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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Mark One
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X Annual report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the fiscal year ended December 31, 1999
_____ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-26433
ENVIRO-CLEAN OF AMERICA, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0386415
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
211 Park Avenue
Hicksville, New York 11801
(Address of principal executive offices, including ZIP Code)
(516) 931-4455
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes X No ____
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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State the issuer's revenues for its most recent fiscal year: $7,281,408
As of April 12, 2000, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked prices of such common
equity. (See definition of affiliate in Rule 12b-2 of the Exchange Act) was
approximately $10,093,935 (for purposes of calculating this amount, only
directors, officers, and beneficial owners of 5% or more of the capital stock of
the Registrant have been deemed affiliates).
The number of shares of the Common Stock of the Registrant outstanding as
of April 13, 2000 was 5,422,195.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders to be held on June 14, 2000, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes ______ No X
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ENVIRO-CLEAN OF AMERICA, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX
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Page
Number
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PART I.
Item 1. Description of Business..................................................... 2
Item 2. Description of Property..................................................... 17
Item 3. Legal Proceedings........................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......................... 17
PART II.
Item 5. Market for Common Equity and Related
Stockholder Matters.................................................... 18
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 23
Item 7. Financial Statements........................................................ 26
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................... 26
PART III.
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................... 27
Item 10. Executive Compensation..................................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management............. 27
Item 12. Certain Relationships and Related Transactions............................. 27
Item 13. Exhibits and Reports on Form 8-K........................................... 27
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
Enviro-Clean of America, Inc. (the "Company") was incorporated in Nevada on
December 9, 1997 for the purposes of engaging in the marketing and distribution
of sanitary supplies and related paper products.
As of January 15, 1999, the Company completed the acquisition of Kandel &
Son, Inc. ("Kandel & Son"), a New York-based sanitary supply distribution
company. Prior to the acquisition, Richard Kandel, who is the Chairman of the
Board and Chief Executive Officer of the Company, was also the President and
sole stockholder of Kandel & Son. Kandel & Son distributes approximately 1,000
janitorial and sanitary products to customers in the New York metropolitan area.
As of January 15, 1999, the Company completed the acquisition of
NISSCO/Sunline, Inc. ("NISSCO"), a Florida-based marketing group which acts as
purchasing agent for a buying group consisting of over 170 sanitary/janitorial
supply companies and NISSCO's NIPPCO division, which is a buying group for over
100 paper products distributors (NIPPCO and NISSCO are collectively referred to
as "NISSCO"). Thomas B. Haines, a former director of the Company, was the sole
stockholder of NISSCO immediately prior to the acquisition.
NISSCO derives its revenues in the form of rebates from manufacturers of
products ordered by distributors who are members of the NISSCO buying program.
Manufacturers of cleaning products generally rebate 5% of the gross amount of
orders, to be divided between the buying agent (such as NISSCO) and the
distributor. Generally, NISSCO passes on an amount equal to 2% of the gross
orders to the distributors generating the order and retains 3% as NISSCO's
commission. Members of the NISSCO group purchase approximately $45 million in
products each year.
NISSCO and Kandel & Son are wholly owned subsidiaries of the Company. The
Company has not integrated the operations of NISSCO and Kandel & Son, nor does
the Company intend to do so in the foreseeable future, as they occupy different
niches in the marketplace. Prior to the acquisitions of Kandel & Son and
NISSCO, the Company was engaged solely in strategic planning and development
activities and sold no products or services during that time.
In August, 1999, the Company acquired Cleaning Ideas, Inc. and its wholly
owned subsidiary, Sanivac, Inc., which does business under its own name, as well
as under the trade name "Davis Manufacturing Company" (collectively, "Cleaning
Ideas"). In connection with the acquisition, Cleaning Ideas was merged into a
wholly owned subsidiary of the Company specifically formed for this purpose.
The new subsidiary has succeeded to the business of Cleaning Ideas and has been
renamed "Cleaning Ideas Corp." ("CIC").
CIC is a San Antonio, Texas based manufacturer and distributor of cleaning
supplies, with a particular focus on chemical-based products. CIC has been in
business for over 70 years and gives the Company a geographic presence in the
Southwestern United States. Under the Davis Manufacturing name, CIC
manufactures over 300 products for distribution. CIC operates 12 retail
cleaning supplies stores that sell products bearing the "Cleaning Ideas" private
label brand name. The retail stores focus on selling industrial quality products
to consumers and small businesses. Prior to its acquisition, Cleaning Ideas was
owned by Randall K. Davis, President and Director of the Company, Charles H.
