chemicals. The Company's recovery services consist of removing used refrigerants from air conditioning and refrigeration systems and transferring them into pressurized cylinders for collection. Its reclamation services consist of "cleaning" refrigerants to remove impurities and contaminants and returning them to purity standards set by the Air Conditioning and Refrigerant Institute ("ARI"). Reclaimed refrigerants, unlike recycled refrigerants, meet the same specifications as newly manufactured products. Full Circle, Inc. markets its services to large users of refrigerants such as wholesalers of air conditioning and refrigeration equipment, air conditioning and refrigeration contractors and owners of air conditioned buildings and refrigeration and cold storage facilities. Full Circle, Inc. also purchases used refrigerants for reclamation and resale. Typically, refrigerant is purchased from users choosing to retrofit or replace their CFC bearing equipment for equipment using non-CFC refrigerants.
SUPPLIERS
The Company is not dependent on any one source of refrigerant for its supply of refrigerants. The Company does not maintain long-term supply agreements with its suppliers. The Company has firm purchase orders with several suppliers to meet the majority of their refrigerant needs in 2000.
The Company purchases used refrigerant from major HVAC wholesalers, mechanical contractors, salvage operations, large industrial and institutional users of refrigerant as well as brokers. The Company uses a network of wholesale HVAC supply stores that serve as collection stations for used refrigerants.
The Company's operating results are in part dependent on its ability to obtain sufficient quantities of domestic virgin (pure) and reclaimable refrigerants from its suppliers. In the event that the Company is unable to obtain sufficient quantities of refrigerants in the future, or resell reclaimed refrigerants at a profit, the Company's financial condition and results of operations would be adversely affected.
MARKETING AND SALES
The Company primarily markets its various reclaimed refrigerants and reclaiming services directly to HVAC/R wholesalers, mechanical contractors and large corporate, institutional and governmental users of refrigerants. The Company also markets refrigerants to wholesale distributors of automotive suppliers throughout the United States. The Company's distributors resell to automobile repair shops, service stations and retail automotive supply stores.
Marketing programs are conducted through the efforts of the Company's executive officers, Company sales personnel and manufacturers sales representatives. The Company utilizes various marketing methods, including direct mailings, trade publications, telemarketing, print advertising, in-person solicitation, participation in trade shows and the internet (www.fcrefrigerant.com).
No single customer accounted for more than 10% of the Company's revenues during the years ended September 30, 1999, 1998 or 1997.
The Company typically seeks to fill customer orders within two days of receipt. Accordingly, at September 30, 1999, the Company had no material backlog for any product line. In order to fill orders within the foregoing time frame, the Company seeks to maintain a significant inventory of refrigerants, raw materials and finished goods and solicits customers to place preseason order commitments for their in season refrigerant needs.
COMPETITION
The markets for the Company's products are highly competitive. The Company competes with numerous well-established companies which market refrigerants, many of which possess substantially greater financial, marketing, personnel and other resources than the Company. Such companies may more effectively compete for reduced allocations of supplies of refrigerants and the marketing of refrigerants intended to replace refrigerants containing ozone-depleting CFCs.
The Company believes that it competes on the basis of product availability and customer service in the marketing and sale of refrigerants. The Company believes that its refrigerant recovery and reclamation operation is one of the largest in its industry. The Company believes that its wholesale distributors market other products that compete with the Company's products.
GOVERNMENT REGULATION
In the mid 1980's, increasing concern about damage to the earth's ozone layer caused by ozone depleting substances has resulted in significant legislation governing production and use of products containing CFCs. In 1987, the United States became a signatory to the Montreal Protocol, as amended in 1992, which required its signatories to reduce and ultimately eliminate production and consumption of certain ozone depleting substances. U.S. production of refrigerant products containing CFCs ceased at the end of 1995. The Montreal Protocol has been implemented in the United States through the Clean Air Act and the regulations promulgated thereunder by the EPA. The production and use of refrigerants containing CFCs are subject to extensive, stringent and frequently changing federal, state and local laws and substantial regulation under these laws by governmental agencies, including the EPA, the United States Occupational Safety and Health Administration and the United States Department of Transportation.
Among other things, these regulatory authorities impose requirements which regulate the handling, packaging, labeling, transportation and disposal of hazardous and non-hazardous materials and the health and safety of workers, and require the Company and, in certain instances, its employees, to obtain and maintain licenses in connection with its operations. This extensive regulatory framework imposes significant compliance burdens and risks on the Company.
The Company and its customers are subject to the requirements of the Clean Air Act, and the regulations promulgated thereunder by the EPA, which make it unlawful for any person in the course of maintaining, servicing, repairing, and disposing of air conditioning or refrigeration equipment, to knowingly vent or otherwise release or dispose of ozone depleting substances, and non-ozone depleting substitutes, used as refrigerants.
Pursuant to the Clean Air Act, reclaimed refrigerant must satisfy the same purity standards as newly manufactured refrigerants in accordance with standards established by the ARI prior to resale to a person other than the owner of the equipment from which it was recovered. The ARI and the EPA administer certification programs pursuant to which applicants are certified to reclaim refrigerants in compliance with ARI standards. Under such programs, the ARI issues a certification for each refrigerant and conducts periodic inspections and quality testing of reclaimed refrigerants.
The Company has obtained ARI certification for most refrigerants at its reclamation facility, and is certified by the EPA. The Company is required to submit periodic reports to the ARI and pay annual fees based on the number of pounds of reclaimed refrigerants.
During 1996 and 1997, the EPA published proposed regulations, which, if enacted, would require participation in third-party certification programs similar to the ARI program. Such proposed regulations would also require laboratories designed to test refrigerant purity to undergo a certification process. As of December 1999, the regulations had not been mandated and were under review. The Company anticipates these regulations to pass and has initiated steps to obtain EPA certification.
The Company is subject to regulations adopted by the United States Department of Transportation ("DOT") which classify most refrigerants handled by the Company as hazardous materials or substances and impose requirements for handling, packaging, labeling and transporting refrigerants. The Company believes that it is substantially in compliance with these regulations.
Amendments to existing statutes and regulations or adoption of new statutes and regulations which affect the marketing and sale of refrigerants could require the Company to continually adapt its methods of operations and/or discontinue the sale of certain products at costs that could be substantial. There can be no assurance that the Company will be able, for financial reasons or otherwise, to adapt its operations to comply with applicable laws or regulations or obtain and maintain applicable licenses, permits and approvals in the future. Failure to do so could have a material adverse effect on the Company. The Company's refrigerant operations require the handling, storage and transportation of refrigerants, which are classified as hazardous substances under applicable laws. See "Environmental Matters."
BALLAST & LAMP RECYCLING
INDUSTRY BACKGROUND
FulCircle Recyclers, Inc. (d/b/a Full Circle) recycles and disposes fluorescent lighting ballasts of the type commonly found in office, industrial and institutional buildings. Prior to 1985, ballasts were manufactured using hazardous compounds, which created a need for special handling and disposal procedures when replacing ballasts or removing them at the end of their useful lives.
Polychlorinated biphenyls (commonly known as PCBs) were widely used before 1979 as insulators in electrical equipment such as capacitors, switches and voltage regulators. Virtually all fluorescent light ballasts manufactured before 1979 contain PCBs. PCBs have been shown to cause cancer as well as reproductive and developmental defects in laboratory animals. PCBs do not readily decompose when released into the environment. Instead, they accumulate in plants and animals, working their way up the food chain. Between 1979 and 1985, certain ballasts were manufactured with di (2-ethylhexy) phthalate (DEHP) in place of PCBs. DEHP has since been identified as a probable human carcinogen and is listed as a hazardous substance under the Superfund laws; however, it is not a hazardous waste under the Resource Conservation and Recovery Act (RCRA) when discarded inside a ballast. Its use in ballast manufacturing has been discontinued.
Demand for Full Circle's services is triggered when facility owners replace fluorescent light fixtures with more energy-efficient fixtures. In recent years, lighting manufacturers have made dramatic improvements in the energy efficiency of fluorescent lighting fixtures. Using electronic ballasts and new types of fluorescent lamps, the new fixtures are able to achieve comparable illumination with approximately 25 to 50% less electrical energy than required by older fixtures. Consequently, some light fixture replacements have been motivated by utility sponsored "Demand Side Management" (DSM) programs, where facility owners are given economic incentives to install replacements.
BALLAST RECYCLING
Full Circle recycles and disposes of the hazardous wastes contained in used ballasts. Full Circle has developed a unique "de-manufacturing" process that efficiently separates the ballast into recyclable products and hazardous waste. Both PCBs and DEHP are interchangeably de-manufactured using the same plant and processes.As part of its service, Full Circle subcontracts with transportation companies to pick up ballasts from customers. At the point of receipt, ballasts have already been packaged in sealed drums and are ready for de-manufacturing. The ballasts are transported by truck to the Full Circle facility in New York. At the plant, drums of ballasts are weighed, stored and de-manufactured on its processing lines.
The disposal process separates the components, recycles all materials that can be economically recovered and repackages volume reduced hazardous elements for safe destruction. Over 75% of the weight of a ballast is copper, steel and aluminum, which is recovered and sold to scrap metals dealers. Only the PCB contaminated materials are sent off-site to an incinerator of PCB waste or to a chemical waste landfill, depending on the customer's preference.
Full Circle has PCB disposal contracts with two major companies, which collectively control four PCB incinerators. The Company also has a PCB disposal contract with two major PCB landfill operators.
LAMP RECYCLING
Full Circle also manages the disposal of fluorescent lamps, which will be regulated under The Universal Waste Rule on January 6, 2000. Management does not expect any adverse effect from these regulations. Currently the company utilizes a national network of "strategic alliances" for the processing of this material.
MARKETING AND SALES
In addition to Full Circle's New York operation, it has regional sales offices located across the country. Many of the sales persons have significant prior experience in selling hazardous waste disposal services or selling lighting products. Sales persons are responsible for sales, marketing and customer service in their respective territories.
Full Circle has extensive educational and promotional materials, which are distributed through trade journals, targeted mailing campaigns and conferences. Full Circle's sales personnel market at over 30 conferences and trade shows each year. Full Circle also advertises in many magazines targeted at the lighting, DSM, electric utility, facility management, waste disposal and environmental remediation industries.
