SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ENVIRO-RECOVERY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Texas 33-0507697
-------------------------------- -------------------------------------
(State of Incorporation) (Issuer's I.R.S. Employer I.D. Number)
Enviro-Recovery, Inc.
2200 E. Lake Shore Drive
Ashland, Wisconsin 54806
(Address of principal executive offices and zip code)
(715) 685-9663
(Issuer's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value per share
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Enviro-Recovery is in the business of recovering submerged timber
located in lakes and rivers and processing this timber for a variety of
commercial uses. Much of the timber we recover is old growth and rare species
making our timber unique in the market. We currently recover submerged timber in
the United States and Canada, but we are expanding into South America where
there are important resources of submerged timber. We have entered into a joint
venture with EcoWood, LTD located in the State of Para, Brazil which has a
license in that state to remove sunken timber from the Amazon River system. Our
current sales are primarily in North America and Japan but have the potential of
being world wide because of the unique qualities of the products.
Enviro-Recovery is an environmentally friendly company. Recovering and
processing submerged timber is a sound alternative to logging live forests.
Exploiting the submerged timber reduces current pressures on existing forests
throughout the world. Moreover, much of the useable submerged timber is old or
first growth timber or rare species, which are commonly subject to importation
restrictions or limitations, or bans on logging in standing forests in many
countries. The lower quality recovered wood is an important source of fiber for
pulp mills. Using the recovered timber reduces demands on existing forests and
it can be imported into countries were there are restrictions against the
importation of newly felled timber. In many instances the removal of the
submerged timber improves water quality by reducing the amount of organic
materials which reduce the dissolved oxygen content of the water.
Products
We recover and process a wide variety of highly sought-after log
species. These include oak (red and white), hard maple (regular, bird's eye and
curly), yellow birch (much of which has red hearts), eastern hemlock, pine (red
and white), cypress, American chestnut, beech, basswood, elm, cherry and walnut.
The timber is mostly from the primeval forests of North America and can be over
500 years old, having the slow growth characteristics of high density and fine
grain and textures similar to the wood found in antiques that were created in
the 1700 and 1800's. The timber is commercially usable today because it has been
preserved by the low oxygen content of the water in which it is found.
Lumber cut from old growth forests has many superior qualities
generally not found in modern lumber. Many of the modern forests are genetically
degraded because they have grown from stunted and malformed trees that the
loggers left behind decades ago. Modern forests have grown quickly thereby
producing intrinsically lower quality lumber. Old growth lumber is generally
knot-free. Also the lumber produced from old growth timber is especially
beautiful. The wood has very tight, clear graining because there are many more
growth rings per inch as a consequence of the slow growth of the primeval
forests. This wood generally has better physical properties because of the
higher growth ring density. It is more rot resistant than modern growth lumber
because the old growth trees consist mostly of heartwood. The heartwood of some
2
<PAGE>
species contains aromatic oils and resins that repel insects and fungi and
resist rot. The wood is particularly suited for use in musical instruments
because of its unique resonance that comes from the long immersion in water.
The lumber produced by us is sold under the trademark Timeless
Timber(R). This lumber is milled for specialty users of fine woods. We mill cut
the lumber to meet customer specifications for their use. Timeless Timber is
used in projects were the unique characteristics of old growth lumber defines or
enhances the architectural design or product. Some of these uses include fine
cabinetry, flooring, paneling, doors and architectural millwork. A significant
use of Timeless Timber is in the making of fine furniture and home decorating
accessories such as picture frames. Our lumber is important in the craft market
where Timeless Timber is used in items such as pens, kitchen utensils, paintings
on wood, jewelry, carvings and humidors. We also produce veneer from several
rare species of woods. Timeless Timber is used to make fine musical instruments
such as drums, guitars, and violins.
Marketing
General
We sell our lumber predominately through direct contact with our
customers. We use brochures and direct mailings to generate leads. We advertise
in woodworking journals and magazines and through our web site, which has online
sales capability. In addition, we have received free promotion in the form of
news articles in major newspapers including; The New York Times, USA Today, The
International Herald Tribune and Newsday. Television media coverage includes The
Learning Channel, ABC World News Sunday, The Discovery Channel and Good Morning
America, among others.
We employ one person to work exclusively in sales, two sales
representation firms, and one dealer/agent.
Significant Customers
Leick Furniture has been our predominant customer since 1996,
representing over 10% of our annual net sales. Fujigen, Inc., a Japanese
wholesaler of solid body electric guitars, has recently purchased over $100,000
in rough lumber and has made a commitment to buy one twenty foot container of
lumber every three months. Other annual accounts are ROCKLER (Woodworkers
Store), Drum Workshop, Gaston Billiards, Laser Specialties, and Acorn Millworks.
Profile Customers
The following customers have featured Timeless Timber in specific
projects that have provided us with national and international recognition as
the premiere salvaged wood recovered from submerged timber:
3
<PAGE>
1999 Life Magazine Dream House
Ford Motor Company
Northern Great Lakes Visitor Center
Great Lakes Aquarium
Wisconsin Lake Schooner
National Building Museum
International Softball Congress
Great Northern Depot Renovation
Supplies
Critical to our success is a constant source of first growth timber.
The failure to obtain the first growth logs of the different wood species we
need for our unique product lines will limit our ability to supply the kind of
lumber on which our business reputation is based and our business plan is
founded and result in reduced sales and revenues. We believe there is an
adequate supply of this timber available for recovery throughout the northern
part of North America and in certain other areas of the world. Our current
sources of supply are in the Great Lakes region, including Wisconsin, Michigan
and Ontario, and in New York, Maine, Arkansas, Quebec and New Brunswick.
In 1999, sixty one percent of our log supply came from The United
States and thirty nine percent from Canada. We received logs from the Provinces
of Ontario, New Brunswick and Quebec and from the states of Maine, Pennsylvania,
New York, Michigan, Arkansas, and Wisconsin.
The majority of the lumber and logs we purchase is from independent
contractors. We contract with most of these suppliers on a purchase order basis.
Typically, an independent recovery firm will contact us when they have lumber or
logs of the type we are interested in purchasing. We will indicate our desire to
purchase the lumber and arrange for payment upon delivery.
We conduct efforts to locate sources of lumber. We employ aerial
surveillance and side scan sonar mapping of likely bodies of water. We use this
information in our recovery efforts and to assist independent suppliers.
We maintain an inventory of logs and milled lumber that can be further
processed into products upon demand. The inventory of logs is built up during
the summer and fall months because that is the period during which recovery
efforts can be accomplished. We currently have inventory of unprocessed logs
sufficient for five months of milling and an inventory of milled lumber
sufficient to meet customer demand for three months. As our capital resources
and business improve, we plan to increase these inventory levels as necessary.
Despite our efforts to maintain and manage our inventory, it is possible that
from time to time there will not be an adequate amount of logs available to
operate at maximum economic efficiency or the species and grade of lumber
desired by our customers will not be available. We have a seasonal need for
capital during the summer and autumn months that is reflected in our financial
4
<PAGE>
statements. Any of these factors may result in the loss of business and impact
our financial results and future development.
In 1999 Pend Oreille Pine and Wisconsin Central, Ltd. were our largest
suppliers and represented over 10% of our accounts paid. In 1998 no suppliers
accounted for more than 10% of accounts paid.
Company Licenses for Recovery of Timber
Once we locate underwater logs through aerial and side scan sonar
surveys, we apply for contracts for extracting the logs from the governing state
agency in the United States and from the Ministry of Natural Resources in
Canada. The application process can include approval from several government
agencies at the local, state or provincial, and federal levels. Environmental
impact and historical issues are examined in the approval process. The
contracts, in general, provide a period, lasting from 1 to 5 years for
extracting the logs. We use subcontractors to extract the logs from the
permitted areas where the extraction is completed usually in the same season
that the contracts are approved. We have obtained contracts in the past in the
Province of Ontario, and the States of Wisconsin and New York. In the Province
of Ontario and the State of Wisconsin, the contracts were awarded for specific
areas where side scan records show the underwater timber. In the State of New
York, we hold a license to extract underwater timber from Lake Ontario and the
St. Lawrence Seaway. Under that license, we can apply for permits from the New
York Department of Environmental Conservation to extract logs from defined
areas. Other persons would be subject to the same licensing protocols described
above.
In South America, we have entered into a joint venture agreement with
Eco-Wood, Ltd. The joint venture assets include the only licensing rights issued
in Brazil by IBAMA (institute Brasileiro Do Meio Ambiente E Dos Recursos
Naturais Renovaveis) and other governing agencies for extracting underwater logs
from the Amazon River system in the State of Para.
Expansion of Business in South America
We are pursuing an expansionary program in South America. We have
located several areas where we believe there are significant reserves of
submerged logs or timber that make recovery and processing efforts worth the
time and investment. Through a joint venture agreement concluded on June 16,
2000 we acquired control of Eco-Wood LTD, which holds the license to recover
logs from the Amazon River in the State of Para, Brazil. The asset acquisition
is for a total of 3 million shares of common stock and the option to purchase
2.4 million shares of common stock contingent upon future performance of
Eco-Wood stockholders in acquiring new timber reserves. In addition, Eco-Wood
will receive a two- percent commission on all related sales. Our plan is to
process the lumber locally and market it internationally. Eco-Wood is currently
evaluating the log resources by surveying the river system using a sidecan sonar
and sampling the underwater logs to determine the best sites for recovery
operations.
5
<PAGE>
Facilities
Our production facilities are located in Ashland, Wisconsin. We own a
125,000 square foot, covered manufacturing facility situated on approximately 30
acres of land. This plant was acquired from the City of Ashland in June1996
through an economic development agreement and subsequently improved and expanded
to meet the needs of our specialized production requirements. The facilities
include a band mill, steam kilns, a dimensioning plant and storage areas.
Equipment installation, completed in September 1999, provided the mill with an
overall production capacity of approximately 1.56 to 3.1 million board feet per
year, depending on the mix of hardwoods and softwoods. We do not intend to
further expand the facilities until the availability of capital allows and
demand justifies the increased capacity. If required, we believe that the
facilities currently have the space for future expansion in Ashland. As demand
warrants, we will look at capacity expansion in Ashland as well as other
locations. The location would be dependent on supply sources, regulation
compliance costs and access to markets.
Our accounting office is located in Green Bay, Wisconsin. We rent 400
square feet of space month to month for a net monthly rental of $380. We believe
this space is adequate for our current needs.
Proprietary Rights
We have registered with the United States Patent and Trademark Office
the trademark Timeless Timber(R). We license the use of the trademark to
approved customers who may use the Timeless Timber trademark on their products
and in their advertising.
We have developed proprietary techniques for processing
water-saturated, old growth logs. There can be no assurance that others will not
develop corresponding techniques or better techniques that will limit the
advantage that we believe we currently enjoy in the processing of this type of
lumber.
We enter into confidentiality agreements with our employees and
consultants and rely on laws relating to trade secrets and proprietary
information for the protection of our various proprietary rights. We do not
license the use of any of our technical information or other proprietary rights
at this time, but if we do, we will rely on relevant statutory protections and
contractual arrangements to protect our rights. There can be no assurance that
these laws or agreements will provide a complete protection of our rights in the
event of infringement by others. We will pursue in the courts the defense of our
rights where we believe they have been violated. There can be no assurance that
we will have the resources to fully prosecute any claims we bring or that any
claim of ours will be decided in favor of the company.
Government Regulation
Federal, state and local government agencies regulate the log recovery
process. The regulations vary between country, state or provincial and local
authorities. In general, the application process requires that the governing
6
<PAGE>
state or provincial agency responsible for the environment of the waterway
approve an environmental impact study. The permit is usually reviewed by several
government organizations including agencies responsible for fish and wildlife,
state or provincial timber resources, the environment, water quality, historical
artifacts, cultural concerns, and maintaining navigable waterways. Any of the
agencies can stop the approval of the permit and our ability to extract
underwater logs. When required by regulations, stumpage fees are paid for
recovered timber to the state or provincial agency responsible for timber
rights. The independent suppliers of underwater timber are affected by the same
regulations as us. The length and complexity of the permitting process has
significantly limited the development of the underwater log resources in North
America.
We have a license for importing underwater logs from the Province of
Ontario. The independent suppliers in the Provinces of New Brunswick, Nova
Scotia and Quebec handle export-licensing issues.
Competition
We compete in the broad category of timber products, which includes
major companies such as Georgia Pacific and Boise Cascade. We, however, do not
feel that these companies are direct competitors, as they do not actively
harvest logs from the water. The underwater recovery segment of the market is a
new market niche. Based on the information we have, Enviro- Recovery is the
industry leader and we are not aware of any competitors which recover, saw, dry
and dimension a wide variety of hardwood timber species found underwater in
wholesale quantities. We currently specialize in processing old growth hardwoods
and softwoods, mostly from the Great Lakes region. We are aware of at least two
companies that recover and process underwater wood in the southeastern United
States; however these companies process mostly cypress and southern pine.
We compete on the basis of our ability to obtain and process submerged
timber that has unique characteristics not generally available. Although our
products are more expensive, we believe the unique characteristics of the lumber
support higher pricing than that of commodity lumber. The higher price for
Timeless Timber results from the environmental, historical, and aesthetic value
that recovered old growth timber provides.
The reclaimed wood industry competes with Timeless Timber in the added
value market for historic, environmental lumber. In that industry, companies
extract timber from old wooden buildings that are being destroyed. Reclaimed
wood differs from Timeless Timber in two ways. Not all the reclaimed timber is
old growth wood. The reclaimed wood frequently has a distressed appearance
including nail holes and cracks resulting from its previous use. Conversely,
Timeless Timber is always made from old growth recovered wood that is in a
similar condition to that on the date the log was cut. The reclaimed wood is
commonly sold as flooring.
Lumber that meets Forest Stewardship Counsel certification standards is
a product that competes with Timeless Timber in the environmentally safe wood
market. Certified wood sells for about 10% more in price than uncertified
commodity wood. Wood sold with a FSC certification is cut from managed forests.
7
<PAGE>
Timeless Timber differentiates itself from the FSC certified wood by emphasizing
that Timeless Timber is not harvested from live forests; rather it is a lost
resource that is recovered from rivers and lakes. Buying Timeless Timber
products saves trees.
Certification of Products
Timeless Timber(R) products are certified by Scientific Certification
Systems of Oakland, California under the SCS Environmental Claims Certification
Program as being produced from 100% salvaged wood from recovered submerged
timber. These products include dimensional lumber, rough sawn lumber, veneer,
flooring, paneling, and finished wood household and office products and
accessories.
Employees
We currently have 28 employees. The employees include three executive
officers, 23 persons in milling operations and one in sales
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
When used in this Form 10 and in future filings by Enviro-Recovery with
the Securities and Exchange Commission, the words or phrases "will likely
result," management expects," or "we expect," "will continue," "is anticipated,"
"estimated" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are cautioned not to place undue reliance on any such forward-
looking statements, each of which speak only as of the date made. These
statements are subject to risks and uncertainties, some of which are described
below. Actual results may differ materially from historical earnings and those
presently anticipated or projected. We have no obligation to publicly release
the result of any revisions that may be made to any forward- looking statements
to reflect anticipated events or circumstances occurring after the date of such
statements.
Selected Financial Data
Because Enviro-Recovery continues to develop its products and sales
efforts and is still in the earlier stages of its development, selected
financial data would not be meaningful. Reference is made to the financial
statements of Enviro-Recovery included elsewhere in the document. Our fiscal
year is the calendar year. In this report are Enviro-Recovery consolidated
audited financial statements for the twelve-month periods ending December 31,
1998 and 1999 and reviewed financial statements for the six-month periods ending
June 30th 2000.
8
<PAGE>
Comparison of Fiscal Year 1999 to Fiscal Year 1998
Results of Operations
Sales in fiscal year 1999 increased 196% to $903,412, compared with
sales of $460,424 in fiscal year 1998. The increase in sales resulted from
shipments to a new customer who manufactures hardwood picture frames, and from
improved retail sales from our mill store. For 1999 Leick Furniture and FETCO
were the only two accounts, which individually, were greater than ten percent of
revenues.
The gross loss on fiscal year 1999 sales was $137,727 compared to a
gross loss of $214,828 in fiscal year 1998. The decreased loss was a result of
an increased revenues from $460,424 in 1998 to $903,412 in 1999. As an early
stage company, we have incurred costs associated with the increase of our
production capacity. Due to low production relative to the total production
capacity, a significant portion of these expenses flowed through cost of
revenues as unabsorbed overhead expenses. In addition, a number of one-time
costs were incurred in the development and refinement of our finished product
manufacturing operations.
The operating expenses for fiscal year 1999 were $1,814,737 compared to
$1,433,209 of operating expenses for 1998. The 27% increase in operating
expenses was a result of significantly greater production during 1999 and the
introduction of finished product manufacturing during the year.
The loss from operations in fiscal year 1999 increased 19%, to $1.9
million from the 1998 loss of $1.6 million. As mentioned above the increased
loss was a result of increased production of lumber and finished products and
the resulting buildup of inventories required to support sales development.
The net loss in fiscal year 1999 decreased 4%, to $2.3 million from a
net loss of $2.4 million in fiscal year 1998. In addition to an increased loss
of $299,427 from operations, the net loss reflects an decrease in other expenses
to $386,949 in 1999 from $816,833 in 1998. The decrease in other expenses is a
result of decreased interest expenses associated with debt incurred to finance
inventory increases, and debt associated with equipment purchases including
kilns, high speed saw and materials handling equipment which was paid off with
stock.
Liquidity and Capital Resources
The current assets on December 31, 1999 increased 24% to $6,309,744,
compared with the assets of $5,072,747 on December 31, 1998. The increase in
current assets reflected an increase in end of the year inventories and in
receivables. The end of the year cash decreased to $17,374 for 1999 from
$201,547 for 1998. The inventory for December 31, 1999 increased to $2,783,549
from $1,678,673 on December 31, 1998. We built inventory during 1999 in order to
9
<PAGE>
reach minimum quantities of lumber for deliverable sales of 12 species and 3
grades of wood, and of 15 different retail products. The prepaid expenses at the
end of fiscal year 1999 decreased to $66,962 from $121,194 at the end fiscal
year 1998. The decrease in prepaid expenses reflects advances made to wood
suppliers and prepaid interest.
Net property and equipment increased 10% to $3.2 million on December
31, 1999, from $2.9 million on December 31, 1998. The increase in fixed assets
was a result the completion of dry kilns, purchase of finished products
manufacturing equipment and materials handling equipment, offset by an increase
in related depreciation expense.
The total assets increased 24%, to $6.3 million on December 31, 1999,
from $5.1 million on December 31, 1998. The increase in total assets was a
result of increases in the current assets and the net property and equipment
described above.
Current liabilities increased 25%, to $3.5 million on December 31,
1999, from $2.8 million on December 31, 1998. The increase in current
liabilities is a result of current maturities of long term notes used to fund
the increase in inventories. The current ratio improved from 0.71:1 in 1998 to
0.82:1 in 1999 reflecting the increase in inventories.
Long term debt, less current maturities, decreased 72%, to $0.8 million
on December 31, 1999, from $2.5 million on December 31, 1998. The decrease in
long term debt, less current maturities, is a result of the conversion of long
term debt to stock.
In 1999, capital stock and additional paid in capital increased $3.96
million. This increase was the due to private placements of common stock.
Net cash decreased in 1999 by $184,000 and increased by $15,000 in
I998. Inventories increased $1,095,876 and $1,026,000, respectively. The other
major use of cash was the purchase of property and equipment of $727,295 in 1999
and $1,667,000 in 1998. These uses of cash were offset by issuance of long-term
debt of $788,685 in 1999 and $1.67 million in 1998. Other sources of cash in
1999 and 1998, were the issuance of common stock of $3.96 million and $1.2
million in each year respectively, and proceeds from notes payable of $50,000
and $1.5 million in each year respectively.
In summary, total liabilities increased 19%, to $6.3 million on
December 31, 1999, from $5.3 million on December 31, 1998. Stockholders equity
increased to a surplus of $2,019,656 on December 31, 1999 from a deficit of
$246,408. The above analysis does not include the tax benefits of a loss carry
forward of approximately $6,000,000.
10
<PAGE>
Comparison of Six Months Ended June 30 2000 to June 30,1999
Operating Results
In 2000 net revenues decreased from 1999 by $282,000 or 51%. This
decrease was predominately due to the loss of a new account, Fetco
International, Inc. which manufactures and sells picture frames. Revenues
increased for woodcrafting and retail products. Three accounts, Leick Furniture,
Timeless Timber of Minnesota, and With the Grain, represented more than forty
five percent of our six-month 2000 revenues.
The cost of revenues increased $49,000 or 28%. This increase reflected
the increased production levels of lumber and finished products. We had a
negative gross profit for each six- month period reflecting the continuing
developmental nature of the company and the unabsorbed overhead due to low
production levels relative to total capacity. The gross profit declined from
1999 to 2000 reflecting the loss of the Fetco account.
Operating expenses for the first six months of 2000 were $900,000 as
compared to $800,000 in 1999. The increase in expenses was due to increased
side-scanning and other supply exploration costs incurred during 2000 as we
sought to increase our sources of supply of recoverable timber. The total
operating loss for the first six months reflected these increased costs.
Other expenses increased by $52,000 in 2000 reflecting an additional
investment in our Brazilian ventures. Interest expense for the first six months
of 2000 was $184,000 compared to $157,000 in 1999. The increase of $27,000
resulted from added debt to finance for new manufacturing equipment offset by
the reduction of interest expense on debt that was converted to common stock.
We continue to elect not to recognize the tax loss carry forward as a
deferred asset. As of June 30, 2000 we have an aggregate $7.5 million tax loss
carry forward.
Liquidity and Capital Resources
In 2000 our operating activities used $1.7 million compared to $1.1
million in 1999. This reflects a net increase in inventory of $1,061,000 during
the first six months of 2000. Also in the first nine months of 2000 our accounts
payable decreased $211,000.
During the first six months of 2000, we financed a portion of our cash
needs with the sale of common stock for $2,600,000 in private placements. This
capital was used in part to finance mill equipment additions and the balance was
used to fund our operations. In 1999 we retired an aggregate of $100,000 in
long-term debt. Approximately $900,000 in current notes payable was converted
into common stock.
11
<PAGE>
Total stockholders equity increased to $2.9 million on June 30, 2000
from $2 million on December 31, 1999.
Because our business continues to be in the developmental stage and our
expenses exceed our limited revenue from operations, we will continue to require
substantial amounts of additional debt and equity capital to continue to
operate. We have no assured sources of capital at this time. To the extent we
are unable to obtain needed capital, we may have to limit our operations or
curtail our business. If we sell debt securities or borrow funds, the interest
charges may have an adverse impact on working capital and operations. If we sell
additional equity capital, current investors will experience dilution, possibly
at significant levels.
Other Events
On June 16, 2000, we entered into a joint venture agreement with
Eco-Wood Ltd., which is licensed by IBAMA and the State of Para to recover logs
from the Amazon River system in the State of Para, Brazil. The IBAMA registered
project for recovering lost submerged wood from the Amazon River System,
originally submitted by Fund Amazon, a non-profit company with a mission to save
the rainforest, was approved by IBAMA. As required by IBAMA, EcoWood obtained
the approval of Fund Amazon prior granting the recovery license to Eco-Wood,
Ltd. In consideration for the recovery rights, Eco-Wood shareholders will
receive a total of 3 million shares of common stock and the option to purchase
2.4 million shares of common stock contingent upon future performance of
Eco-Wood stockholders in acquiring new reserves. In addition, Eco-Wood will
receive a 2 percent commission on Eco-Wood sales. Under the joint venture
agreement, Enviro-Recovery, Inc. retains the profits of the Eco-Wood operation
and is responsible for providing management services to Eco-Wood. Eco-Wood is
currently evaluating the log supply in the Amazon River Basin in preparation for
the development of recovery operations in suitable areas.