COMPETITION
The market for Full Circle's services is highly competitive. Full Circle competes with numerous well-established companies which market ballast recycling services. Full Circle believes that it competes on the basis of price, reliability and reputation and that it is one of the largest companies in its industry.
GOVERNMENT REGULATION
TSCA
The Toxic Substance Control Act, or (TSCA) specifically directs EPA to regulate the marking, disposal, manufacturing, processing, and distribution in commerce, and use of Polychlorinated Biphenyl (PCBs). Since 1978, EPA has promulgated numerous rules addressing all aspects of the lifecycle of PCBs.
Recent changes in federal regulations known as, The PCB MEGA Rule makes the disposal of ballasts more stringent than before. The MEGA Rule preamble states that a generator should either test these ballasts for PCB concentration or assume the ballasts contain PCBs at greater than 50 ppm. Ballasts which contain potting material that is contaminated with over 50 ppm (which is the regulatory threshold) must be disposed of at a facility permitted for the Commercial Storage of PCB waste by the Federal EPA. Presently, there are only four facilities in the United States that have this approval including Full Circle. The company believes that this relatively new regulation offers a distinct competitive advantage.
CERCLA
The Comprehensive Environmental Compliance and Liability Act of 1980, or CERCLA (also known as the Superfund law) also regulates PCB's. Under this law any release or even threat of release of a hazardous substance constitutes a "CERCLA release", and requires immediate cleanup action and notification by all Responsible Parties, as defined. As a result, discarding over 16 ballasts in a landfill, which is equal to an aggregate of over one pound of PCB's, technically creates a Superfund Liability because there is a threat that the ballasts could rupture in the landfill and leak into the soil.
UWR
The Universal Waste Rule (UWR) was adopted in May 1995 (40 CFR Part 273). At that time, tires, pesticides and certain mercury containing devices were covered under this law. On July 6, 1999, the EPA included fluorescent lamps in the UWR (the law goes into effect January 6, 2000). This rule is designed to reduce the amount of hazardous waste disposed of in municipal solid waste, landfills, and encourages recycling and proper disposal of fluorescent lamps. It also reduces the regulatory burden on businesses that generate these wastes.
The company believes this new regulation will significantly increase the number of lamps that are recycled each year, and thus increasing the total market for this service.
THE COMPANY
CONSULTING AGREEMENT
In September 1998, the Company appointed Colmen Capital Advisors, Inc. ("Colmen") to provide executive management, investment banking, and advisory services on an exclusive basis. Colmen, located in King of Prussia, Pennsylvania, is a private investment banking firm that provides advisory services in business turnarounds, financing, mergers, acquisitions, and strategic planning. Under the terms of the agreement, Colmen was providing investment banking and consulting services.
On June 28, 1999 the Company reached an agreement on the termination of the contract with Colmen. Under the agreement, the Company paid Colmen a termination fee of $ 330,000, Colmen forfeited all Company stock options previously granted to them, Mr. Peter Colella, Colmen's Managing Partner, and Mr. James Hellauer, its Executive Director, resigned from EVTC's Board of Directors and Mr. Hellauer resigned as President and Chief Executive Officer of EVTC. Mr. George Cannan, EVTC's Chairman of the Board, assumed Mr. Hellauer's responsibilities as Chief Executive Officer.
RISK FACTORS
On May 17, 1999 the Company received notification from the Nasdaq Listing Qualifications Panel (the "Panel") informing the Company of the Panels decision to move trading of the Company's common stock from the National Market to the Nasdaq Small Cap Market, subject to successfully completing the required application and review process. The Panel determined that the Company had evidenced compliance with the minimum bid price requirement of $1.00 per share; however, the Panel was of the opinion that the Company failed to present a definitive plan which would enable it to evidence compliance with the $5,000,000 minimum market value of public float requirement for continued listing on the Nasdaq National Market within a reasonable period of time. The Panel noted that the Company appears to comply with all requirements for continued listing on The Nasdaq Small Cap Market, and expressed confidence in the Company's ability to sustain compliance with those requirements over the long term, particularly given the Company's improved results from operations. The Company successfully completed the application and review process, demonstrating compliance with all requirements for inclusion on the Nasdaq SmallCap Market and effective with the open of business on May 20, 1999, the Company's common stock began trading on to the Nasdaq SmallCap Market. The Company is confident of its ability to comply with all requirements for continued listing on the Nasdaq Small Cap Market, however if the Company were to fail to meet the requirements for continued listing it could have a materially adverse effect on the price of the Company's common stock.
The Company has financed its working capital requirements through operating cash flow and a working capital revolving line of credit obtained from a bank (the "Credit Facility"). As of September 30, 1999, $9,742,380 was outstanding under the Credit Facility. The Credit Facility was due on January 15, 1999. On April 7, 1999 the Company received a Forbearance Letter and new short term General Loan and Collateral Agreement from the bank. Under the terms of the Forbearance Letter and General Loan Agreement, the bank gave the Company until August 31, 1999 to secure long term financing from a different lender and provided additional financing up to $1,500,000 subject to the Company meeting specific pay down obligations, loan covenants and issuance of stock warrants to the bank. On September 14, 1999 the Company received a letter from the bank agreeing to extend the term of the note on a month to month basis while the Company completed its refinancing. At September 30, 1999, the Company was in negotiations with several lenders to provide the Company with long term financing. Subsequent to September 30, 1999, the Company secured and closed on a three-year $12,300,000 Long-Term Revolving Credit Facility agreement with The CIT Group/Business Credit.
RESEARCH AND DEVELOPMENT
The Company's management places emphasis on obtaining the technology and developing the products to achieve superiority in its industry. The Company employs a full-time chemist to administer such projects. However, research and development costs to date have not been material.
During the fiscal year ended September 30, 1996, the Company entered into a 50% joint venture with an unaffiliated company. The venture's name is Liberty Technology International, Inc. ("LTI"). LTI developed and constructed a refrigeration separation plant that provides a cost effective and environmentally sound alternative to total destruction of mixed refrigerants. At September 30, 1999, 1998 and 1997, the Company has advanced/invested approximately $402,604, $547,786 and $669,000, respectively, in LTI, which is included in other assets in the accompanying consolidated balance sheets. LTI's operations commenced in January of 1997. LTI is one of the largest refrigerant separation facilities in the country.
The Company reports the earnings and losses related to the aforementioned ventures under the equity method of accounting. To date, the income related to these joint ventures have not been material to the Company's financial statements.
QUALITY ASSURANCE & ENVIRONMENTAL COMPLIANCE
The Company utilizes in-house quality and regulatory compliance control procedures. The Company maintains its own in-house analytical testing laboratory to assure that reclaimed refrigerants comply with ARI purity standards and employs portable testing equipment when performing on-site services to verify certain quality specifications. The Company employs two full time employees dedicated to quality control and regulatory compliance and provides extensive quality control and regulatory compliance training to all operations personnel. In addition, management is significantly involved in regulatory compliance efforts.
PROPRIETARY PROTECTION
The Company principally relies on a combination of trade secret laws and employee and third party non-disclosure agreements to protect its products and technology. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such technologies or, despite the precautions taken by the Company, obtain access to the Company's know-how, concepts, ideas and documentation. Since the Company believes that proprietary information is important to its business, failure to protect its trade secrets could have a material adverse effect on the Company.
TRADEMARKS
The Company has several registered and/or pending trademarks that it uses to market its products.
INSURANCE
The Company carries insurance coverage which it considers sufficient to protect the Company's assets and operations. The Company currently maintains general commercial liability insurance for claims up to $1,000,000 per occurrence and $2,000,000 in the aggregate. There can be no assurance that such insurance will be sufficient to cover potential claims or that an adequate level of coverage will be available in the future at a reasonable cost. The Company is self-insured for product liability in connection with the marketing and sale of its refrigerants and liquidation sales of recycling and recovery equipment. No material losses have occurred.
The Company attempts to operate in a professional and prudent manner and to reduce its liability risks through specific risk management efforts, including employee training. Nevertheless, a partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, would have a material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory and common-law liability for environmental damage and personal injury. The Company, and in certain instances, its officers, directors and employees, may be subject to claims arising from the Company's on-site or off-site services, including the improper release, spillage, misuse or mishandling of refrigerants classified as hazardous or non-hazardous substances or materials. The Company may be strictly liable for damages, which could be substantial, regardless of whether it exercised due care and complied with all relevant laws and regulations. The Company does not maintain environmental impairment insurance. There can be no assurance that the Company will not face claims resulting in substantial liability for which the Company is uninsured, that hazardous substances or materials are not or will not be present at the Company's facilities, or that the Company will not incur liability for environmental impairment or personal injury (See "Legal Proceedings").
ENVIRONMENTAL MATTERS
The Company's refrigerant operations require the handling, storage and transportation of refrigerants, which are classified as hazardous substances under applicable laws. The Company does not maintain environmental impairment insurance. There can be no assurance that the Company will not incur environmental liability arising out of the use of hazardous substances. The use of hazardous substances is subject to extensive federal, state and local law and substantial regulation under these laws by governmental agencies, including the EPA, the Occupational Safety and Health Administration, various state agencies and county and local authorities acting in conjunction with federal and state authorities. Among other things, these regulatory bodies impose requirements to control air, soil and water pollution, to protect against occupational exposure to such chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous chemicals and substances.
The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that facilities that treat, store or dispose of hazardous wastes comply with certain operating standards. Before transportation and disposal of hazardous wastes off-site, generators of such waste must package and label their shipments consistent with detailed regulations and prepare a manifest identifying the material and stating its destination. The transporter must deliver the hazardous waste in accordance with the manifest to a facility with an appropriate RCRA permit. Under RCRA, impurities removed from refrigerants consisting of oils mixed with water and other contaminants are not presumed to be hazardous waste. The Company believes that it is in substantial compliance with these regulations.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the annual reporting of Emergency and Hazardous Chemical Inventories (Tier II reports) to the various states in which the Company operates and to file annual Toxic Chemical Release Inventory Forms with the EPA. The Company believes that it is in substantial compliance with these regulations.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), establishes liability for clean-up costs and environmental damages to current and former facility owners and operators, as well as persons who transport or arrange for transportation of hazardous substances. Almost all states, including New York, have similar statutes regulating and handling and storage of hazardous substances, hazardous wastes and non-hazardous wastes. Many such statutes impose requirements, which are more stringent than their federal counterparts. The Company could be subject to substantial liability under these statutes to private parties and government entities, in some instances without any fault, for fines, remediation costs and environmental damage, as a result of the mishandling, release, or existence of any hazardous substances at any of its facilities.