ITEM 3. DESCRIPTION OF PROPERTY
See Section 1, Item 1, Facilities, for a description of our property.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of shares of the common stock by (1) each person known to
be the owner of more than 5% of the outstanding shares of common stock, (2) each
director and (3) all executive officers and directors as a group. The
information is as of June 30, 2000, and it is based on information obtained from
each of the below named persons including officers and directors as of October
30, 2000. On June 30, 2000 there were 94,966,803 shares of common stock
outstanding.
12
<PAGE>
Number of Shares of Percent of
Common Stock Ownership
Beneficially** of Common Stock
Name of Beneficial Owner Owned Outstanding
------------------------ --------------------- ----------------
Bruce Nesmith 0 (1) 0%
Steven Schock 6,100,000(2) 6.1%
Gregory Grambow 0 0%
Robert Obernesser 30,000 *
Neal Katz 244,000 *
David Neitzke 2,200,000(3) 2.3%
Jeff Schwartz 161,893(4) *
Rick & Kathi Luytjes 9,200,000(5) 9.4%
Thomas Evinrude 10,626,531(6) 10.7%
Directors and officers
as a group (5 persons) 8,735,893(7) 8.5%
* Less than 1%.
** Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
issuable upon the exercise of options or warrants currently exercisable, or
exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(1) Excludes options to purchase 3,000,000 shares of common stock not currently
exercisable.
(2) Includes options to purchase 5,000,000 shares of common stock currently
exercisable.
(3) Includes options to purchase 2,200,000 shares of common stock currently
exercisable. Excludes options to purchase 300,000 shares of common stock
not currently exercisable.
(4) Includes options to purchase 35,000 shares of common stock currently
exercisable. Started as Director and CFO in October 2000. Beneficial
ownership calculations are based on holdings as of June 30, 2000.
13
<PAGE>
(5) Includes warrants to purchase 1,000,000 shares of common stock currently
exercisable and options to purchase 1,600,000 shares of common stock
currently exercisable.
(6) Includes 5,250,000 shares in the Thomas Armitage Evinrud Irrevocable Trust
of 1998, Henry J. Loos Trustee, which trust is for the benefit of Mr.
Evinrude. Includes 580,671 shares of common stock owned directly by Mr.
Evinrude. Includes 4,795,860 shares of the common stock which may be issued
upon conversion of an aggregate of $1,395,590 of debt and $43,168 of
interest at the rate of $.30 per share of common stock.
(7) See notes 1 through 4 above
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of October 30, 2000 Our directors and officers are set forth in the table
below.
Director
Name Age Since Position
----- ---- ------ ---------
Bruce Nesmith 52 -- CEO, President
Steven Schock 43 1998 Director
David Neitzke 45 1998 Director
Greg Grambow 52 1999 Director
Neal Katz 54 2000 Director
Robert Obernesser 63 2000 Director
Jeffery Schwartz 32 2000 CFO, Director
Mr. Bruce Nesmith has over 25 years experience in the hardwood lumber
industry. He has been the President and CEO of the company since June 1, 2000.
He has been involved in startup, expansion and turnaround situations as General
Manager and as Executive Vice President for several hardwood lumber products
manufacturers. He was the General Manager of Buchanan Hardwood Flooring from
January 1, 1997 through March 31, 2000. He was Executive Vice President of
Anderson Tully Company, the largest privately owned hardwood lumber producer in
the US, from June 1, 1990 through September 1, 1996, and Vice President and
General Manager of two of the premier independent strip flooring manufacturers
in the US for a number of years. He has extensive experience in hardwood lumber,
dimension, flooring, and molding. He has been responsible for product
development and marketing for a number of different wood products. Mr. Nesmith
attended Louisiana Tech and Middle Tennessee State University.
Dr. Steven Schock was the president and chief executive officer from
May 1998 to September 1999 when he resigned as president and chief executive
officer. Dr. Schock has been a director since May 1998. Prior to becoming
14
<PAGE>
president and CEO of the company, Dr. Schock was an Associate Professor in the
Department of Ocean Engineering at Florida Atlantic University where he
conducted research in remote sensing of the seabed and the development of
acoustic imaging sonar. Since resigning as CEO, Dr. Schock resumed his position
at Florida Atlantic University as Associate Professor of Ocean Engineering. In
1989 Dr. Schock started a high technology company, Precision Signal, Inc., which
was sold in 1996 to a large marine instrumentation company. Dr. Schock is a
graduate of the US Naval Academy and served as an officer and engineer on a
nuclear submarine. Dr. Schock holds a Doctorate from the University of Rhode
Island in Ocean Engineering.
Mr. David Neitzke has been the vice president and treasurer and a
director of the company since 1998 and the chief operations officer of Superior
Water Logged Lumber Company since 1989. Mr. Neitzke has been actively engaged in
the hardwood lumber business since 1984. From 1984 to 1986 Mr. Neitzke worked
for Red Hawk Lumber, Inc., a custom lumber mill. He formed River Valley Forrest,
Inc. and River Valley Logging, Inc. in 1986, companies that specialized in
sawing veneer and high grade logs, which he operated from founding until 1990.
From 1990 to 1991, Mr. Neitzke worked for the City of Mondovi, Wisconsin to
establish a large-scale sawmill and dimension mill as part of the overall
economic development plan for the city.
Mr. Greg Grambow was the President and Chief Operating Officer of the
Company from September 1999 to January 2000. Mr. Grambow is a director. Mr.
Grambow's employment and directorship are the subject of termination
negotiations. Mr. Grambow was the President of Barrington Company, a business
and financial consulting firm, from 1994 until September 1999. Before his
employment with Barrington, he was the President of Smileage Dental Services,
Inc., a staff model independent practitioners association and dental health
maintenance organization.
Mr. Neal Katz has been an independent consultant since 1992. He
specializes in strategic planning and organizational systems. He has been
helping to develop business organizations and working with key executives in a
number of major industries for the past 20 years. He is currently affiliated
with IDX Corporation, and he is a professor at Brandis University.
Mr. Robert Obernesser was the President and CEO of the company from
April through May 2000. He has been involved in startup, expansion, and
turnaround situations as Vice President, Executive Vice President, President and
Division Manager for retailers such as Montgomery Ward, Cloth World Stores,
Foliage Plus Companies, Ames Department Stores, and Courtesy Home Centers. In
these positions, he has been responsible for the development and opening of 100
new stores and the repositioning of several hundred more. From June 1993 through
October 1995, he was General Manager and COO of Courtesy Home Centers-Chicago.
He was a partner with McMillian Doolittle-Retail Consultants from November 1995
to April 2000. He is a graduate of Loras College with a BA in Economics and is
currently serving on the Loras College National Alumni Board.
15
<PAGE>
Mr. Jeffery Schwartz became a director of the company in 2000. Mr.
Schwartz is Chief Financial Officer of the company. He was Vice President of the
Lionheart Group and was a founder of and is currently Chairman of Rainmaker
Capital, Inc. of New York City. He is a shareholder in the company. Mr. Schwartz
received his BA from the University of Richmond and an MBA from the New York
University Stern School of Business in finance and accounting.
Board Meetings and Committees
During the fiscal year ended December 31, 1999, the board of directors
met on ten occasions and took written action on ten occasions. For the last
seven meetings of 1999, all directors attended the meetings and the written
actions were by unanimous consent. One former director did not attend the first
three meetings of 1999; however, actions were approved unanimously by directors
attending those meetings. The board of directors has established no committees.
Directors serve for a term of one year after election or until their earlier
resignation or their successor is elected or appointed and qualified.
ITEM 6. EXECUTIVE COMPENSATION
Executive Compensation
The tables below summarize the compensation of each executive officer
of Enviro- Recovery at the end of 1999 fiscal year for all his services to us
and our subsidiaries:
SUMMARY COMPENSATION TABLE
Name and Principal Long Term
Position Fiscal Year Annual Compensation Compensation
--------------------- ----------- --------------------- ---------------
Options Granted
Gregory Grambow * 1999 $34,415 0
President and CEO
Director (1)
David Neitzke, 1999 $68,000 2,000,000
Vice President and
Director
(1) Mr. Grambow was employed as the president and chief executive officer from
September 1999 to early January 2000 when his employment was terminated.
Mr. Grambow was paid $27,692 as compensation in fiscal year 2000 and a
termination amount as specified in his employment agreement. Mr. Grambow
was employed under a written employment agreement providing for annual
compensation of $120,000 and an option which expired when his employment
was terminated. From January through April 2000, Mr. Jeffrey Wierichs
served as the acting chief executive officer. Mr. Robert Obernesser served
as President and CEO from April through May 2000. Mr. Nesmith assumed the
offices of president and chief executive officer in June 2000.
16
<PAGE>
AGGREGATE FISCAL YEAR-END OPTION/SAR VALUES
-------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Option/SARs at in-the-money Options/SARs
Name Fiscal Year End (#) at Fiscal Year End
---------------- ------------------------------ ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
David Neitzke 2,100,000 400,000 $230,000 $0
Options for Mr. Grambow are not included in this table because his
options expired upon termination of employment in January 2000.
The value of in-the-money options/SARs in the above table is based on
the share price of $0.215, the bid price at the market closing on December 31,
1999.
Remuneration of the Board of Directors
A director who is an employee does not receive any compensation as a
director. There is no plan in place for compensation of persons who are
directors who are not employees of the Company.
Key-man Life Insurance
We do not own life insurance covering the death of any officer,
director or other key employee.
1998 Performance Equity Plan
In 1998, we adopted the 1998 Performance Equity Plan covering
12,000,000 shares of common stock. The stockholders of Enviro-Recovery approved
the plan on March 20, 1999. Under the plan, we may issue awards to our
directors, officers, employees and consultants. The awards include stock
options, restricted stock, deferred stock, stock appreciation rights, reload
options and other stock based awards. The plan will terminate when there are no
more shares of common stock available for issuance or on June 5, 2008. The board
of directors or a committee of the board of directors administers the plan.
These bodies have the authority to determine the terms of any specific award, in
compliance with the general terms of the plan. Currently, there are 6,010,000
shares of common stock reserved for outstanding awards under the plan.
Other Stock Options, Warrants and Convertible Securities
In addition to the outstanding awards under the 1998 Performance Equity
Plan, Enviro- Recovery has issued rights to acquire up to 39,619,000 shares of
common stock as of June 30, 2000. The rights have been issued as stock options
and warrants and convertible debt. The terms of these rights vary as to exercise
price and the term during which they may be exercised.
17
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The authorized capital stock consists of 250,000,000 shares of capital
stock of which 248,000,000 are designated as shares are common stock, $0.0001
par value and 2,000,000 are designated as shares of preferred stock, $0.001 par
value. As of June 30,2000 there were 94,966,803 shares of common stock issued
and outstanding. No preferred stock is outstanding.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders. In addition, the holders are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of legally available funds. In the event of
our dissolution, liquidation or winding-up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of all our
liabilities and subject to the prior distribution rights of any preferred stock
that may be outstanding at that time. The holders of common stock do not have
cumulative voting rights or preemptive or other rights to acquire or subscribe
for additional, un-issued or treasury shares, which means that the holders of
more than 50% of such outstanding shares, voting at an election of directors can
elect all the directors on the board of directors if they so choose and, in such
event, the holders of the remaining shares will not be able to elect any of the
directors. All outstanding shares of common stock are, and when issued, the
shares of common stock offered hereby, are fully paid and non- assessable.
Preferred Stock
The board of directors has the ability to issue preferred stock and
establish the rights of any preferred stock being issued at the time of issuance
without any shareholder approval. The preferred stock may be issued in one or
more classes or series and may have various rights established, such as rights
to dividends, liquidation preferences, and voting. These rights may be
subordinate or superior to the rights of the holders of the common stock and
other classes of securities outstanding.
Stock Transfer Agent
The stock transfer agent for the common stock is Madison Stock
Transfer, Inc., P.O. Box 290-145, Brooklyn, New York.
18
<PAGE>
PART II
ITEM 1. MARKET PRICE OF, AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS
Market Information
Our common stock was traded on the OTC Bulletin Board until November
18, 1999 and is currently traded on the "pink sheets" under the symbol EVRE. Our
common stock is only traded on a limited or sporadic basis and this should not
be deemed to constitute an established public trading market. There is no
assurance that the common stock will be actively traded in the future.
Therefore, there can be no assurance that there will be liquidity in the common
stock.