The Occupational Safety and Health Act of 1970 mandates requirements for safe work places for employees and special procedures and measures for the handling of certain hazardous and toxic substances. State laws, in certain circumstances, mandate additional measures for facilities handling specified materials.
The Company believes that it is in substantial compliance with all material federal, state and local laws and regulations governing its operations and has obtained all material licenses and permits required for the operation of its business. Amendments to statutes and regulations and/or the Company's expanded level of operations in the future could require the Company to continually modify or alter methods of operations at costs which could be substantial and could subject the Company to increased regulation. There can be no assurance that the Company will be able, for financial or other reasons, to comply with applicable laws and regulations. Failure by the Company to comply with applicable laws and regulations could subject the Company to civil remedies, including fines and injunctions, as well as potential criminal sanctions, which could have a material adverse effect on the Company.
EMPLOYEES
At September 30, 1999, the Company employed approximately 132 persons, including its executive officers. None of the Company's employees are represented by a union. The Company believes its employee relations are good.
ACQUISITION
On October 15, 1999, the Company announced that it had signed a letter of intent to acquire afreegift!com, inc., ("afreegift") an Oak Brook, Illinois based internet direct marketing company.
On December 22, 1999, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with afreegift, a Nevada corporation, Sakoff Enterprises, Inc., a Delaware corporation (the "Shareholder"), and Scott L. Sakoff ("Sakoff"). Under the Agreement, afreegift will merge into e solutions marketing, inc., a new wholly owned subsidiary formed by the Company in December of 1999 ("e solutions") in exchange for common stock of the Company. The purpose of the merger is to diversify the Company's business segments and to take advantage of the burgeoning e-commerce industry. The transaction is intended to qualify as a tax-free reorganization and will be accounted for using the purchase method of accounting.
The consummation of the transactions contemplated by the Agreement is subject to approval by the Company's stockholders. An annual meeting of the Company's stockholders will be called for February 28, 2000 for the purpose of seeking ratification and approval of the Agreement and the transactions contemplated thereby. Subject to stockholder approval and satisfaction of certain pre-closing conditions, the Shareholder will be entitled to receive at the closing a number of shares of the Company's common stock to be agreed upon prior to the closing and the right to receive additional shares of the Company's common stock (the "Earn-Out Shares") upon satisfaction of certain financial performance objectives. In no event shall the number of shares issued at closing and Earn-Out Shares exceed 8,000,000.
If the merger is consummated, the Company expects to expand its board of directors to seven members. The Shareholder will have the right to three seats on the Company's board so long as the subsidiary meets specified financial performance objectives. Also, at the closing of the merger, Sakoff will enter into an employment agreement with e solutions under which he will serve as President and Chief Executive Officer of e solutions. The employment agreement is for a term of 1 year. The Company is obligated to renew the employment agreement for an additional one year term upon e solutions meeting certain performance goals.
Pending shareholder action on the merger, the Company is obligated to lend $1,000,000 to afreegift at times specified in a funding agreement. In exchange, the Company will receive a note from afreegift secured by all of its assets. The note is to be repaid in a year and bears interest at 9%.
The Company intends to launch its first permission marketing web site in the Spring of 2000. The Company expects to formally close on the transaction in the quarter ending March 31, 2000.
For additional information on this acquisition see the Company's current report on Form 8K that will be filed with the Securities and Exchange Commission on or before January 6, 2000.
Except for the historical information contained herein, the matters discussed in this Acquisition section are forward-looking statements that involve risks and uncertainties. The forward-looking statements in this section are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of factors, including without limitation the market and the pricing for direct marketing Internet services, operating costs, the presence of competitors with greater resources, the Company's need for liquidity, and other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies twelve locations in the United States, all of which, with one exception, are leased from third parties. The following summarizes the location, square footage of the building or leased space, and use of each facility. The Company believes that these facilities are adequate for its existing and near-term future needs and that its facilities are adequate for its current and proximate future needs.
Square Location Footage Use -------- ------- ---
Lakewood, NJ 21,000 Refrigerant packaging and distribution center
Bronx, NY 13,500 Ballast recycling
Keller, TX 55,000 Refrigerant, recovery equipment storage and distribution center.
Hurst, TX 26,000 Reclamation and refrigerant storage facility; Executive offices
Houston, TX 1,500 Recovery, storage and distribution center
Chicago, IL 15,000 Recovery, storage and distribution center
Livermore, CA 8,700 Recovery, storage and distribution center
Orlando, FL 3,540 Recovery, storage and distribution center
Kapolei, HI 5,000 Recovery, storage and distribution center
Clearwater, FL, 2,000 Recovery, storage and distribution center
Louisville, KY 2,000 Recovery, storage and distribution center
Wheatridge, CO 2,000 Recovery, storage and distribution center
The Company leases the 21,000 square foot building in Lakewood, NJ from George Cannan, Sr., the Company's founder, Chairman and principal stockholder. The Company pays a gross rental of $10,000 per month pursuant to a 5-year lease agreement with George Cannan through December 31, 2004. The Company believes that the terms of this lease are at least as favorable as it could obtain from an unaffiliated third party. See Item 13 - Certain Relationships and Related Party Transactions.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or involving the Company which, if adversely determined, would result in a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq SmallCap Market System under the symbol "EVTC". The following table sets forth, for the period since October 1, 1997, the high and low prices for the Common Stock as reported by NASDAQ. The NASDAQ quotations represent quotations between dealers without adjustments for retail markups, markdowns or commissions and may not necessarily represent actual transactions.
COMMON STOCK HIGH LOW ------------ ---- --- YEAR ENDED SEPTEMBER 30, 1999
First Quarter $ 1 3/4 $ 3/8
Second Quarter 1 1/4
Third Quarter 3 5/16 1/2
Fourth Quarter 2 1/16 7/8
YEAR ENDED SEPTEMBER 30, 1998
First Quarter $ 5/8 $ 6
Second Quarter 7 1/4 5 5/8
Third Quarter 7 3/8 5 1/4
Fourth Quarter 5 5/8 1 1/4
As of September 30, 1999, there were 39 record holders of the Company's Common Stock. The Company believes that there are in excess of 1,000 beneficial owners of the Company's Common Stock.
On May 20,1999, the Company's securities began trading on the Nasdaq SmallCap Market. The Company is currently processing an application to again be listed on the Nasdaq National Market System.
The Company has not paid any cash dividends on its Common Stock and does not currently intend to declare or pay cash dividends in the foreseeable future. The Company intends to retain any earnings that may be generated to provide funds for the operation and expansion of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for each of the five fiscal years ended September 30, 1999. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and related notes thereto included elsewhere in this Report.
During July 1998, the Company adopted a plan to discontinue its Recycling and Recovery Equipment Business. See Note 8 of Notes to the Consolidated Financial Statements. The Statements of Operations Data above have been recast to exclude such discontinued operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained herein which are not historical facts are forward looking statements that involve risks and uncertainties, including but not limited to, changes in the markets for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of, refrigerants), regulatory and economic factors, increased competition, the nature of supplier or customer arrangements which become available to the Company in the future, adverse weather conditions, technological obsolescence and potential environmental liability. The Company's actual results may differ materially from the results discussed in any forward-looking statement.
The Company's fiscal year-end is September 30.
RESULTS OF CONTINUING OPERATIONS
Year ended September 30, 1999 compared to year ended September 30, 1998:
Net sales for continuing operations for the year ended September 30, 1999 were $38,731,683, an increase of $248,513 or .7%. The increase in net sales is primarily attributed to the increase in sales of refrigerant products, resulting from stronger demand for R-22 refrigerant and R-134a refrigerant. Although there was a strong demand for R-134a, which is the primary replacement for R-12, sales were significantly limited by the industry wide shortage of the product. During 1999 its suppliers placed the Company under a tight allocation of R-134a. However, the shortage of R-134a available for sale by the Company was partially off set by the increase in the average selling price. Sales of refrigerant R-12 continue to provide a significant portion of the Company's revenues, although its relative percentage continues to decline. This decline in R-12 sales is primarily attributed to the significant increase in the demand for R-134a and the Company's increasing emphasis on refrigerant reclaiming and commercial HVAC refrigerant sales. The Company's ability to maintain its current level of R-12, R-134a and R-22 sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerant for its supply of these refrigerants and historically has purchased from a number of manufacturers and suppliers. The Company's refrigerant reclaiming and separation activities will continue to serve as an important source of R-12, as well as other CFC and non-CFC refrigerants. Additionally, ballast-recycling sales decreased by 4.2% primarily due to a decline in scrap metal revenues caused by the worldwide decline in scrap metal pricing. Revenues from ballast-recycling services were slightly higher for the year.
Cost of sales for continuing operations for the year ended September 30, 1999 was $32,361,928, a decrease of 9.3% from the $35,669,958 reported in fiscal year 1998. Continuing operations costs of sales were 83.6% of continuing operations revenues, a decrease from 92.6% for fiscal year 1998. The decrease is primarily attributable to sales of R-12, R-134a and R-22 at higher margins for fiscal year 1999. Additionally, cost of sales for ballast recycling decreased due to improved productivity and increased ballast-recycling service margins. In fiscal year 1998, the Company was forced to sell R-12 below cost to meet market-pricing set by the automotive original equipment manufacturers.
Selling, general and administrative expenses related to continuing operations for 1999 decreased to $5,263,936, a decrease of $2,594,005 or 33.0% from $7,857,941 reported in fiscal 1998. The decrease is primarily attributable to the Company's cost reduction program initiated late in the first quarter that, resulted in reduced marketing, distribution, and administrative expenses related to it's refrigerant reclaiming subsidiary. Additionally, the Company's reserve for bad debt as of September 30, 1999 was reduced by $820,000 due to a partial recovery on a trade receivable and a change in the estimated net realizable value of the note that was in default at September 30, 1998 and fully reserved in fiscal 1998. Management revised its estimate of the collectibility based on subsequent cash received of $500,000 and estimated value of $320,000 for underlying collateral. The recovery included cash payments, common stock shares assigned to the Company and security interests in real property.