Below is a table indicating the range of high and low bid information
for the common stock for each full quarterly period within the three most recent
fiscal years and for the first three quarters of 2000. This information has been
obtained from the National Quotation Bureau, LLC.
Quarterly Period High Low
---------------- ---- ---
Fiscal Year 1998
Jan. 1 - Mar. 31 $1.3125 $0.3125
Apr. 1 - Jun. 30 $1.00 $0.50
Jul. 1 - Sep. 30 $0.60 $0.20
Oct. 1 - Dec. 31 $0.70 $0.16
Fiscal Year 1999
Jan. 1 - Mar. 31 $0.70 $0.29
Apr. 1 - Jun. 30 $0.35 $0.15625
Jul. 1 - Sep. 30 $0.25 $0.17
Oct. 1 - Dec. 31 $0.24 $0.09
Fiscal Year 2000
Jan. 1 - Mar. 31 $1.55 $ .16
Apr. 1 - Jun. 30 $0.44 $0.0375
Jul. 1 - Sep. 30 $0.31 $0.1010
Holders
As of June 30, 2000, there were 625 holders of record of the common
stock.
19
<PAGE>
Dividend Policy
We have never declared or paid cash dividends on the common stock. We
anticipate that all future earnings will be retained for working capital and
business expansion. The payment of any future dividends will be at the sole
discretion of the board of directors and will depend upon, among other things,
future earnings, capital requirements, our financial condition and general
business conditions. Therefore, there can be no assurance that any dividends on
the common stock will be paid in the future.
ITEM 2. LEGAL PROCEEDINGS
On June 29, 2000, Superior Water - Logged Lumber Co., Inc. filed a law
suit against Michael Austin and Subsea Contractors, Inc. in the State of
Wisconsin, Circuit Court, Ashland County (Case No. 00-cv-055). Superior has
claimed breach of contract and breach of exclusive supply provisions, and demand
for return of principal and payment of interest on a loan by Superior to the
defendants which is in default. Superior is also asking for an injunction to
prevent the defendants from continuing to use for their benefit trade secrets of
Superior they learned during their consultancy to Superior and for an order to
return to Superior proprietary information and property. The plaintiffs answered
the complaint on August 14, 2000 and filed certain counterclaims. No substantive
action has been taken in the resolution of the claims or injunctive relief
sought. Superior intends to pursue the claim vigorously and obtain the relief
sought.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
(a) Previous independent accountants
(i) On June 13, 2000, we dismissed Schenck & Associates SC as
our independent accountants because on July 29, 1999 they acquired
another accounting firm which had been doing our payroll which caused
them to be disqualified in providing SEC audit services to us.
(ii) The report dated November 1, 1999 of Schenck & Associates
SC on the consolidated financial statements contained a disclaimer of
opinion because the scope of the work relating to a taking of the
physical inventory at December 31, 1997 was not sufficient to enable
them to express an opinion on the financial statements for December 31,
1997, accordingly, they could not express an opinion on the statements
of income, retired earnings and cash flows for the year ended December
31, 1998.
(iii) The Registrant's Board of Directors participated in and
approved the decision to change independent accountants on June 13,
2000.
(iv) The connection with its audits through June 13, 2000,
there have been no disagreements with Schenck & Associates SC on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which
20
<PAGE>
disagreements if not resolved to the satisfaction of Schenck &
Associates SC would have caused them to make reference thereto in their
report on the consolidated financial statements for such years.
(v) Through June 13, 2000, there have been no reportable
events (as defined in Regulation S-K Item 304(a)(1)(v)).
(vi) The Registrant has requested that Schenck & Associates SC
furnish it with a letter addressed to the SEC stating whether or not it
agrees with the above statements. A copy of such letter, dated November
7, 2000 is filed as Exhibit 16.1 to this Form 10-SB.
(b) New Independent Accountants
The Registrant engaged Virchow, Krause & Company, LLP as its
new independent accountants as of June 13, 2000. Prior to their
engagement, we did not consult with Virchow, Krause & Company, LLP
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion
that might be rendered on our consolidated financial statements, and no
written report or oral advice was provided to us by concluding there
was an important factor to be considered by us in reaching a decision
as to an accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304(a)(1)(iv) of Regulation S-K, or a reportable
event, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Issuances in connection with 1997 merger
On June 2, 1997, Enviro-Recovery effected a merger with a Resource
Recovery, Inc. In the merger, Enviro-Recovery issued an aggregate of 15,435,369
shares-of common stock pursuant to Rule 504 of Regulation D, under the
Securities Act.
On December 16, 1997, Enviro-Recovery issued an additional 39,930
shares of common stock to reconcile variances in the shareholders list dated
June 2, 1997 in connection with the merger of Resource Recovery, Inc. and
Enviro-Recovery and an amended shareholders list. The shares of common stock
were issued pursuant to Rule 504 of Regulation D, under the Securities Act.
On February 29, 1999, March 10, 1 999 and May 28, 1999, Enviro-Recovery
issued an additional 121,000 shares of common stock to settle additional
reconciliations of the June 2, 1997 shareholders list of Resource Recovery, Inc.
and further amended shareholder lists. The shares of common stock were issued
pursuant to Rule 504 of Regulation D, under the Securities Act.
21
<PAGE>
Settlement of outstanding consulting and service obligations and year-end bonus
On December 16, 1997 and January 27, 1998, Enviro-Recovery issued an
aggregate of 1,243,500 shares of common stock to settle amounts owed to various
former employees and consultants for services rendered and as bonus shares to
the then employees. The shares were issued pursuant to Section 4(2) of the
Securities Act. Each of the investors represented that they were buying for
investment purposes and received certificates with legends against their
transfer unless in compliance with the securities laws of the United States and
relevant state jurisdictions.
Private placements of common stock
Enviro-Recovery sold the below listed amounts of common stock at the
specified aggregate dollar amounts in private offerings to investors pursuant to
Section 4(2) of the Securities Act. Each of the investors represented that they
were sophisticated investors with substantial net worth and buying for
investment purposes and received certificates with legends against transfer
unless in compliance with the laws of the United States and relevant state
jurisdiction.
(A) On June 4, 1998, Enviro-Recovery sold an aggregate of 9,605,000 shares of
common stock to ten persons for an aggregate consideration of $960,000
pursuant to conversion of outstanding loans and the sale of stock.
(B) On July 21, 1998, Enviro-Recovery issued an aggregate of 30,000 shares of
common stock in settlement of a claim of payment for services previously
rendered by legal counsel.
(C) On June 30, 1998, Enviro-Recovery issued 666,667 shares of common stock for
the conversion of an outstanding loan from an individual in the amount of
$100,000.
(D) On dates in October and November 1998, Enviro-Recovery issued an aggregate
of 1,587,000 shares of common stock to an individual for an aggregate
consideration of $158,000.
(E) On dates in November and December 1998 and January 1999, Enviro-Recovery
issued an aggregate of 10,835,000 shares of common stock to sixteen persons
for an aggregate consideration of $1,083,000.
(F) On February 23, 1999, Enviro-Recovery issued 5,000 shares of common stock
in exchange for consulting services.
(G) On March 1, 1999 and March 26, 1999, Enviro-Recovery issued an aggregate of
5,000,000 shares of common stock to six persons for an aggregate
consideration of $500,000.
(H) On March 29, 1999, Enviro-Recovery issued an aggregate of 5,000,000 shares
of common stock to eleven persons for an aggregate consideration of
$500,000.
22
<PAGE>
(I) On May 10, 1999, May 12,1999 and May 28, l999, Enviro-Recovery issued an
aggregate of 4,442,050 shares of common stock to four persons, each of
which was a stockholder and one of which was a director of the company,
upon conversion of outstanding loans aggregating $444,205.
(J) On May 28, 1999, Enviro-Recovery issued an aggregate of 265,395 shares of
common stock to two persons in settlement for the claim of outstanding
amounts due for consulting services rendered in 1997.
(K) On February 24, 2000, Enviro-Recovery issued an aggregate of 20,000 shares
of common stock to one person in settlement for the claim of outstanding
amounts due for consulting services rendered in 1997.
(L) On October 6, 1999 and October 8, 1999, Enviro-Recovery issued an aggregate
of 7,100,000 shares of common stock to nine persons, each of which is a
shareholder of the company, for an aggregate consideration of $725,000.
(M) On February 24, 2000, Enviro-Recovery issued an aggregate of 100,000 shares
of common stock to one person in settlement for the claim of outstanding
amounts due for consulting services rendered in 1998 and 1999.
(N) On March 9, 2000, Enviro-Recovery issued an aggregate of 268,233 shares of
common stock to two persons executing the cashless exercise of 500,000
warrants.
(O) On April 5, 2000, Enviro-Recovery issued an aggregate of 22,769,800 shares
of common stock to twenty-six persons for an aggregate consideration of
$2,631,700.
(P) On October 23, 2000, Enviro-Recovery issued an aggregate of 6,050,000
shares of common stock to 10 persons, all of whom were accredited
investors, for an aggregate consideration of $605,000.
The following is a list of sales of common stock of Enviro-Recovery to persons
on the specified dates of the listed amounts pursuant to Rule 504, under
Regulation D of the Securities Act.
Per Share Number Aggregate
Date Amount of Shares Consideration
-------- --------- --------- --------------
09/28/98 $.210 25,000 $ 5,250
09/30/98 $.213 15,000 $ 3,188
10/03/98 $ .22 9,091 $ 2,000
10/09/98 $.144 13,841 $ 2,000
10/09/98 $.144 13,841 $ 2,000
10/14/98 $ .16 12,500 $ 2,000
10/16/98 $ .17 58,824 $10,000
10/16/98 $.145 15,000 $ 2,168
10/19/98 $.160 30,000 $ 4,800
23
<PAGE>
Per Share Number Aggregate
Date Amount of Shares Consideration
-------- --------- --------- --------------
10/23/98 $.150 33,333 $ 5,000
10/27/98 $.170 58,824 $ 10,000
11/03/98 $.170 14,706 $ 2,500
11/03/98 $.136 3,676 $ 500
11/03/98 $.170 7,647 $ 3,000
11/04/98 $.170 39,000 $ 6,630
11/09/98 $.189 52,824 $ 10,000
11/11/98 $.170 17,647 $ 3,000
11/23/98 $.187 53,476 $ 10,000
12/08/98 $.20 15,000 $ 3,000
12/18/98 $.10 100,000 $ 10,000
12/22/98 $.18 61,920 $ 10,000
12/22/98 $.16 80,495 $ 13,000
12/22/98 $.18 1,920 $ 10,000
12/24/98 $.16 18,576 $ 3,000
12/28/98 $.17 29,412 $ 5,000
12/29/98 $.10 150,000 $ 15,000
12/31/98 $.33 122,699 $ 40,000
01/06/99 $.28 20,000 $ 5,610
01/08/99 $.10 150,000 $ 15,000
01/08/99 $.10 50,000 $ 5,000
01/14/99 $.35 22,857 $ 8,000
01/15/99 $.35 28,571 $ 10,000
01/19/99 $.35 78,500 $ 27,475
01/21/99 $.30 40,000 $ 12,000
01/21/99 $.30 124,720 $ 37,416
01/21/99 $.23 1,304,348 $300,000
01/22/99 $.35 14,285 $ 5,000
01/31/99 $.17 88,235 $ 15,000
04/06/99 $.28 272,532 $ 76,308
04/06/99 $.28 290,468 $ 81,000
07/17/99 $.16 813,325 $130,132
07/17/99 $.16 500,000 $ 80,000
Use of Proceeds
All the proceeds of the above offerings, unless otherwise indicated,
were used for general working capital purposes.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Texas Business Corporation Act permits Texas corporations such as
ours to include in the articles of incorporation a provision eliminating or
limiting directors' exposure to liability for monetary damages for breaches of
their duty of care as directors, if the director acted in good faith and with
ordinary care. The act does not eliminate the directors' liability for monetary
damages for acts or omissions not in good faith or involving the intentional
violations of law, the improper purchase or redemption of stock, payment of
improper dividends or any transaction from which the director received an
improper personal benefit.