Interest expense in fiscal year 1999 was $1,014,677, a decrease of $73,564 or 6.8% from the prior year. This is primarily attributed to a decreased 1999 average line of credit advance balance from 1998.
The Company recognized income from continuing operations of $469,608 for 1999, an increase of $5,657,349 over last years loss of $5,187,741. The increased profitability was primarily attributed to the Company's cost reduction program resulting in reduced marketing, distribution and administrative expenses, the 126% improvement in gross margin, the partial recovery of a certain trade receivable in the amount of $820,000, and the recognition of $300,000 in Federal income tax benefit related to the Company's $7,784,601 federal tax net operating loss carryforward. The increase in profitability was offset by a $350,691 inventory theft at one of the Company's branch locations and $474,751 in payments to Colmen, primarily related to the termination of their consulting contract and $194,091 in fees and charges paid to the Company's former bank to extend the Credit Facility.
In July 1998, the Company's Board of Directors adopted a plan to discontinue its recycling and recovery equipment segment. The Company initiated a liquidation program to sell all assets of the segment. Management intended for the disposal to be completed by June 30, 1999 (the phase-out period) however, during fiscal 1999 those estimates were revised to June 30, 2000. In fiscal 1999, the Company had liquidation revenues of $ 1,245,325 and incurred direct costs of $425,366. Based on the past years operations of the discontinued segment, management has revised its net realizable values of assets at $1,098,760 with direct costs estimated at $304,209 to continue the liquidation process through June 30, 2000. The Company did not incur any additional expenses or charges during the year ended September 30, 1999 related to discontinued operations, and based on current estimates, the Company does not foresee incurring any material charges related to the discontinuation of this segment in fiscal 2000.
Year ended September 30, 1998 compared to year ended September 30, 1997:
Net sales for continuing operations for the year ended September 30, 1998 were $38,483,170, a decrease of $16,613,784, or 30.2%. The decrease in net sales is primarily attributed to a 31.8% decrease in sales of refrigerant products, resulting from weak demand and pricing for refrigerant R-12 and other CFC refrigerants. The weak demand during fiscal year 1998 is primarily due to the relatively mild climate in the Western and Northeast portions of the United States during summer of 1998 and customer inventory carry over from the mild summer of 1997. The weak demand coupled with the fact that several large automotive original equipment manufacturers were selling large quantities of refrigerant R-12 into the market resulted in weak pricing during fiscal year 1998. Additionally, ballast-recycling sales decreased 10.9%, primarily due to a turnover in sales personnel.
Sales of refrigerant R-12 continue to provide a significant portion of the Company's revenues although its relative percentage is declining. The decline in R-12 sales is primarily attributed to the significant increase in the demand for R-134a, the replacement for R-12, and the Company's increasing emphasis on refrigerant reclaiming and commercial refrigerant sales. The Company's ability to maintain its current level of R-12 sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerant for its supply of R-12 or R-134a refrigerant and historically has purchased from a number of manufacturers and suppliers. The Company's refrigerant reclaiming and separation activities will continue to serve as an important source of R-12, as well as other CFC refrigerants.
Cost of sales for continuing operations for the year ended September 30, 1998 was $35,669,958, a decrease of 16.7% from the $42,841,492 reported in fiscal year 1997. Continuing operations costs of sales were 92.6% of continuing operations revenues, an increase from 77.8% for fiscal year 1997. The increase is primarily attributable to sales of refrigerant R-12 below cost during fiscal year 1998. The Company was forced to sell R-12 below cost to meet market pricing set by the automotive original equipment manufacturers. In addition, cost of sales was impacted by a $600,000 lower of cost or market writedown on refrigerant R-12 inventory at year-end. The Company has substantially enhanced its access to low cost R-12 through its reclamation and separation, and did not have a reoccurrence of this problem in 1999.
Selling, general, and administrative expenses related to continuing operations for 1998 increased to $7,857,941, an increase of $1,960,230 or 33.2% from $5,897,711 reported in prior year. This increase resulted from reserving approximately $1,300,000 for potential bad debts, $200,000 in increased legal fees and $183,000 related to the TTL investment. The Company's reserve for bad debt was primarily attributed to an allowance placed on a note receivable that was in default in the amount of $1,236,000 at September 30, 1998. In addition, the increase is attributed to sales and marketing expenses associated with the expansion of the Company's reclaiming operations.
Interest expense in fiscal year 1998 was $1,088,241, an increase of $79,133 or 7.8% from prior year. This is primarily attributed to an increased 1998 average line of credit advance balance from 1997.
The Company recognized a loss from continuing operations of $5,187,741 for 1998. The loss is primarily attributed to the weak demand and pricing for refrigerant R-12, the lower cost or market write down of R-12, write off of investment and bad debts, and increased legal fees, as mentioned above. The Company does not anticipate any of these items recurring in future years. In 1997, the Company reported $3,261,384 in continuing operations income.
In July 1998, the Company's Board of Directors adopted a plan to discontinue its recycling and recovery equipment segment. The Company has initiated a liquidation program to sell all assets of the segment. Management intended for the disposal of the segment to be completed by June 30, 1999 (the Phase-Out Period) however, during fiscal 1999 those estimates were revised as discussed above. The Company recognized a loss from discontinued operations of $1,024,840 in fiscal year 1998. The Company recognized a 1998 loss of $5,273,005 related to the disposal of the discontinued segment. The disposal loss is composed of an approximate $4,800,000 write down of inventory to net realizable value and estimated Phase-Out Period costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $5,656,391 at September 30, 1999 compared to $4,103,766 at September 30, 1998, an increase of $1,552,625. The increase in working capital is primarily attributable to the increase in accounts receivable due to a 32% increase in sales during the fourth quarter of 1999 versus sales during the fourth quarter of 1998 and the partial recovery of $820,000 related to the trade receivable discussed above.
The Company relies on its bank debt as a source of funds for operations. The Company has financed its working capital requirements through operating cash flow and a working capital revolving line of credit obtained from a bank (the "Credit Facility"). At September 30, 1999, the amount outstanding under the Credit Facility was $9,742,380 a decrease of $2,250,000 from the line of credit advance balance at September 30, 1998. Borrowings outstanding under the Credit Facility bear interest at the bank's prime rate plus 1.5 %. The Credit Facility is secured by eligible accounts receivable, eligible inventory and property and equipment.
The Credit Facility was due on January 15, 1999. On April 7, 1999 the Company received a Forbearance Letter and new short term General Loan and Collateral Agreement from the bank. Under the terms of the Forbearance Letter and General Loan agreement, the bank gave the Company until August 31,1999 to secure long term financing from a different lender and provided the Company with additional financing of up to $1,500,000, subject to the Company meeting specific pay down obligations, loan covenants and issuance of stock warrants to the bank. On September 14, 1999 the Company received a letter from the bank agreeing to extend the term of the note on a month to month basis while the Company completed its refinancing. At September 30, 1999, the Company was in negotiations with several lenders to provide the Company with long term financing.
Subsequent to September 30, 1999, the Company secured and closed on a three-year $12,300,000 long-term Revolving Credit Facility agreement with The CIT Group/Business Credit. The CIT Credit Facility provides up to $12,300,000 in financing based upon eligible accounts receivable, inventory and equipment ("CIT Facility"). Borrowings outstanding under the CIT Facility bear interest at an effective rate of prime plus .6%.
In connection with obtaining the CIT Facility, the Company incurred deferred loan costs of $296,929 that will be capitalized and amortized over the life of the CIT Facility.
As an incentive to the Company's former bank to extend the Credit Facility and issue a formal forbearance agreement while the Company sought alternative financing, the Company agreed to pay the bank cash fees of $44,091 and issue the bank warrants to purchase 300,000 shares of the Company's common stock at a price of $1.40 per share. The Company has agreed to register such warrants on Form S-3 with the Securities and Exchange Commission in January of 2000.
On July 28, 1999 the Company signed several stock subscription agreements to sell and issue restricted Section 144 common stock to several private investors. Proceeds from the sale of such stock will be used for working capital and to pay down debt outstanding under the Credit Facility. Subsequent to September 30, 1999 the entire amounts outstanding under such subscription agreements, $594,600, was collected by the Company in December 1999.
On October 1, 1999 the Company's board of directors voted to sell and issue up to one million shares of restricted Section 144 common stock to several private investors for the sole purpose of providing working capital and short term financing that would be required if the Company was successful in acquiring afreegift. The sell price of such stock was set at approximately 85% of the prior five-day average closing price at October 1, 1999 or $1.00 per share. With the signing of the formal agreement to purchase afreegift, on December 22, 1999. The Company is currently in the process of selling these shares.
Pending shareholder approval of the afreegift merger discussed above, the Company is obligated to lend $1,000,000 to afreegift at times specified in a funding agreement. In exchange, the Company will receive a note from afreegift secured by all of its assets. The note is to be repaid in a year and bears interest at 9%.
Net cash used in operating activities related to continuing operations was $247,270 for 1999 versus net cash provided of $4,846,191 for 1998. Net cash provided by operating activities related to discontinued operations was $325,710 for 1999 versus net cash used by discontinued operations of $799,412 in 1998.
Net cash used in continuing operations investing activities was $180,201 in 1999 and $331,558 in 1998. Net cash used by discontinued operations investing activities was $ - 0 - in fiscal year 1999 compared to $17,477 net cash used in 1998.
The net cash used in financing activities in 1999 of $2,250,000 reflects net payments on the Credit Facility compared to $1,507,620 in payments on the Credit Facility in 1998.
As of the date of this Report, other than as set forth in this Report, the Company has no material commitments for capital expenditures, research and development, or additional employees.
SEASONALITY
The Company's operating results vary from period to period as a result of weather conditions and the availability and price of refrigerant products (virgin and reclaimable). The Company's business has historically been seasonal in nature with peak sales of refrigerants occurring in the second and third fiscal quarters. Accordingly, the first and fourth fiscal quarters of the Company's operations have been characterized by inventory build-up and seasonal operating losses resulting in periodic operating cash flow short falls, which in the past necessitated loans from the Company's banks.
YEAR 2000
The Company has assessed the potential issues and costs associated with the year 2000 and believe that it has addressed such issues. The Company has implemented revisions to effect year 2000 compliance of all its accounting and operations systems. The Company has reviewed year 2000 compliance issues with its vendors, suppliers, and customers. At the present time, the Company believes that costs or consequences of unforeseen issues would not result in the occurrence of a material event or uncertainty reasonably likely to have a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
SFAS No. 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be recast. The Company adopted this statement in fiscal year 1999.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information". In February 1998 the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Post retirement Benefits." The Company adopted these statements in 1999. The adoption did not have a significant impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. We do not believe this will have a material effect on the operations. Implementation of this standard has recently been delayed by the FASB for a 12- month period through the issuance of SFAS No 137. "Accounting for Derivative Instruments and Hedging Activities - deferral of the effective date of FASB Statement No 133". The Company will now adopt SFAS 133 as required for its first quarterly filing of fiscal year 2001.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from the adverse changes in market rates and prices) to which the Company is exposed are interest rates on the Company's debt and short-term investment portfolios. The Company centrally manages its debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. The Company's investment portfolios consist of cash equivalents and short-term marketable securities; accordingly, the carrying amounts approximate market value. The Company's investments are not material to the financial position or performance of the Company.
Assuming year-end 1999 variable rate debt and investment levels, a one-point change in interest rates would impact net interest expense by less than $100,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Independent Auditors' Reports - BDO Seidman, LLP 22
Independent Auditors' Report - KPMG, LLP 23
Consolidated Balance Sheets - as of September 30, 1999 and 1998 24
Consolidated Statements of Operations and Comprehensive Income (Loss) - for each of the years ended September 30, 1999, 1998 and 1997 25
Consolidated Statements of Stockholders' Equity - for each of the years ended September 30, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows - for each of the years ended September 30, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
Schedule II - Valuation and Qualifying Accounts 43
INDEPENDENT AUDITORS' REPORT
The Board of Directors EVTC, Inc. Hurst, Texas
We have audited the accompanying consolidated balance sheet of EVTC, Inc. and subsidiaries as of September 30, 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the year ended September 30, 1999. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EVTC, Inc. and subsidiaries as of September 30, 1999, and the results of their operations and their cash flows for the year ended September 30, 1999 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP Dallas, Texas December 8, 1999, except for Notes 5 and 13, as to which the date is December 23, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors EVTC, Inc.:
We have audited the accompanying consolidated balance sheet of EVTC, Inc. and subsidiaries as of September 30, 1998, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended September 30, 1998. In connection with our audits of the consolidated financial statements, we also have audited the 1998 and 1997 data in the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EVTC, Inc. and subsidiaries as of September 30, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 1998 in conformity with generally accepted accounting principles. Also in our opinion, the 1998 and 1997 data in the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas January 5, 1999
EVTC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and 1998
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) NATURE OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
EVTC, Inc. (the "Company") was incorporated under the name "Environmental Technologies Corporation" under the laws of Delaware. In 1997, the Company changed its corporate name to "EVTC, Inc." but continues to trade and do business as "Environmental Technologies Corporation." The Company is primarily engaged in: the marketing and sale of refrigerants including dichlorofluoromethane (R-12) and tetrafluoroethane (R-134a)) and refrigerant reclaiming fluorescent light fixture ballasts and lamps (Ballast Recycling segment). In 1998, the Company discontinued its segment in the manufacture and distribution of refrigerant recycling and recovery equipment for automotive and commercial use (see note 8).
The Company's sales are highly seasonal in nature, as industry-wide refrigerant sales are related to weather temperatures, primarily in the warmer months. The Company's historical refrigerant sales have primarily come from the sale of R-12, a refrigerant that is a chlorofluorocarbon (CFC). As of January 1, 1996, however, CFC-based refrigerants can no longer be manufactured in the United States under current regulations. CFC replacement products, such as R-134a, are now readily available to the Company. Notwithstanding the cessation of a predictable manufactured supply of R-12, management believes it will have access to an adequate supply of R-12 through fiscal 2000. However, beyond fiscal 2000 the Company's access to R-12 is much less certain. Management believes R-134a sales will continue to offset the decline of R-12 sales in future periods.
During 1999 its suppliers placed the Company under a tight allocation of R-134a. The shortage of R-134a available for sale by the Company was partially off set by the increase in the average selling price of R-134a. The shortage of R-134a during the period was a result of several R-134a plants closing and the strong worldwide demand for the product. The Company believes that world wide production of R-134a in the future will be sufficient to fulfill demand and prevent significant future shortages of the product. The Company's ability to maintain its current level of R-12, R-134a and other refrigerant sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerants and historically has purchased from a number of manufacturers and suppliers. The Company's refrigerant reclaiming and separation activities will continue to serve as an important source of R-12, as well as other CFC and non-CFC refrigerants.
The Company's note payable to a bank was $ 9,742,380 at September 30, 1999. On April 7, 1999 the Company received a Forbearance Letter and new short term General Loan and Collateral Agreement from the bank. Under the terms of the Forbearance Letter and General Loan agreement, the bank gave the Company until August 31, 1999 to secure long term financing from a different lender and provided additional financing up to $1,500,000 subject to the Company meeting specific pay down obligations, loan covenants and issuance of stock warrants to the bank. On September 14, 1999 the Company received a letter from the bank agreeing to extend the term of the note on a month to month basis while the Company completed its refinancing.
Subsequent to September 30, 1999, the Company has secured a three-year loan agreement with The CIT Group/Business Credit ("CIT") which provides a $12,300,000 credit facility at a rate equivalent to the effective prime rate plus six tenths of one percent per annum. The CIT credit facility has various compliance covenants such as: the Company shall keep and maintain its books and records in accordance with generally accepted accounting principles, consistently applied; the Company will continue to have good and marketable title to all of the Collateral free and clear of all liens; the Company will maintain financially sound and reputable casualty insurance with respect to the Collateral; etc. The compliance covenants do not include covenants related to specific financial ratios.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of EVTC, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for its 50% ownership interest in a joint venture using the equity method.
(c) CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents and trade receivables. The Company considers such risk in placing its cash and cash equivalents in financial institutions and other instruments. Concentration of credit risk with respect to trade receivables is limited because of the large number of customers that make up the Company's customer base and their dispersion in various industries and across different geographies. The Company performs ongoing credit evaluations of its customers' financial condition. No single customer accounted for more than 10% of total net sales in fiscal 1999, 1998 or 1997.
(d) USE OF ESTIMATES
In conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare the Company's consolidated financial statements. Actual results could differ from these estimates.
(e) REVENUE RECOGNITION
Sales are generally recorded by the Company when products are shipped to customers or services are performed. Revenue from sales of recyclable scrap materials is recognized when shipped. Products shipped on consignment to customers are not included in sales.
Ballast recycling revenues are recognized upon the receipt and acceptance of waste material at its recycling facility in the Bronx, New York. Waste material disposal costs are accrued as the related revenues are recognized.
During the fourth quarter of fiscal 1999, the Company recorded a recovery of $820,000 to the allowance for bad debts and accounts receivable related to a certain refrigerant product account receivable that was fully reserved for in 1998. Management revised its estimate of the collectibility based on subsequent cash received and estimated value of the underlying collateral. The recovery included cash payments, common stock shares assigned to the Company and security interests in real property.
(f)CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents were $1,244,649 and $2,015,428 on September 30, 1999 and 1998, respectively, and consisted of short-term money market accounts.
(g) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the straight-line and declining balance methods over the estimated useful lives of the assets. Costs of maintenance and repairs are charged to expense when incurred.
(i)GOODWILL
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. Accumulated goodwill amortization was $ 237,285 and $188,070 at September 30, 1999 and 1998, respectively.
The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved.
(j)INCOME TAXES
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At September 30, 1999, the Company has net operating loss carryforwards for federal income tax purposes of $7,784,601 and recorded a $300,000 net deferred tax asset (as detailed in Note 7 to the Consolidated Financial Statements).
(k) INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The computations of basic and diluted earnings per share from continuing and discontinued operations for each year are based on the following numerators and denominators.
The numerator for continuing operations is income (loss) from continuing operations. The numerator for discontinued operations is the aggregate of loss from discontinued operations, net of income taxes, and loss on disposal of discontinued operations.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The denominator for continuing and discontinued operations is computed as follows:
1999 1998 1997 ---- ---- ----
Denominator for basic earnings per share-
Weighted average shares 4,989,719 4,989,719 5,040,398
Effect of dilutive securities: Employee stock options -- -- 29,973 Warrants 89,150 -- 10,506 Subscription Stock 69,788 ---------
Dilutive potential common shares 158,938 -- 40,479
Denominator for diluted earnings per share -
Weighted-average shares and assumed Conversions 5,148,657 4,989,719 5,080,877 ========= ========= =========
The following stock options and warrants are not included in the diluted earnings per share calculation since in each case the exercise price is greater than the average market price.
1999 1998 1997 ---- ---- ----
Employee stock options 98,000 283,500 62,000 Warrants 300,000 -- 33,750
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents, accounts receivable and accounts payable are reflected in the consolidated financial statements at their respective carrying values, which approximate fair values due to the short-term nature of these instruments. The carrying value of the Company's bank borrowings approximates fair value because such borrowings have variable rates of interest.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews for impairment long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.
(n) STOCK-BASED COMPENSATION
The Company accounts for stock based compensation in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation." SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price at the date of the grant over the amount an employee must pay to acquire the stock. Because the Company grants options to employees at a price equal to or plus 10% of the market price of the stock at the date, no compensation expense is recorded. The Company, as required, has provided pro forma disclosures of compensation expense as determined under the provisions of SFAS No. 123.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(o) CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.