The act also permits Texas corporations to include in the articles of
incorporation a provision to indemnify any and all persons it has the power to
24
<PAGE>
indemnify. The act provides that a Texas corporation may indemnify a person who
was, is or is threatened to be made a named party in a proceeding because the
person is or was acting on behalf of the corporation. The indemnification by the
corporation may be made if it is determined that the person conducted himself in
good faith, reasonably believed that the conduct was in the corporation's best
interests if the indemnitee is a director, or was at least not opposed to the
corporations' best interests if the person was someone other than a director.
Directors may not be indemnified if the person improperly benefitted personally
or the person is found liable to the corporation. The indemnification may be in
respect of judgments, penalties, fines, settlements and reasonable expenses
actually incurred.
We have implemented the above-described provisions in our articles of
incorporation. In addition, our by-laws provide for similar provisions. We do
not have separate agreements of indemnification or advancement of expenses. We
have obtained directors and officers insurance.
Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling our company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC, indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against liabilities, other than the payment by us of expenses
incurred by a director, officer or controlling person in successful defense of
any action, suit or proceeding, is asserted by such director, officer or
controlling person in connection with the securities being offered or sold, we
will, unless in the opinion of its counsel that the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the federal securities laws, and will be governed by the final
adjudication of such case.
PART F/S
Our financial statements are included in this report beginning on page
F-1, immediately following in this section.
25
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
December 31, 1999 and 1998
Table of Contents
Page
Independend Auditors' Report F-2 - F-3
Consolidated Balance Sheet F-4 to F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity (Deficit) F-7 - F-8
Consolidated Statements of Cash Flows F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-23
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Enviro-Recovery, Inc. and Subsidiaries
Ashland, Wisconsin
We have audited the accompanying consolidated balance sheet of Enviro-Recovery,
Inc. (a Texas Corporation) and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated statements of operations, stockholders equity (deficit)
and cash flows of Enviro-Recovery, Inc. for the year ended December 31, 1998,
were audited by other auditors whose report dated November 1, 1999, did not
express an opinion on these statements for the reason described in the third
paragraph.
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 1999 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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.
Because the prior auditors were not engaged as auditors until after December 31,
1998, they were not present to observe the physical inventories at December 31,
1997 (stated at $652,931), and were unable to satisfy themselves concerning
inventory quantities on hand at those dates by other auditing procedures.
Accordingly, the scope of their work was not sufficient to enable them to
express, and they did not express an opinion on the consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1998.
In our opinion, the 1999 consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of Enviro-Recovery, Inc. and subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
F-2
<PAGE>
Enviro-Recovery, Inc. and Subsidiaries
Independent Auditors' Report
Page 2
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's significant operating losses
and negative cash flow from operations raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Virchow, Krause & Company LLP
Green Bay, Wisconsin
August 4, 2000
F-3
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
_______________________________________________________________________________
ASSETS
Current assets
Cash $ 17,374
Receivables:
Trade 66,256
Other 4,282
Inventories 1,280,430
Prepaid expenses 66,962
----------
Total current assets $1,435,304
Property and equipment
Land and improvements 25,336
Buildings and improvements 940,315
Equipment 2,824,476
Vehicles 143,627
Office equipment 39,863
----------
3,973,617
Less accumulated depreciation 805,965
----------
Net property and equipment 3,167,652
Other assets
Inventories in excess of amounts
expected to be sold currently 1,503,119
Other 203,669
----------
Total other assets 1,706,788
----------
Total assets $6,309,744
==========
See notes to consolidated financial statements.
F-4
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
_______________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of notes payable to stockholders $ 2,503,391
Current maturities of notes payable 210,998
Trade accounts payable 445,807
Customer deposits 75,007
Other liabilities 253,093
-----------
Total current liabilities $ 3,488,296
Long-term liabilities
Notes payable to stockholders 90,000
Notes payable 711,792
-----------
Total long-term liabilities 801,792
-----------
Total liabilities 4,290,088
Stockholders' equity Common stock, $.0001 par value:
Authorized - 250,000,000 shares
Issued - 71,081,770 shares 7,108
Common stock, subscribed 645,000
Additional paid-in capital 7,736,288
Accumulated deficit (6,368,740)
-----------
Total stockholders' equity 2,019,656
-----------
Total liabilities and stockholders' equity $ 6,309,744
===========
See notes to consolidated financial statements.
F-5
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31, 1999 and 1998
_______________________________________________________________________________
1999 1998
---- ----
Revenue $ 903,412 $ 460,424
Cost of revenue 1,036,139 675,252
----------- -----------
Gross profit (loss) (132,727) (214,828)
Operating expenses 1,814,737 1,433,209
----------- -----------
Loss from operations (1,947,464) (1,648,037)
----------- -----------
Other income (expense):
Interest expense (400,203) (620,200)
Loss on disposal of property and equipment (13,332) (213,718)
Other income 26,586 17,085
----------- -----------
Other expense - net (386,949) (816,833)
----------- -----------
Loss before income taxes (2,334,413) (2,464,870)
Income tax credit -- --
----------- -----------
Net loss $(2,334,413) $(2,464,870)
=========== ===========
Basic and diluted loss per share $ (.04) $ (.09)
=========== ===========
See notes to consolidated financial statements.
F-6
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
_______________________________________________________________________________
Common Stock
-----------------
Shares Shares Stock Subscribed
Issued Subscribed Amount Amount
---------- ---------- ---------- ----------
Balances, December 31, 1997 20,454,944 -- $ 2,046 $ --
Stock issued 13,889,692 -- 1,389 --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, December 31, 1998 34,344,636 -- 3,435 --
Stock issued 36,737,134 -- 3,673 --
Stock subscribed -- 6,450,000 -- 645,000
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, December 31, 1999 71,081,770 6,450,000 $ 7,108 $ 645,000
========== ========== ========== ==========
See notes to consolidated financial statements.
F-7
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
_______________________________________________________________________________
Total
Additional Stockholders'
Paid-in Accumulated Equity
Capital Deficit (Deficit)
------------- ----------------- -----------------
$2,057,057 $(1,558,111) $ 500,992
1,717,385 - 1,718,774
- (2,476,216) (2,476,216)
--------------- ---------- ----------
3,774,442 (4,034,327) (256,450)
3,961,846 - 3,965,519
- - 645,000
- (2,334,413) (2,334,413)
--------------- ---------- ----------
$7,736,288 $(6,368,740) $2,019,656
========== =========== ==========
F-8
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
_______________________________________________________________________________
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,334,413) $(2,464,870)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 449,920 256,008
Amortization 7,894 3,358
Loss on disposal of property and equipment 13,332 213,718
Issuance of common stock for services 27,039 31,540
Changes in certain assets and liabilities:
Receivables (60,231) 1,260
Inventories (1,104,876) (1,025,742)
Prepaid expenses 79,486 (72,389)
Accounts payable (147,406) 265,776
Customer deposits (78,803) (10,000)
Other liabilities 75,712 107,927
----------- -----------
Net cash used for operating activities (3,072,346) (2,693,414)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (788,695) (1,667,014)
Proceeds from sale of property and equipment 15,000 154,430
Loans made (33,000) (174,300)
Increase in intangible assets -- (555)
----------- -----------
Net cash used for investing activities (806,695) (1,687,439)
----------- -----------
Cash flows from financing activities
Proceeds from additional long-term debt -- 1,960,621
Retirement of long-term debt (98,659) (283,316)
Proceeds from notes payable 50,000 1,486,565
Issuance of common stock 3,098,527 1,230,671
Common stock subscribed 645,000 --
----------- -----------
Net cash provided by financing activities 3,694,868 4,394,541
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1999 and 1998
_______________________________________________________________________________
1999 1998
---- ----
Net (increase) decrease in cash $(184,173) $ 13,688
Cash, beginning 201,547 187,859
--------- ---------
Cash, ending $ 17,374 $ 201,547
========= =========
Supplemental cash flow information
Cash paid for interest $ 347,584 $ 523,558
Noncash financing activities
Loans from stockholders in the amount of $839,953 and $456,563 were
converted into common stock during 1999 and 1998, respectively.
During 1999 and 1998, the Company issued common stock in exchange for
services. Shares issued during 1999 and 1998 were 268,395 and 315,395,
respectively. The value of the shares issued was $27,039 and $31,540,
respectively.
See notes to consolidated financial statements.
F-10
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 1. Company's activities and significant accounting policies
Company's activities - The Company is engaged primarily in the
production of lumber and wood products from old growth forest timber
recovered from the bottom of the lakes and rivers of North America.
Lumber sales are made to customers located mainly in the upper
Midwestern region of the United States.
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and all majority owned
subsidiaries. Those subsidiaries include:
Ownership
Interest
---------
Resource Recovery, Inc. 100%
Superior Water Logged Lumber Company, Inc. 100%
Resource Recovery of Wisconsin, Inc. 100%
Viking Marine, Inc. 75%
All significant intercompany balances and transactions have been
eliminated.
Revenue recognition - The Company recognizes revenue from production
of lumber upon delivery to the customer.
Use of estimates in preparation of financial statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could vary
from the estimates that were used.
Inventories - Inventories are stated at the lower of cost or market.
The cost of inventory is determined on the first-in, first-out (FIFO)
method.
Property, equipment and depreciation - Property and equipment are
stated at cost. Depreciation for financial reporting purposes is
provided over the estimated useful lives of the respective assets
using the straight-line and accelerated methods.
Earnings (loss) per share - Earnings (loss) per share is calculated
based on net income (loss) and weighted average number of shares
outstanding during the period. For all periods the computation of
diluted earnings (loss) per share was antidilutive, therefore, the
amounts reported for basic and diluted earnings (loss) per share were
the same.
F-11
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 1. Company's activities and significant accounting policies (continued)
Income taxes - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences
between the basis of inventories for financial and income tax
reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either
be taxable or deductible when the assets are recovered or settled.
Deferred taxes are also recognized for operating losses that are
available to offset future taxable income.
Stock-based compensation - The Company accounts for employee stock
options in accordance with Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees." Under APB 25,
the Company recognizes no compensation expense related to employee
stock options, as no options are granted at a price below the market
price on the day of grant.
In 1996, FAS No. 123, "Accounting for Stock-Based Compensation,"
became effective for the Company. FAS 123, which prescribes the
recognition of compensation expense based on the fair value of options
on the grant date, allows companies to continue applying APB 25 if
certain pro forma disclosures are made assuming hypothetical fair
value method application. See Note 10 for pro forma disclosures
required by FAS 123 plus additional information on the Company's stock
option plans.
Reclassifications - Certain accounts in the prior year financial
statements have been reclassified for comparative purposes to conform
with the presentation in the current year financial statements.
Note 2. Going concern
The 1999 financial statements have been prepared on the going concern
basis, which assumes the realization of assets and liquidation of
liabilities in the normal course of business. The application of the
going concern concept is dependent on the Company's ability to
generate future profitable operations and to receive continued
financial support from its stockholders and other investors. Through
December 31, 1999, the Company has suffered recurring losses and
negative cash flow from operations, conditions that raise substantial
doubt about the Company's ability to continue as a going concern.
Management is of the opinion that sufficient working capital will be
obtained from external financing to meet the Company's liabilities and
commitments as they become payable.
F-12
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 3. Fair value of financial instruments
Cash, accounts receivable, accounts payable and accrued liabilities
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The carrying amount of
long-term debt approximates fair value because these financial
instruments bear interest at rates which approximate current market
rates for notes with similar maturities and credit quality.
Note 4. Inventories
Inventories at December 31, 1999 consisted of the following:
Raw materials $ 432,616
Retail inventory 38,431
Work in process 671,745
Finished goods 1,640,757
---------
Total inventories $2,783,549
==========
Note 5. Investments in Brazilian operations
The Company entered into an agreement, dated July 27, 1998 and amended
on March 3, 1999 to acquire the holding rights of two Brazilian
companies to timber in Lake Tucurui, Brazil. Under the July 27, 1998
agreement the Company paid a total of $149,046. $84,746 was paid for
the consideration of obtaining first right of refusal on all wood
recovered from Lake Tucurui and the bandmill owned by Know-How
Maderias, an operating sawmill. In addition, the Company had funded an
additional $64,300 for the purchase of Lamituc Comercial Itda,
R.Cortes Real Barros, and Know-How Maderias. Either the Company or the
Brazilian parties may terminate the agreement at any time after May 7,
1999. If either party terminates the agreement, the Brazilian parties
shall refund the $64,300, associated with the payments to acquire the
Brazilian companies. As of June 30, 2000, the Company has not received
notice from the Brazilian parties of termination and the Company has
not sent notice of termination to the Brazilian parties. The delay in
completion of the acquisition of rights was primarily due to delays in
the release of the timber contracts to the Brazilian parties by the
Brazilian government. The Brazilian parties received the timber
contracts in February 2000. The Company is continuing discussions with
the Brazilian parties and new funding sources. At December 31, 1999
the payments under these agreements are included in other assets.