(p) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
SFAS No. 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be recast. The Company adopted this statement in fiscal year 1999.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information". In February 1998 the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Post retirement Benefits." The Company adopted these statements in 1999. The adoption did not have a significant impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. We do not believe this will have a material effect on the operations. Implementation of this standard has recently been delayed by the FASB for a 12- month period through the issuance of SFAS No 137. "Accounting for Derivative Instruments and Hedging Activities - deferral of the effective date of FASB Statement No 133". The Company will now adopt SFAS 133 as required for its first quarterly filing of fiscal year 2001.
(2) INVENTORIES
Inventories at September 30, 1999 and 1998 consist of the following:
1999 1998 ---- ----
Raw materials $2,428,007 $3,644,095
Finished goods 4,377,485 3,592,345
Total inventories $6,805,492 $7,236,440 ========== ==========
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. During the fourth quarter of fiscal 1998, the Company recorded a charge of approximately $600,000 to write down refrigerant product inventories to estimated net realizable values.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at September 30, 1999 and 1998 is summarized as follows:
DEPRECIABLE LIVES 1999 1998
Machinery and equipment 2-10 years $ 3,776,735 $3,600,437 Office equipment 2-5 years 991,804 851,565 Vehicles 5 years 231,188 183,449 Leasehold improvements 2-5 years 174,910 170,067 ---------- ---------
5,174,637 4,805,518 Accumulated (3,773,601) (3,158,577) depreciation $ 1,401,036 $1,646,941 =========== ==========
Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or the lease term.
(4) INVESTMENTS IN JOINT VENTURES AND LOANS TO OFFICERS
During fiscal 1995, the Company entered into a 50% joint venture (Transformation Technologies, Ltd. (TTL)) with two unaffiliated individuals to research the applicability of transforming mixed or contaminated refrigerants (defined as a hazardous substance) into a useful by-product. At September 30, 1997, the Company had advanced/invested approximately $183,000 in the TTL joint venture. The investment was written-off in the fourth quarter of fiscal 1998 as the Company determined there was substantial uncertainty regarding the realization of this investment.
The Company entered into a 50% joint venture (Liberty Technology International, Inc. (LTI)), with an unaffiliated company. LTI constructed a refrigeration separation plant that provides an alternative to total destruction of mixed refrigerants.
At September 30, 1999 and 1998, the Company's investment in LTI was approximately $403,000 and $548,000, respectively. LTI's operations commenced in fiscal 1997.
The Company's share of net income (loss) from the joint ventures was not material to the Company's results from operations for any of the years presented.
Due from officer at September 30,1999 and 1998 represents advances to an executive officer of the Company. The non-interest-bearing advance was converted to an interest-bearing, secured note (7% at September 30, 1999) during fiscal 1999.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NOTE PAYABLE
At September 30, 1999 and 1998, the note payable consists of a secured line of credit in the aggregate available amount of $13,500,000 with a bank. The balances outstanding under the line of credit at September 30, 1999 and 1998 were $9,742,380 and $11,992,380, respectively. In fiscal 1999, borrowings bore interest at the bank's prime rate plus 1.5% (9.75% at September 30, 1999). At September 30, 1999 the balance outstanding under the line of credit was below eligible security by $1,316,483. In fiscal 1998, borrowings bore interest at the bank's prime rate or LIBOR plus 1.75%. Borrowings outstanding at September 30, 1998 were at the bank's prime rate (8.25%). The line of credit was secured by eligible accounts receivable, eligible inventory and property and equipment. At September 30, 1998 the balance outstanding under the line of credit exceeded eligible security by $192,583. The line of credit was due on January 15, 1999. The Company received a non-binding verbal agreement from the bank to extend the due date for 120 days. In April 1999 the Company received a Forbearance Letter and new General Loan and Collateral Agreement from the bank, which the Company executed. The loan agreement provided a limited amount of additional financing up to $1,500,000 subject to the Company meeting specific pay down obligations, loan covenants and issuance of stock warrants to the bank. As an inducement for the bank to extend the Credit Facility and issue the Company a formal Forbearance Letter while the Company sought alternative financing, the Company agreed to pay the bank cash fees of $44,091 and issue the bank warrants to purchase 300,000 shares of the Company's common stock at a price of $1.40 per share. The Company has agreed to register such warrants on Form S-3 with the Securities and Exchange Commission in January of 2000.
Subsequent to September 30, 1999, the Company has secured a three-year loan agreement with CIT which provides a $12,300,000 credit facility ("CIT credit facility") at a rate equivalent to the effective prime rate plus six tenths of one percent per annum. The CIT credit facility is secured by eligible accounts receivable, eligible inventory and property and equipment.
(6) CASH FLOWS
Cash paid during fiscal 1999, 1998 and 1997 for interest and income taxes is as follows:
1999 1998 1997 ---- ---- ----
Interest $1,014,677 $1,088,241 $1,011,233 ========== ========== ==========
Income taxes $ 25,014 $ 261,097 $1,045,584 ========= =========== ==========
During fiscal 1999 the Company recorded a receivable for subscribed stock totaling $594,600. This amount was received in December 1999. Also, the Company recorded an unrealized gain on stock securities of $54,460 in 1999.
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended September 30, 1999, 1998 and 1997 is allocated as follows:
1999 1998 1997 ---- ---- ----
Income from continuing operations $ (300,000) $(1,005,858) $ 2,116,000
Discontinued operations - loss from Discontinued operations --- --- (1,219,000) ---------- ------------ ----------- (300,000) (1,005,858) 897,000 ========== ============ ===========
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of income tax expense (benefit) from continuing operations for the years ended September 30, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ----
Current: Federal $ ------ $ (1,677,451) $2,129,300 State ------ 60,000 426,000 ---------- ------------ ----------- ------ (1,617,451) 2,555,300
Deferred:
Federal (252,000) 587,354 (434,900) State (48,000) 24,239 (4,400) ---------- ----------- ---------- $(300,000) 611,593 (439,300) ---------- ----------- ----------
$(300,000) $(1,005,858) 2,116,000 ========= =========== =========
Income tax expense (benefit) attributable to continuing operations for the years ended September 30, 1999, 1998 and 1997 differed from the expected income tax expense (computed by applying the U.S. Federal income tax rate to income (loss) from continuing operations before income taxes) as a result of the following:
1999 1998 1997 ---- ---- ----
Computed "expected" income
Tax expense (benefit) $ 57,667 $(2,105,823) $1,828,311 State income taxes, net of Federal benefit (31,968) 55,598 278,256 Change in deferred tax net asset Valuation allowance (378,532) 935,679 -- Other 52,833 108,688 9,433 ---------- ----------- ---------- (300,000) (1,005,858) $2,116,00 ========== =========== ==========
The temporary differences that give rise to a significant portion of deferred tax assets and liabilities (continuing and discontinued operations) as of September 30, 1999 and 1998 are as follows:
Deferred tax assets:
Allowance for bad debts $ 381,912 $ 656,731 Inventory reserve --- 1,997,957 Net operating loss carryforwards 2,646,764 272,777 Plant and equipment --- 13,385 Other 11,990 109,415 --------- ---------
Gross deferred tax assets 3,040,666 3,050,265 Valuation allowance (2,655,762) (3,034,294) ----------- ---------- Deferred tax assets - net of valutaion allowance 384,904 15,971 ----------- ----------
Deferred tax liabilities - Plant & Equipment 61,900
Other 23,004 15,971 ----------- ---------- Gross Deferred Tax Liabilities 84,904 ---- ----------- ---------- Net deferred tax assets 300,000 ---- =========== ==========
Increase in the valuation allowance for 1998 is allocated $935,679 to income tax benefit from continuing operations and $2,098,615 to income tax benefit from discontinued operations.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The increase in the valuation allowance for deferred tax assets as of September 30, 1999 was $2,655,762. The net change in the total valuation allowance for the year ended September 30, 1999 was a decrease of $378,532. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the prior year loss and the unpredictable nature of the markets, the Company operates in, Management recorded a valuation allowance of $2,655,762 at September 30, 1999 for the portion of the deferred tax asset and Net Operating Losses not expected to be realized in fiscal 2000.
At September 30, 1999, the Company has net operating loss carryforwards for federal income tax purposes of $7,784,601which are available to offset future federal taxable income through 2019.
(8) DISCONTINUED OPERATIONS
During July 1998, the Company's Board of Directors adopted a plan to discontinue its Recycling and Recovery Equipment business segment. The Company has initiated a liquidation program to sell all assets of the segment. Management intended for the disposal of the segment to be completed by June 30, 1999 (the Phase-Out Period), however during fiscal 1999 those estimates were revised to June 30, 2000. In fiscal 1998, loss on discontinued operations included a $477,000 charge for future operating results through the phase-out period and a writedown of $4,796,000 to inventory, accounts receivable, leasehold improvements, and equipment to estimated net realizable values. In fiscal 1999, the Company had liquidation revenues of $1,245,325 and incurred direct costs of $425,366.
The Company revised the estimate for completion of the Phase-Out period and accordingly, the operating results of the discontinued Recycling and Recovery Equipment business operations, including provisions for lease termination costs, employee benefits and expenses during the extended Phase-Out Period through June 30, 2000 were revised to $304,209 and inventory, accounts receivable, and equipment estimated at net realizable values of $1,098,760. These estimates have been segregated from continuing operations and reported as a separate line item in the accompanying consolidated statement of operations. As shown below, the revenues from discontinued operations were completely offset by the cost of operations and change in estimates resulting in no income or loss from discontinued operations.
Operating results (exclusive of any corporate charges and interest expense and the aforementioned provisions) from the discontinued Recycling and Recovery Equipment segment are as follows:
1999 1998 1997 ---- ---- ----
Revenues $1,245,325 $ 1,435,350 $2,352,789 ========== =========== ==========
Loss before income taxes $ --- $(1,024,840) (3,594,994) Income tax benefit $ --- $ --- (1,219,000) ---------- ------------ ----------- Loss from discontinued operations $ --- $(1,024,840) $(2,375,994) ========== =========== ==========
During the fourth quarter of fiscal 1997, the Company recorded a charge of approximately $1,600,000 to write down recycling and recovery equipment inventories to estimated net realizable values.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Assets and liabilities of the discontinued Recycling and Recovery Equipment business segment are as follows:
1999 1998 ---- ----
Assets:
Accounts receivable $209,122 $ 130,000 Inventories 877,121 1,436,948 Equipment and other 12,517 30,000 ---------- ---------- $1,098,760 $1,596,948 ========== ==========
Liabilities:
Accounts Payable $ ---- $ 165,000 Accrued Liabilities 304,209 311,687 ---------- --------- 304,209 476,687 ========== =========
(9) STOCK OPTIONS
(a) EMPLOYEE
The Company has two stock option plans (the Option Plans) pursuant to which 500,000 shares of common stock for each plan have been reserved for issuance upon the exercise of options designated as either (a) incentive stock options (ISOs) under the Internal Revenue Code of 1986, as amended, or (b) non-qualified options. ISOs may be granted under the Option Plans to employees and officers of the Company. Nonqualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. The options are exercisable for a period that ends five years from the date the options become exercisable.
Transactions relating to the Option Plans for the years ended September 30, 1999, 1998 and 1997 are summarized as follows:
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions. Expected life of 5.0 years; expected volatility of 70 % in 1999, 48% in 1998 and 17% in 1997; expected dividend yield of 0%; and risk-free interest rate of 5.88 % in 1999, 4.25% in 1998 and 6.22% in 1997.
The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income (loss) would have been changed to the pro forma amounts as indicated below (in thousands of dollars, except per share amounts):
1999 1998 1997 ---- ---- ----
Net income (loss):
As reported $ 470 $ (11,485) $885
Pro forma 385 (11,581) 841
Diluted income (loss) per share:
As reported $ .09 $(2.30) $.18
Pro forma .07 (2.32) .17
The effects of applying SFAS No. 123 in the pro forma disclosure are not indicative of future results.
(b) NONEMPLOYEE
On September 16, 1998 the Company executed an agreement with Colmen Capital Advisors, Inc. ("Colmen") to provide certain business improvement services to the Company over a one-year period ("Colmen Agreement"). Pursuant to the Colmen Agreement, services included, among others, establishing a strategic business plan, developing an annual operating plan, implementing day-to-day business and management accountability, formulating a corporate financing structure and implementing a strategic acquisitions and mergers program. Pursuant to the Colmen Agreement the Company paid Colmen $17,500 each month (subsequently increased in November 1998 to $30,000 each month) for these services, and was to grant Colmen options to acquire 500,000 shares of common stock. In addition, the Company agreed to issue options to acquire 500,000 common shares six months and one day from the Colmen Agreement date. On June 28, 1999 the Company reached an agreement on the termination of the contract with Colmen. Under the agreement, the Company paid Colmen a termination fee of $330,000 and all options were forfeited by Colmen. On January 11, 1999 the Board of Directors passed a resolution to issue all outside Board members options for 5,000 shares of the Company's common stock for serving on the Company's Board of Directors.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11)abOPERATING SEGMENTS
The Company has two reportable segments: refrigerant and ballast recycling. The refrigerant segment is engaged in the marketing and sale of refrigerants, as well as performing refrigerant reclaiming services. The ballast-recycling segment is engaged in the recycling and disposal of fluorescent lighting ballasts. Amounts under the Corporate caption are items not directly attributable to a segment or items not allocated to the operating segment in evaluating their performance.
The accounting policies of the segment are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on profit or loss from operations. The Company does not allocate the majority of interest expense, all corporate overhead and income tax expense or benefit to individual segments in evaluating performance.
There have been no intersegment sales for the years ended September 30, 1999, 1998 and 1997.
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
With the exception of the reconciliations shown the above totals represent consolidated total amounts.
All revenues and long-lived assets of the Company are attributable to and reside domestically.
No individual or related group of customers accounted for more than 10% of the Company's total consolidated revenues.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS
The Company leases its New Jersey office and warehouse facilities from its principal shareholder at an annual cost of $120,000 in fiscal 1999, 1998 and 1997. The Company also leases other operating and office facilities pursuant to operating leases expiring through 2004.
The following is a schedule of future minimum rental payments under operating leases:
2000 $551,466 2001 262,968 2002 197,540 2003 192,207 2004 81,294 -------- Total $1,285,475
Total rental expense was $556,865, $606,708 and $534,015 for the years ended September 30, 1999, 1998 and 1997, respectively.
(b) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
The Company is self-insured for product liability in connection with the marketing and sale of its refrigerants. No material losses have occurred during the periods presented.
Some of the Company's products and services are regulated by the Federal Clean Air Act (the Clean Air Act) and the regulations promulgated thereunder by the Environmental Protection Agency (EPA), as well as certain state environmental regulations. As such, the Company's business is affected by the requirements of the Clean Air Act, the EPA and other regulations and the degree of enforcement thereof.
The Company's ballast recycling subsidiary has obtained approval from the EPA as a qualified recycler of waste materials. In connection therewith, the Company entered into an agreement with the EPA to set aside in a Closure Trust Fund, beginning in 1994, approximately $112,500 (annually adjusted for inflation), which was payable over a three-year period in equal annual installments of $37,500. The purpose of this fund is to accumulate resources required to clean up the Company's recycling facility upon closure. As of September 30, 1999, the Company has fully funded this obligation. The Company does not expect any significant cleanup costs in connection with the closure of its facility.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) SUBSEQUENT EVENTS
On July 20, 1999 the Company's board of directors authorized the Company to enter into an agreement to sell 792,800 shares of restricted Section 144 common stock to a private investor. The Company entered into an agreement to sell the 792,800 shares of its common stock to the private investor on August 9, 1999. In December 1999, the Company received the cash payment for the subscription stock issued. The Company intends to use these funds for working capital and other general corporate purposes.
On October 1, 1999 the Company's board of directors voted to sell and issue up to one million shares of restricted Section 144 common stock to several private investors for the sole purpose of providing working capital and short term financing that would be required if the Company was successful in acquiring afreegift, as discussed below. The sell price of such stock was set at approximately 85% of the prior 5 days average closing price on October 1, 1999 or $1.00 per share. With the signing of the formal agreement to purchase afreegift, on December 22, 1999, the Company is in the process of selling these shares.
On November 18, 1999, an appraisal was completed of the Lakewood, NJ property that the Company leases from Mr. George Cannan, CEO and principle shareholder. The appraisal reported an appraisal value in excess of $800,000. Mr. Cannan has offered the property for sale to the Company for $871,000. The Company is currently in the process of obtaining a loan from a local bank in New Jersey for approximately $500,000. The mortgage loan will be used in conjunction with the forgiveness of the $371,016 note receivable from Mr. Cannan to purchase the property.
On December 22, 1999, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with afreegift.com, Inc., a Nevada corporation ("afreegift"), Sakoff Enterprises, Inc., a Delaware corporation (the "Shareholder"), and Scott L. Sakoff ("Sakoff"). Under the Agreement, afreegift will merge into e solutions marketing, inc., a new wholly owned subsidiary formed by the Company in December of 1999, ("e solutions"), in exchange for common stock of the Company. Afreegift is an Oak Brook, Illinois based internet direct marketing company. The transaction is intended to qualify as a tax-free reorganization and will be accounted for using the purchase method of accounting.
The consummation of the transactions contemplated by the Agreement is subject to approval by the Company's stockholders. An annual meeting of the Company's stockholders will be called for February 28, 2000 for the purpose of seeking ratification and approval of the Agreement and the transactions contemplated thereby. Subject to stockholder approval and satisfaction of certain pre-closing conditions, the Shareholder will be entitled to receive at the closing a number of shares of the Company's common stock to be agreed upon prior to the closing and the right to receive additional shares of the Company's common stock (the "Earn-Out Shares") upon satisfaction of certain financial performance objectives. In no event shall the number of shares issued at closing and Earn-Out Shares exceed 8,000,000.
If the merger is consummated, the Company expects to expand its board of directors to seven members. The Shareholder will have the right to three seats on the Company's board so long as the subsidiary meets specified financial performance objectives. Also, at the closing of the merger, Sakoff will enter into an employment agreement with e solutions under which he will serve as President and Chief Executive Officer of e solutions . The employment agreement is for a term of 1 year. The Company is obligated to renew the employment agreement for an additional 1-year term upon e solutions meeting certain performance goals.
Pending stockholder action on the merger, the Company is obligated to lend $1,000,000 to afreegift at times specified in a funding agreement. In exchange, the Company will receive a note from afreegift secured by all of its assets. The note is to be repaid in a year and bears interest at 9%.
The Company intends to launch its first Permission Marketing web site in the Spring of 2000. The Company expects to formally close on the transaction in the quarter ending March 31, 2000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On January 22, 1999 the Company severed its relationship with its certifying accountants, KPMG, LLP ("KPMG"). The action was recommended and approved by the audit committee of the Company.
KPMG's reports on the Company's financial statements for the past two years contained no adverse opinion or disclaimer of opinion, and was not qualified as to uncertainty, audit scope or accounting principles.
During the most recent two fiscal years and any of the subsequent interim periods preceding January 22, 1999, there were no disagreements between the Company and KPMG on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports on the financial statements for such years, except as follows:
There was a disagreement with KPMG concerning the amount of the valuation allowance for deferred tax assets at September 30, 1998. Discussions took place between KPMG and the audit committee of the Company. The dispute was resolved to KPMG's satisfaction and a valuation allowance of one hundred percent was recorded on the books of the Company. KPMG has stated that if the valuation allowance had not been recorded, its report on the Company's 1998 consolidated financial statements would have been modified.
On November 23, 1999, the Company appointed BDO Seidman, LLP as its certifying accountants. The action was recommended and approved by the audit committee of the Company.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company as of September 30,1999 were:
NAME AGE POSITION ---- --- --------
George Cannan, Sr. 56 Chairman, Chief Executive Officer and Director
David Keener 35 Chief Financial Officer
Caroline Costante 37 Secretary
John Stefiuk 48 Director
John D. Mazzuto 51 Director
Robert J. Casper 56 Director
GEORGE CANNAN, SR. founded Environmental Materials Corp. ("EMC") a wholly-owned subsidiary of the Company in 1975 and has been President, Chief Executive Officer and a director of EMC since that time. Mr. Cannan founded the Company in 1989; was President and Chief Executive Officer until December 31, 1995; has been Chairman of the Board and a director of the Company since 1989; and was reappointed Chief Executive Officer in 1999. In July 1992, EMC became a wholly owned subsidiary of the Company. Mr. Cannan has been responsible for all phases of the Company's operations since its inception. Prior to founding EMC, Mr. Cannan was a manufacturer's representative in the automotive industry.