F-13
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 5. Investments in Brazilian operations (continued)
On June 14, 2000, the Company entered into a joint venture with
EcoWood, Ltd., providing Enviro-Recovery with the rights to submerged
logs in the Amazon River and tributaries in the State of Para.
According to EcoWood representations in the joint venture agreement,
1) there is between 10 and 60 million cubic meters of logs in the
areas covered by the recovery licenses based on EcoWood research and
2) EcoWood has rights to recover the logs from the Amazon River
system. Under the joint venture agreement, EcoWood shall recover and
process logs exclusively for Enviro-Recovery. Enviro-Recovery will
finance log retrieval and milling operations and develop export
markets for the environmentally safe wood products. Enviro-Recovery
retains the earnings of the joint venture. During 2000, the Company
loaned EcoWood, Ltd. $90,000 for business development.
Note 6. Notes payable to stockholders
Notes payable to stockholders at December 31, 1999 consisted of the
following:
Note to Jack Lowry, with interest at 2% over prime,
due April 2000. The note is secured by real estate. $300,000
24% note to First Capital Services, Inc. The note
was due April 1999. 250,000
24% note to First Capital Services, Inc. The note
was due September 1999. This note was paid in full
during March 2000. 350,000
8.50% unsecured note payable to William and Reeva Heide.
Interest only payments were due during the first year.
Principal payment of $10,000, plus interest, is payable in
in each of the second, third and fourth years, with the
remaining balance, plus interest, payable in the fifth
year (May 2001). 100,000
8% unsecured note payable to Jerry and Jane Immel in
quarterly payments of $1,200 the first year, $1,800 the
second year, and $2,400 the third year, with a balloon
payment of $7,993, including interest on October 1, 1999. 10,501
F-14
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 6. Notes payable to stockholders (continued)
Noninterest bearing note payable to Jeffrey
Wierichs due on demand. $ 50,000
8% unsecured note to Steven Schock. The
note is due December 2000. 137,300
9% note to Thomas Evinrude. The note is
due August 2000 and is secured by a first
priority security interest in specific property
and a general security interest. 1,395,590
---------
2,593,391
Less current maturities 2,503,391
---------
Long-term portion $ 90,000
==========
Note 7. Notes payable
Notes payable at December 31, 1999 consisted of the following:
15.6% note payable to Edge Tech payable in
monthly payments of $2,490. The note was
due June 1999 and is secured by equipment. $ 8,770
10.25% note to Northern States Power Company
payable in monthly payments of $1,069, including
interest. The note is due October 2001 and is
secured by real estate. 30,614
10% note payable to Northern States Power
Company in monthly payments of $2,295, including
interest. The note is due May 2003 and is secured
by real estate. 97,990
Note payable at 2% over prime (effectively 10.25%
at December 31, 1999) to M&I Bank in monthly payments
of $6,700, including interest. The note is due
January 2001 and is secured by a general
business security agreement. 239,820
F-15
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 7. Notes payable (continued)
Note payable at 2.5% over prime (effectively 10.75% at
December 31, 1999) to M&I Bank in monthly payments of
$682, including interest. The note is due June 2006
and is secured by a general business security agreement. $ 42,575
Advances under a $350,000, 4% note to the Department of
Development. The note is payable in monthly payments of
$5,400, including interest to December 2004, at which
time the remaining balance is due. The note is secured by
accounts receivable, inventory, intangibles and
waterway rights. 319,902
Advances under a $100,000, 7.5% note to Northwest WI
Business Development Co. Monthly principal and interest
payments of $1,624 are due through February 2004. The
note is secured by a general business security agreement
and personal guarantees of Scott Mitchen and Robert
Holland. 97,299
Notes payable in monthly payments currently totaling
$3,913, including interest ranging from 4% to 10.5%,
due 2000 through 2004. The loans are secured by specific
equipment at the companies. 85,820
---------
922,790
Less current maturities 210,998
-------
Long-term portion $711,792
========
F-16
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 7. Notes payable (continued)
Maturities of long-term debt at December 31, 1999 are as follows:
Year ending
December 31,
2000 $210,998
2001 318,308
2002 112,691
2003 121,166
2004 141,844
2005 17,783
--------
Total $922,790
========
Note 8. Income taxes
Significant components of the Company's deferred tax asset at
December 31, 1999 are as follows:
Net operating loss $1,203,000
Section 263A adjustment for inventory 18,000
---------
Total deferred tax assets 1,221,000
Valuation allowance for deferred tax asset (1,221,000)
----------
Net deferred tax asset $ -
==============
At December 31, 1999, the Company had approximately $6,000,000 of net
operating loss carryforwards for income tax purposes that expire from
the years 2007 to 2019.
F-17
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 8. Income taxes (continued)
The Company's income tax credit differed from the amount computed by
applying the statutory U.S. federal income tax rate to loss before
income taxes as follows:
1999 1998
---- ----
U.S. federal income tax benefit
at federal statutory rate $259,000 $412,000
State income tax benefit, net of federal
income tax effect 124,000 161,000
Increase in valuation allowance for
deferred tax assets (383,000) (573,000)
-------- --------
Total income tax benefit $ - $ -
========= =========
Note 9. Earnings (loss) per share
Basic and diluted loss per share were calculated as follows:
1999 1998
---- ----
Numerator
Net loss - numerator for basic
and diluted loss per share (2,334,413) $ (2,464,870)
=========== ============
Denominator
Denominator for basic loss per
share - weighted average shares 52,713,203 27,399,790
Effect of dilutive securities -
options and warrants 9,808,019 5,990,000
----------- -----------
Denominator for diluted loss per
share - weighted average shares
and dilutive potential common
shares 62,521,222 33,389,790
========== ==========
Loss per share:
Basic $(.04) $(.09)
Diluted $(.04) $(.09)
F-18
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 9. Earnings (loss) per share (continued)
There were an additional 9,565,000 shares of stock from options and
warrants not included in the denominators effect of dilutive
securities due to their exercise price exceeding the market price on
December 31, 1999.
As a result of net losses, the inclusion of options and warrants were
antidilutive and, therefore, were not utilized in the computation of
diluted loss per share.
Prior to issuance of these financial statements an additional
23,658,033 shares of common stock were issued for $2,631,700. Had this
issuance occurred during 1999, the weighted average number of shares
at December 31, 1999 would have been 64,542,220, resulting in an
$(.04) basic and diluted loss per share.
Note 10. Stock option plans
The Company has two stock option plans established on June 5, 1998,
under which non-qualified and qualified stock options may be granted
to certain employees and non-employee stockholders. Each option allows
for purchase of one common share of the Company.
Qualified plan - employees - This plan calls for immediate vesting of
options granted on June 5, 1998 with either a four or five year
vesting schedule for additional options to be granted. The exercise
price of the options granted and vested on June 5, 1998 at December
31, 1998 is $.10 per share. The exercise price for subsequent options
will be the closing market price on the day before the option vest
(June 5) of each succeeding year. These options will expire on
termination of employment or on June 4, 2005.
Non-qualified plans - non-employee and stockholders - This plan calls
for immediate vesting of options. The exercise price for current and
subsequent options varies from $.10 to market at June 5, 1999. The
options under this plan expire at various dates.
F-19
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 10. Stock option plans (continued)
Presented below is a summary of stock option plans activity for
the years shown:
Weighted Weighted
Options Average Options Average
Outstanding Exercise Exercisable Exercise
(In 000's) Price (In 000's) Price
--------- ----- --------- -----
Qualified plan
Balance, December 31, 1997 -- $ --
Granted 9,670 .16
------- -----
Balance, December 31, 1998 9,670 .16 4,640 $ .10
Granted -- --
Expired (3,680) .19
------- -----
Balance, December 31, 1999 5,990 $ .14 4,345 $ .11
======= =====
Non-qualified plan
Balance, December 31, 1997 295 $ 3.00 295 $ 3.00
Granted 12,370 .26
------- -----
Balance, December 31, 1998 12,665 .33 5,665 $ .10
Granted 7,850 .21
------- -----
Balance, December 31, 1999 20,515 $ .28 12,515 $ .23
======= =====
The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
Options Outstanding
Range of Number Weighted Average Weighted Average
Prices (In 000's) Remaining Life Exercise Price
------ --------- -------------- --------------
$.10 - .25 19,010 4.47 years $ .12
.26 - .50 6,850 1.63 years .45
.51 - 1.00 350 1 year 1.00
1.01 - 3.00 295 .89 year 3.00
----------- ---------- ------------- -----
$.10 - 3.00 26,505 3.58 years $ .25
F-20
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 10. Stock option plans (continued)
Options Exercisable
Range of Number Weighted Average
Prices (In 000's) Exercise Price
------ --------- --------------
$.10 - .25 14,365 $ .11
.26 - .50 1,850 .33
.51 - 1.00 350 1.00
1.01 - 3.00 295 3.00
----------- ------- -----
$.10 - 3.00 16,860 $ .20
Pro forma fair value disclosures - Had compensation expense for the
Company's stock options been recognized based on the fair value on the
grant date under the methodology prescribed by FAS 123, the Company's
net loss and loss per share for the two years ended December 31, would
have been impacted as shown in the following table:
1999 1998
---- ----
Reported net loss $(2,334,413) $(2,464,870)
Pro forma net loss (2,484,215) (2,499,438)
Reported diluted loss per share (.04) (.09)
Pro forma diluted loss per share (.05) (.09)
The fair value of options granted, which is amortized to expense over
the option vesting period in determining the pro forma impact, is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
1999 1998
---- ----
Expected life of option 3 years 7 years
Risk-free interest rate 6% 6%
Expected volatility of Enviro-Recovery, Inc. 30% 30%
Expected dividend yield on Enviro-Recovery,
Inc. stock 0% 0%
F-21
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 10. Stock option plans (continued)
The weighted average fair value of options granted during 1999 and
1998 is as follows:
1999 1998
---- ----
Fair value of each option granted $ .062 $ .027
Total number of options granted 7,850,000 22,040,000
In accordance with FAS 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical
model using the preceding Black-Scholes assumptions. In actuality,
because the Company's stock options are not traded on any exchange,
employees can receive no value nor derive any benefit from holding
stock options under these plans without an increase in the market
price of Enviro-Recovery, Inc. stock. Such an increase in stock price
would benefit all stockholders commensurately.
Note 11. Warrants and convertible loan
On March 25, 1999, the Company issued 500,000 warrants for
consideration for raising money for the Company. These warrants have a
conversion price of $.34 per share. These warrants were exercised in
February 2000.
During 1998, the Company issued 1,120,000 warrants for individuals
providing a loan and collateral on a loan. 1,000,000 of the warrants
have a conversion price of $.10 and expire September 23, 2000. 120,000
of the warrants have a conversion price of $1.00 and expire March 24,
2004.
Tom Evinrude shall have the right at any time prior to maturity at his
option, to convert, any portion or all of the outstanding principal
amount and accrued but unpaid interest on his note payable (see Note
6) into fully paid and non-assessable shares of common stock of the
Company at the conversion rate of $.30 per share of such common stock.
F-22
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 12. Risk concentrations
The Company's business entails a number of risks. A significant
portion of the Company's revenue is concentrated with two major
customers. These customers accounted for $360,000 (or 40%) of total
revenue in 1999.
The Company is also dependent on a small number of suppliers. Of these
suppliers, two accounted for approximately 37% of cost of revenue in
1999.