DAVID A. KEENER joined the Company in 1998 as its Chief Financial Officer. Mr. Keener is a Certified Public Accountant. Prior to joining the Company, Mr. Keener was President of Dual-Heat LTD from April 1996 to January of 1998; Business Control Manager of Sensormatic Electronics Corporation from June 1994 to April 1996; and Audit Manager with Deloitte & Touche, LLP from January 1988 to May 1994.
CAROLINE COSTANTE has been Secretary of the Company since its inception. Ms. Costante has been employed by EMC since 1979 and is responsible for the overall administration of the operations of EMC.
JOHN STEFIUK is the President of Federal Bronze Products, Inc. a metal servicing center and representative agency based in Newark, New Jersey. Mr. Stefiuk joined Federal Bronze in 1972 and became President in 1978. During his tenure at Federal Bronze, he has held various managerial and operating positions.
JOHN D. MAZZUTO is the President of Platinum Holdings, a private investment company. Mr. Mazzuto has held prior positions with Asian Oceanic Group, an international merchant bank where he served as President of the bank's New York subsidiary and Group Managing Director of the parent company. Prior to this, he held the position of Managing Director of Corporate Finance for Chemical Bank.
ROBERT J. CASPER is the President and Chief Executive Officer of R.J. Casper & Associates. Mr. Casper has held prior positions as Chairman, Midwestern National Life Insurance Company, President of MC Equities, President/Chief Operating Officer of U.S. Life Corporation and Executive Vice President of Home Life Insurance Company. Mr. Casper's background encompasses over 30 years of experience in the life insurance industry, with 25 years of executive level, hands on management experience.
INFORMATION CONCERNING BOARD
The Board of Directors met three times during the 1999 fiscal year.
The Board of Directors has an Audit Committee, a Compensation Committee, and Executive Committee. The Audit Committee is responsible for reviewing the Company's audited financial statements, meeting with the Company's independent accountants to review the Company's internal controls and financial management practices and examining all agreements or other transactions between the Company and its directors and officers (other than those compensation functions assigned to the Compensation Committee) to determine whether such agreements or transactions are fair to the Company's shareholders. Members of the Audit Committee are Messrs. Jack Stefiuk and Robert Casper.
The Compensation Committee is responsible for reviewing the compensation and benefits of the Company's executive officers, making recommendations to the Board of Directors concerning compensation and benefits for such executive officers and administering the Company's stock option plans. Members of the Compensation Committee are Messrs. Jack Stefiuk and Robert Casper.
The Executive Committee has the authority to act, between meetings of the full Board of Directors, on any matter that might properly be brought before the Board of Directors, subject to exceptions for certain major matters. Members of the Executive Committee are Messrs. George Cannan and John Mazzuto.
Directors of the Company receive no cash compensation for serving on the Board of Directors, other than reimbursement of reasonable expenses incurred in attending meetings. Directors receive stock options for 5,000 shares for serving on the Board of Directors.
Officers of the Company are elected annually by the Board of Directors and hold office at the discretion of the Board.
SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers, directors, and holders of more than ten percent of the Company's Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission") and NASDAQ. Such persons are required to furnish the Company with copies of all Section 16(a) forms they file.
To the best knowledge of the Company, all filing requirements applicable to its executive officers, directors, and greater than 10% beneficial owners were complied with.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, compensation for the Company's Chairman and Chief Executive Officer ("CEO) and each officer that earned over $100,000 during such years (the "Named Executives"):
Stock Option Name and Principal Position Year Salary Bonus ($) (shares) --------------------------- ---- ------ --------- --------
George Cannan, Sr. 1999 $200,000 (1) -0- Chairman/CEO 1998 $200,000 (1) -0- 1997 $200,000 (1) -0-
David A. Keener 1999 $123,077 (1) 45,000 Chief Finncial Officer 1998 $ 85,998 -0-
James Hellauer(2) 1999 $ -0- (1) 45,000 CEO/President
(1) Represents less than 10% of the Executive's compensation. (2) Mr. Hellauer resigned in 1999. Mr. Hellauer's salary was paid by Colmen Capital Advisors from the monthly management fees paid by the Company to Colmen.
Option Exercises During, and Stock Options Held at End of Fiscal 1999
The following table indicates the total number and value of exercisable stock options held by the Named Executives as of September 30, 1999. No options were exercised by the Named Executives in the fiscal year ended September 30, 1999:
(1) Based on the last sale price for the Company's Common Stock on September 30, 1999 of $1.13 per share, as reported by NASDAQ.
Stock Option Plans
The Company maintains stock option plans designated as the 1992 Stock Option Plan (the "1992 Plan") and the 1996 Stock Option Plan (the "1996 Plan") collectively the "Option Plans" pursuant to each of which 500,000 shares of Common Stock have been reserved for issuance upon the exercise of options designated as either (i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, amended (the "Code") or (ii) non-qualified options. Nonqualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. In certain circumstances, the exercise of stock options may have an adverse effect on the market price of the Company's Common Stock.
The purpose of the Option Plans is to encourage stock ownership by certain directors, officers and employees of the Company and certain other people instrumental to the success of the Company and give them a greater personal interest in the success of the Company. The Option Plans are administered by the Board of Directors. The Board, within the limitations of the Option Plans, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights by the Company are to be imposed on shares subject to options. ISOs granted under the Option Plans may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Non-qualified options granted under the Option Plans may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Options granted under the Option Plans will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). Any options granted under the Option Plans are not transferable during the optionee's lifetime but are transferable at death by will or by the laws of descent and distribution.
EMPLOYMENT AGREEMENTS
David Keener, the Company's Executive VP and CFO, is subject to the terms of an employment agreement whereby Mr. Keener is entitled to receive a base compensation of $120,000, bonus and benefits compensatory with other executive officers of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1999, the name and number of shares of Common Stock held by each person known to the Company to own beneficially more than five percent (5%) of the Company's Common Stock and the number of shares owned by each director and executive officer of the Company and all directors and executive officers as a group. Each of the following has an address c/o Environmental Technologies Corp., 121 S. Norwood Dr., Hurst, Texas 76053. All shares are owned directly by the named person.
NUMBER OF NAME SHARES OWNED PERCENT OF CLASS(1) ---- ------------ -------------------
George Cannan, Sr. 1,710,060 29.6%
Caroline Costante 122,761 (2) 2.1%
David Keener 63,000 (3) 1.1%
John Stefiuk 65,000 (4) 1.1%
Robert Casper 31,000 (5) 0.5%
John Mazzuto 35,000 (6) 0.6%
All Directors and Officers as a Group (6 persons) 2,026,821 35.1%
- ----------
(1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this report upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date of this report have been exercised. (2) Includes 40,000 shares of Common Stock issuable upon the exercise of stock options (10,000 of which are presently exercisable). (3) Includes 45,000 shares of Common Stock issuable upon the exercise of stock options (none are presently exercisable). (4) Includes 15,000 shares of Common Stock issuable upon the exercise of stock options, which are presently exercisable. (5)abIncludes 5,000 shares of Common Stock issuable upon the exercise of stock options, which are presently exercisable. (6) Includes 35,000 shares of Common Stock issuable upon the exercise of stock options, which are presently exercisable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's refrigerant packaging and distribution operations are located in a 21,000 square foot building situated at 550 James Street, Lakewood, New Jersey 08701. The building is leased at a rental of $10,000 per month from George Cannan, Sr., the Company's founder, Chairman and principal stockholder, pursuant to 5-year lease. The Company believes that the terms of such lease are at least as favorable as those, which it could obtain from a non-affiliated third party.
As of September 30, 1999, the Company had a $371,016 note receivable from George Cannan. This note receivable bears interest at 7% per annum and is secured by the 21,000 square foot building located at 550 James Street in Lakewood New Jersey. The Company plans to purchase the Lakewood, New Jersey facility for a fair market value of $871,000, financed by a mortgage for approximately $500,000 and forgiveness of the note receivable due from George Cannan.
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT DESCRIPTION
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Hurst, State of Texas on the 30th day of December, 1999.
EVTC, INC.
BY: /s/George Cannan, Sr. ---------------------------------- GEORGE CANNAN, SR., Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE --------- ----- ----
/s/George Cannan, Sr. Chairman, Chief Executive Officer December 30,1999 GEORGE CANNAN, SR. and Director
/s/David Keener Chief Financial Officer December 30,1999 DAVID KEENER
/s/John Stefiuk Director December 30,1999 JOHN STEFIUK
/s/John Mazzuto Director December 30,1999 JOHN MAZZUTO
/s/Robert Casper Director December 30,1999 ROBERT CASPER
INDEX TO EXHIBITS
Exhibit No. Description ----------- -----------
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT
Effective December 30, 1999 the subsidiaries of the Company were:
Environmental Materials Corp. Envirogroup Services, Inc. Refrigerant Reclaim Services, Inc. FulCircle Recyclers, Inc. E.M.C. Export Co., Inc. e solutions marketing, inc.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors EVTC, Inc.:
We consent to incorporation by reference in the Registration Statement (No.333-8355) on Form S-8 of EVTC, Inc. of our report, dated January 5, 1999, relating to the consolidated balance sheet of EVTC, Inc. as of September 30, 1998 and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended September 30, 1998, and 1998 and 1997 data in the related financial statement schedule which report appears in the September 30, 1999 annual report on Form 10K of EVTC, Inc.
KPMG, LLP
Dallas, Texas December 30, 1999
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors EVTC, Inc.:
We consent to incorporation by reference in the Registration Statement (No. 333-8355) on Form S-8 of EVTC, Inc. of our report, dated December 8, 1999 except for Notes 5 and 13, as to which the date is December 23, 1999, relating to the consolidated balance sheet of EVTC, Inc. and subsidiaries as of September 30, 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the year ended September 30, 1999, and related financial statement schedule which report appears in the September 30, 1999 annual report on Form 10-K of EVTC, Inc.
BDO Seidman, LLP
Dallas, Texas December 30, 1999