F-23
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
June 30, 2000 and 1999
Table of Contents
Page
Independent Accountants' Report F-25
Consolidated Balance Sheets F-26 - F-27
Consolidated Statements of Operations F-28
Consolidated Statements of Stockholders' Equity (Deficit) F-29 - F-30
Consolidated Statements of Cash Flows F-31 - F-32
Notes to Consolidated Financial Statements F-33 - F-45
F-24
<PAGE>
Independent Accountants' Report
Board of Directors and Stockholders
Enviro-Recovery, Inc. and Subsidiaries
Ashland, Wisconsin
We have reviewed the accompanying consolidated balance sheets of
Enviro-Recovery, Inc. (a Texas Corporation) and subsidiaries as of June 30, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the six months then ended. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Virchow, Krause & Company, LLP
Green Bay, Wisconsin
October 26, 2000
F-25
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
ASSETS 2000 1999
---- ----
Current assets
Cash $ 123,248 $ 470,757
Receivables:
Trade 76,773 3,080
Other 12,784 3,421
Inventories 1,261,455 773,523
Prepaid expenses 66,962 155,718
---------- ----------
Total current assets 1,541,222 1,406,499
---------- ----------
Property and equipment
Land and improvements 28,665 25,336
Buildings and improvements 940,315 938,080
Equipment 2,647,635 2,806,675
Vehicles 143,627 141,627
Office equipment 41,234 44,732
---------- ----------
3,801,476 3,956,450
Less accumulated depreciation 938,582 480,813
---------- ----------
Net property and equipment 2,862,894 3,475,637
---------- ----------
Other assets
Inventories in excess of amounts
expected to be sold currently 1,480,839 908,049
Other 303,534 207,879
---------- ----------
Total other assets 1,784,373 1,115,928
---------- ----------
Total assets $6,188,489 $5,998,064
========== ==========
See notes to consolidated financial statements.
F-26
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
---- ----
Current liabilities
Current maturities of notes payable to
stockholders $ 2,188,725 $ 909,704
Current maturities of notes payable 338,349 183,833
Trade accounts payable 113,948 329,561
Customer deposits 10,607 152,510
Other liabilities 164,595 177,070
------------ ------------
Total current liabilities 2,816,224 1,752,678
------------ ------------
Long-term liabilities
Notes payable to stockholders -- 1,638,725
Notes payable 473,112 811,461
------------ ------------
Total long-term liabilities 473,112 2,450,186
------------ ------------
Total liabilities 3,289,336 4,202,864
------------ ------------
Stockholders' equity Common stock, $.0001
par value:
Authorized - 250,000,000 shares
Issued - 94,239,803 at June 30, 2000 and
63,053,086 at June 30, 1999 9,424 6,305
Common stock, subscribed 400,000 --
Additional paid-in capital 10,366,423 6,822,170
Accumulated deficit (7,876,694) (5,033,275)
------------ ------------
Total stockholders' equity 2,899,153 1,795,200
------------ ------------
Total liabilities and stockholders' equity $ 6,188,489 $ 5,998,064
============ ============
See notes to consolidated financial statements.
F-27
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Six Months Ended June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
2000 1999
---- ----
Revenue $ 273,753 $ 555,612
Cost of revenue 672,745 624,023
----------- -----------
Gross loss (398,992) (68,411)
Operating expenses 915,200 789,459
----------- -----------
Loss from operations (1,314,192) (857,870)
Other income (expense):
Interest expense (184,165) (156,606)
Interest income 6,015 3,970
Loss on disposal of property and equipment (30,712) --
Other income 15,100 11,558
----------- -----------
Other expense - net (193,762) (141,078)
----------- -----------
Net loss $(1,507,954) $ (998,948)
=========== ===========
Basic and diluted loss per share $ (.02) $ (.02)
See notes to consolidated financial statements.
F-28
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Six Months Ended June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
Common Stock
------------------------------------
Shares Shares Stock Subscribed
Issued Subscribed Amount Amount
------ ---------- ----- ------
Balances, December 31, 1998 34,344,636 -- $ 3,435 $ --
Stock issued 28,708,450 -- 2,870 --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, June 30, 1999 63,053,086 -- $ 6,305 $ --
========== ========== ========== ==========
Balances, December 31, 1999 71,081,770 6,450,000 $ 7,108 $ 645,000
Stock issued 23,158,033 (6,450,000) 2,316 (645,000)
Stock subscribed -- 4,000,000 -- 400,000
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, June 30, 2000 94,239,803 4,000,000 $ 9,424 $ 400,000
========== ========== ========== ==========
See notes to consolidated financial statements.
F-29
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Six Months Ended June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
Total
Additional Stockholders'
Paid-in Accumulated Equity
Capital Deficit (Deficit)
------------- ----------------- -------------
$3,774,442 $(4,034,327) $ (256,450)
3,047,728 - 3,050,598
- (998,948) (998,948)
--------------- ----------- ----------
$6,822,170 $(5,033,275) $1,795,200
========== =========== ==========
$7,736,288 $(6,368,740) $2,019,656
2,630,135 - 1,987,451
- - 400,000
- (1,507,954) (1,507,954)
--------------- ---------- ----------
$10,366,423 $(7,876,694) $2,899,153
=========== =========== ==========
See notes to consolidated financial statements.
F-30
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
2000 1999
---- ----
Cash flows from operating activities
Net loss $(1,507,954) $ (998,948)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 223,914 106,533
Amortization 135 1,684
Loss on disposal of property and equipment 30,712 --
Issuance of common stock for services -- 27,039
Changes in certain assets and liabilities:
Receivables (19,019) 3,806
Inventories 41,255 (2,899)
Prepaid expenses -- (9,270)
Accounts payable (331,859) (263,652)
Customer deposits (64,400) (1,300)
Other liabilities (88,499) (312)
----------- -----------
Net cash used for operating activities (1,715,715) (1,137,319)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (68,668) (724,961)
Proceeds from sale of property and equipment 118,800 --
Loans made (100,000) (31,000)
----------- -----------
Net cash used for investing activities (49,868) (755,961)
----------- -----------
Cash flows from financing activities
Retirement of long-term debt (515,994) (861,069)
Issuance of common stock 1,987,451 3,023,559
Common stock subscribed 400,000 --
----------- -----------
Net cash provided by financing activities 1,871,457 2,162,490
----------- -----------
See notes to consolidated financial statements.
F-31
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Six Months Ended June 30, 2000 and 1999
(See Independent Accountants' Report)
_______________________________________________________________________________
2000 1999
---- ----
Net increase in cash $105,874 $269,210
Cash, beginning 17,374 201,547
-------- --------
Cash, ending $123,248 $470,757
======== ========
Supplemental cash flow information
Cash paid for interest $212,853 $177,125
======== ========
Noncash financing activities
Loans from stockholders in the amount of $839,953 were converted into
common stock during 1999.
During 1999, the Company issued common stock in exchange for services.
Shares issued were 268,395. The value of the shares issued was $27,039.
See notes to consolidated financial statements.
F-32
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
______________________________________________________________________________
Note 1. Company's activities and significant accounting policies
Company's activities - The Company is engaged primarily in the
production of lumber and wood products from old growth forest timber
recovered from the bottom of the lakes and rivers of North America.
Lumber sales are made to customers located mainly in the upper
Midwestern region of the United States.
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and all majority owned
subsidiaries. Those subsidiaries include:
Ownership
Interest
---------
Resource Recovery, Inc. 100%
Superior Water Logged Lumber Company, Inc. 100%
Resource Recovery of Wisconsin, Inc. 100%
Viking Marine, Inc. 75%
All significant intercompany balances and transactions have been
eliminated.
Revenue recognition - The Company recognizes revenue from production
of lumber upon delivery to the customer.
Use of estimates in preparation of financial statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could vary
from the estimates that were used.
Inventories - Inventories are stated at the lower of cost or market.
The cost of inventory is determined on the first-in, first-out (FIFO)
method.
Property, equipment and depreciation - Property and equipment are
stated at cost. Depreciation for financial reporting purposes is
provided over the estimated useful lives of the respective assets
using the straight-line and accelerated methods.
Earnings (loss) per share - Earnings (loss) per share is calculated
based on net income (loss) and weighted average number of shares
outstanding during the period. For all periods the computation of
diluted earnings (loss) per share was antidilutive, therefore, the
amounts reported for basic and diluted earnings (loss) per share were
the same.
F-33
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 1. Company's activities and significant accounting policies (continued)
Income taxes - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences
between the basis of inventories for financial and income tax
reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either
be taxable or deductible when the assets are recovered or settled.
Deferred taxes are also recognized for operating losses that are
available to offset future taxable income.
Stock-based compensation - The Company accounts for employee stock
options in accordance with Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees." Under APB 25,
the Company recognizes no compensation expense related to employee
stock options, as no options are granted at a price below the market
price on the day of grant.
In 1996, FAS No. 123, "Accounting for Stock-Based Compensation,"
became effective for the Company. FAS 123, which prescribes the
recognition of compensation expense based on the fair value of options
on the grant date, allows companies to continue applying APB 25 if
certain pro forma disclosures are made assuming hypothetical fair
value method application. See Note 10 for pro forma disclosures
required by FAS 123 plus additional information on the Company's stock
option plans.
Note 2. Going concern
The June 30, 2000 and 1999 financial statements have been prepared on
the going concern basis, which assumes the realization of assets and
liquidation of liabilities in the normal course of business. The
application of the going concern concept is dependent on the Company's
ability to generate future profitable operations and to receive
continued financial support from its stockholders and other investors.
The Company has suffered recurring losses and negative cash flow from
operations, conditions that raise substantial doubt about the
Company's ability to continue as a going concern. Management is of the
opinion that sufficient working capital will be obtained from external
financing to meet the Company's liabilities and commitments as they
become payable.
F-34
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSCIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 3. Fair value of financial instruments
Cash, accounts receivable, accounts payable and accrued liabilities
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The carrying amount of
long-term debt approximates fair value because these financial
instruments bear interest at rates which approximate current market
rates for notes with similar maturities and credit quality.
Note 4. Inventories
Inventories at June 30, 2000 and 1999 consisted of the following:
2000 1999
---- ----
Raw materials $ 104,191 $ 399,573
Retail inventory 36,729 27,131
Work in process 624,817 377,722
Finished goods 1,976,557 877,146
--------- ----------
Total inventories $2,742,294 $1,681,572
========== ==========
Note 5. Investments in Brazilian operations
The Company entered into an agreement, dated July 27, 1998 and amended
on March 3, 1999 to acquire the holding rights of two Brazilian
companies to timber in Lake Tucurui, Brazil. Under the July 27, 1998
agreement the Company paid a total of $149,046. $84,746 was paid for
the consideration of obtaining first right of refusal on all wood
recovered from Lake Tucurui and the bandmill owned by Know-How
Maderias, an operating sawmill. In addition, the Company had funded an
additional $64,300 for the purchase of Lamituc Comercial Itda,
R.Cortes Real Barros, and Know-How Maderias. Either the Company or the
Brazilian parties may terminate the agreement at any time after May 7,
1999. If either party terminates the agreement, the Brazilian parties
shall refund the $64,300 associated with the payments to acquire the
Brazilian companies. As of June 30, 2000, the Company has not received
notice from the Brazilian parties of termination and the Company has
not sent notice of termination to the Brazilian parties. The delay in
completion of the acquisition of rights was primarily due to delays in
the release of the timber contracts to the Brazilian parties by the
Brazilian government. The Brazilian parties received the timber
contracts in February 2000. The Company is continuing discussions with
the Brazilian parties and new funding sources. At June 30, 2000 and
1999 the payments under these agreements are included in other assets.
F-35
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 5. Investments in Brazilian operations (continued)
On June 14, 2000, the Company entered into a joint venture with
EcoWood, Ltd., providing Enviro-Recovery with the rights to submerged
logs in the Amazon River and tributaries in the State of Para.
According to EcoWood representations in the joint venture agreement,
1) there is between 10 and 60 million cubic meters of logs in the
areas covered by the recovery licenses based on EcoWood research and
2) EcoWood has rights to recover the logs from the Amazon River
system. Under the joint venture agreement, EcoWood shall recover and
process logs exclusively for Enviro-Recovery. Enviro-Recovery will
finance log retrieval and milling operations and develop export
markets for the environmentally safe wood products. Enviro-Recovery
retains the earnings of the joint venture. The Company loaned EcoWood,
Ltd. $100,000 for business development which is included in other
assets at June 30, 2000.
Note 6. Notes payable to stockholders
Notes payable to stockholders at June 30, 2000 and 1999 consisted of
the following:
2000 1999
---- ----
Note to Jack Lowry, with interest at 2%
over prime, due April 2000. The note is
secured by real estate. $300,000 $300,000
24% note to First Capital Services, Inc.
The note was due April 1999. 250,000 250,000
24% note to First Capital Services, Inc.
The note was due September 1999. - 350,000
8.50% unsecured note payable to William and
Reeva Heide. Interest only payments were due
during the first year. Principal payment of
$10,000, plus interest, is payable in each of
the second, third and fourth years, with the
remaining balance, plus interest, payable in
the fifth year (May 2001). 100,000 100,000
F-36
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 6. Notes payable to stockholders (continued)
2000 1999
---- ----
8% unsecured note payable to Jerry and
Jane Immel in quarterly payments of
$1,200 the first year, $1,800 the second
year, and $2,400 the third year, with a
balloon payment of $7,993, including
interest on October 1, 1999. $ 5,835 $ 15,539
8% unsecured note to Steven Schock. The
note is due December 2000. 137,300 137,300
9% note to Thomas Evinrude. The note is
due August 2000 and is secured by a first
priority security interest in specific
property and a general security interest. 1,395,590 1,395,590
--------- ---------
2,188,725 2,548,429
Less current maturities 2,188,725 909,704
--------- ----------
Long-term portion $ - $1,638,725
=========== ==========
Note 7. Notes payable
Notes payable at June 30, 2000 and 1999 consisted of the following:
2000 1999
---- ----
15.6% note payable to Edge Tech payable in
monthly payments of $2,490. The note was
due June 1999 and is secured by equipment. $ - $ 16,658
10.25% note to Northern States Power
Company payable in monthly payments of
$1,069, including interest. The note is due
October 2001 and is secured by real estate. 25,667 34,548
10% note payable to Northern States Power
Company in monthly payments of $2,295,
including interest. The note is due May 2003
and is secured by real estate. 88,934 105,199
F-37
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 7. Notes payable (continued)
2000 1999
---- ----
Note payable at 2% over prime to M&I Bank
in monthly payments of $6,700, including
interest. The note is due January 2001
and is secured by a general business
security agreement. $ 208,988 $ 255,883
Note payable at 2.5% over prime to M&I
Bank in monthly payments of $682,
including interest. The note is due June 2006
and is secured by a general business security
agreement. 39,996 42,968
Advances under a $350,000, 4% note to the
Department of Development. The note is
payable in monthly payments of $5,400,
including interest to December 2004, at which
time the remaining balance is due. The note
is secured by accounts receivable, inventory,
intangibles and waterway rights. 293,636 337,297
Advances under a $100,000, 7.5% note to
Northwest WI Business Development Co.
Monthly principal and interest payments of
$1,624 are due through February 2004. The note
is secured by a general business security
agreement and personal guarantees of Scott
Mitchen and Robert Holland. 87,279 98,424
Notes payable in monthly payments currently
totaling $3,913, including interest ranging from
4% to 10.5%, due 2000 through 2004. The loans
are secured by specific equipment at the
companies. 66,961 104,317
--------- -------
811,461 995,294
Less current maturities 338,349 183,833
------- -------
Long-term portion $473,112 $811,461
======== ========
F-38
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 7. Notes payable (continued)
Maturities of long-term debt at June 30, 2000 are as follows:
June 30,
2001 $338,349
2002 135,476
2003 135,080
2004 115,991
2005 72,029
Thereafter 14,536
--------
Total $811,461
========
Note 8. Income taxes
Significant components of the Company's deferred tax asset at June 30,
2000 and 1999 are as follows:
2000 1999
---- ----
Net operating loss $1,507,000 $673,000
Section 263A adjustment for inventory 18,000 287,000
----------- -------
Total deferred tax assets 1,525,000 960,000
Valuation allowance for deferred tax asset (1,525,000) (960,000)
---------- --------
Net deferred tax asset $ - $ -
========== ========
At June 30, 2000, the Company had approximately $7,500,000 of net
operating loss carryforwards for income tax purposes that expire from
the years 2007 to 2020.
F-39
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_______________________________________________________________________________
Note 8. Income taxes (continued)
The Company's income tax benefit differs from the amount computed by
applying the statutory U.S. federal income tax rate to loss before
income taxes as follows:
2000 1999
---- ----
U.S. federal income tax benefit
at federal statutory rate $213,000 $ 75,000
State income taxes net of federal
income tax effect 91,000 47,000
Increase of valuation allowance for
deferred tax assets (304,000) (122,000)
-------- --------
Total benefit from income taxes $ - $ -
======== ==========
Note 9. Earnings (loss) per share
Basic and diluted loss per share at June 30, 2000 and 1999 were
calculated as follows:
2000 1999
---- ----
Numerator
Net loss - numerator for basic
and diluted loss per share $ (1,507,954) $ (998,948)
============ ===========
Denominator
Denominator for basic loss per share
- weighted average shares 82,660,787 48,698,861
Effect of dilutive securities - options
and warrants 7,591,937 7,208,020
----------- ----------
Denominator for diluted loss per
share - weighted average shares
and dilutive potential common shares 90,252,724 55,906,881
========== ==========
Loss per share:
Basic $(.02) $(.02)
Diluted (.02) (.02)
F-40
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 9. Earnings (loss) per share (continued)
There were an additional 8,158,000 and 4,015,000 shares of stock from
options and warrants not included in the denominators effect of
dilutive securities due to their exercise price exceeding the market
price on June 30, 2000 and 1999, respectively.
As a result of net losses, the inclusion of options and warrants were
antidilutive and, therefore, were not utilized in the computation of
diluted loss per share.
Note 10. Stock option plans
The Company has two stock option plans established on June 5, 1998,
under which non-qualified and qualified stock options may be granted
to certain employees and non-employee stockholders. Each option allows
for purchase of one common share of the Company.
Qualified plan - employees - This plan calls for immediate vesting of
options granted on June 5, 1998 with either a four or five year
vesting schedule for additional options to be granted. The exercise
price of the options granted and vested on June 5, 1998 at December
31, 1998 is $.10 per share. The exercise price for subsequent options
will be the closing market price on the day before the option vest
(June 5) of each succeeding year. These options will expire on
termination of employment or on June 4, 2005.
Non-qualified plans - non-employee and stockholders - This plan calls
for immediate vesting of options. The exercise price for current and
subsequent options varies from $.10 to market at June 5, 1999. The
options under this plan expire at various dates.
F-41
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 10. Stock option plans (continued)
Presented below is a summary of stock option plans activity for the
years shown:
Weighted Weighted
Options Average Options Average
Outstanding Exercise Exercisable Exercise
(In 000's) Price (In 000's) Price
------------ -------- ----------- --------
Qualified plan
Balance, December 31, 1998 9,670 $ .16 4,640 $ .10
Granted January - June 1999 -- --
Expired January - June 1999 (3,680) .19
------ ----
Balance, June 30, 1999 5,990 .19 4,345 $ .11
Granted July - December 1999 -- --
Expired July - December 1999 -- --
------ ----
Balance, December 31, 1999 5,990 .14 4,345 $ .11
Granted -- --
------ ----
Balance, June 30, 2000 5,990 $ .14 4,860 $ .13
====== ====
Weighted Weighted
Options Average Options Average
Outstanding Exercise Exercisable Exercise
(In 000's) Price (In 000's) Price
------------ -------- ----------- ------
Non-qualified plan
Balance, December 31, 1998 12,665 .33 5,665 $ .10
Granted January - June 1999 2,750 .39
------ ----
Balance, June 30, 1999 15,415 .24 8,415 $ .20
Granted July - December 1999 5,100 .12
------ ----
Balance, December 31, 1999 20,515 .28 12,515 $ .23
Granted 7,066 .18
------ ----
Balance, June 30, 2000 27,581 $ .26 12,811 $ .23
====== ====
F-42
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 10. Stock option plans (continued)
The following table summarizes information for options outstanding and
exercisable at June 30, 2000: Options Outstanding
Range of Number Weighted Average Weighted Average
Prices (In 000's) Remaining Life Exercise Price
------ --------- -------------- --------------
$.10 - .25 26,076 3.64 years $ .14
.26 - .50 6,850 2.51 years .45
.51 - 1.00 350 .50 year 1.00
1.01 - 3.00 295 .39 year 3.00
----------- ------- ---------- -----
$.10 - 3.00 33,571 2.36 years $.24
Options Exercisable
Range of Number Weighted Average
Prices (In 000's) Exercise Price
------ --------- --------------
$.10 - .25 15,176 $ .11
.26 - .50 1,850 .33
.51 - 1.00 350 1.00
1.01 - 3.00 295 3.00
----------- ------- -----
$.10 - 3.00 17,671 $ .20
Pro forma fair value disclosures - Had compensation expense for the
Company's stock options been recognized based on the fair value on the
grant date under the methodology prescribed by FAS 123, the Company's
net loss and loss per share for the six month periods ended June 30,
would have been impacted as shown in the following table:
2000 1999
---- ----
Reported net loss $(1,507,954) $(998,948)
Pro forma net loss (1,514,962) (1,073,849)
Reported diluted loss per share (.02) (.02)
Pro forma diluted loss per share (.02) (.02)
F-43
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 10. Stock option plans (continued)
The fair value of options granted, which is amortized to expense over
the option vesting period in determining the pro forma impact, is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions at June 30:
2000 1999
---- ----
Expected life of option 3 years 3 years
Risk-free interest rate 6% 6%
Expected volatility of Enviro-Recovery, Inc. 30% 30%
Expected dividend yield on Enviro-Recovery,
Inc. stock 0% 0%
The weighted average fair value of options granted during the six
months ended June 30, 2000 and 1999 is follows:
2000 1999
---- ----
Fair value of each option granted $ .089 $ .062
Total number of options granted 7,066,000 7,050,000
In accordance with FAS 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical
model using the preceding Black-Scholes assumptions. In actuality,
because the Company's stock options are not traded on any exchange,
employees can receive no value nor derive any benefit from holding
stock options under these plans without an increase in the market
price of Enviro-Recovery, Inc. stock. Such an increase in stock price
would benefit all stockholders commensurately.
Note 11. Warrants and convertible loan
On March 25, 1999, the Company issued 500,000 warrants for
consideration for raising money for the Company. These warrants have a
conversion price of $.34 per share. These warrants were exercised in
February 2000.
During 1998, the Company issued 1,120,000 warrants for individuals
providing a loan and collateral on a loan. 1,000,000 of the warrants
have a conversion price of $.10 and expire September 23, 2000. 120,000
of the warrants have a conversion price of $1.00 and expire March 24,
2004.
F-44
<PAGE>
ENVIRO-RECOVERY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 11. Warrants and convertible loan (continued)
Thomas Evinrude shall have the right at any time prior to maturity at
his option, to convert, any portion or all of the outstanding
principal amount and accrued but unpaid interest on his note payable
(see Note 6) into fully paid and non-assessable shares of common stock
of the Company at the conversion rate of $.30 per share of such common
stock.
F-45
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
(a) Exhibits
3.1* Restated and Amended Certificate of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1* Form of Common Stock Certificate of Registrant
10.1* 1998 Performance Equity Plan
10.2* Form of Stock Option Agreement between Registrant and Steven Schock
10.3* Form of Stock Option Agreement between Registrant and David Neitzke
10.4* Form of Agreement between Registrant and Fund Amazon, and Eco-Wood,
Ltd.
10.5* Loan Agreement dated August 5, 1998 between Superior Water - Logged
Lumber Co., Inc. and Thomas Evinrude.
16.1* Letter from Schenck and Associates SC
21.1* Subsidiaries of Registrant
27.1* Financial Data Schedule
________________________
* Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 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 on the 8th day of November,
2000.
ENVIRO-RECOVERY, INC.
/s/ Bruce Nesmith
--------------------------
Bruce Nesmith, President and
Chief Executive Officer