Davis, who is
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the father of Randall K. Davis, and Carolyn Davis, who is the mother of Randall
K. Davis.
On August 17, 1999, the Company acquired Superior Chemical & Supply, Inc.
("Superior"), a Bowling Green, Kentucky-based distributor of cleaning supplies.
Prior to the acquisition of Superior, Stephen Haynes, who remains as the
President of Superior, was the sole stockholder of Superior. Superior operates
three locations within the state of Kentucky and distributes over 1,000 product
items to approximately 300 customers statewide.
The material terms and conditions of the Cleaning Ideas and Superior
acquisitions are summarized in the Company's Report on Form 8-K filed with the
Securities and Exchange Commission (the "SEC") on November 3, 1999 and as
amended on October 29, 1999 and December 8, 1999.
On December 16, 1999, the Company acquired June Supply-San Antonio, Inc.,
("June Supply"). Michael Rose and Alan Stafford, the former stockholders of June
Supply, remain as the President and the vice president of June Supply. June
Supply sells janitorial goods to various customers throughout the state of
Texas. The material terms and conditions of the June Supply acquisition are
summarized in the Company's Report on Form 8-K filed with the SEC on November
10, 1999 and as amended on January 11, 2000.
The Company continues to research the cleaning supplies industry,
identifying and categorizing potential acquisition targets by size of revenues,
geographic market and products distributed. The Company uses the results of
this on-going research to further refine its business plan, rate potential
acquisition targets according to their potential fit with the Company's plans
and develop financial projections regarding the capital needs of the Company.
Management also identifies attractive acquisition targets through advertising in
trade publications, by word-of-mouth within its industry, by attendance at
industry trade shows and through additional research. Management believes that
the costs of identifying acquisition targets will not be material, especially in
light of the substantial overlap between the expenditures for these activities
and those of general marketing expenses. For example, trade publication
advertising and trade show attendance are also core marketing activities and, as
such, would also be included in the Company's basic marketing budget.
While it is impossible to predict the effect that any acquisition will have
on the ability of the acquired company to retain its existing customers, the
Company believes it is taking all reasonable efforts to ensure that its acquired
companies can continue to compete for the business of its existing customer
base.
As the Company believes that much of the competition in its industry tends
to focus on services, the Company intends to expand substantially the range of
services offered by its acquired companies. A key element of the plan is the
Company's proposal to link together with the Company, each of its acquired
companies and selected customers directly with a central Internet-based ordering
system to be developed by the Company. This system will allow the Company to
place orders with its master distributors electronically, eliminating paper,
postage and fax costs and allowing for instant ordering. The Company's initial
system is currently in the process of being implemented and is designed to
expand modularly with the addition of acquired companies. The Company also
intends to distribute CD-ROM based catalogs to its distributors and customers to
enhance the ordering capability of those who do not wish to order over the
Internet. Management of the Company believes that this Internet-based and
electronic ordering system will lower the effective costs of sales relative to
the cost of sales under traditional product and ordering systems that rely
principally upon printed catalogs and purchase orders or telephone orders.
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(b) Business of Issuer
The Company is a holding company, the principal assets of which are all the
issued and outstanding capital stock of Kandel & Son, NISSCO, CIC, Superior and
June Supply (collectively, these companies are sometimes referred to as the
"Subsidiaries"). Through the Subsidiaries, the Company engages in the
manufacturing, purchasing, marketing and distribution of janitorial and sanitary
supplies and related paper products. The Company plans to continue in its
acquisition of additional janitorial/sanitary product businesses across the
United States and to establish management controls and systems to enable the
combined companies to realize substantially greater growth and profitability
than each achieve under current ownership and management. The Company may also
consider acquisition targets in Canada.
A. The Market for the Company's Products
The market for sanitary/janitorial supplies and services in the United
States is substantial. According to the International Sanitary Supply
Association's most recent survey in 1997, the sanitary/janitorial distribution
industry had $16.7 billion in sales. This figure represented a 10.4% increase
over the corresponding figures for 1995. According to the survey, the sale of
paper and plastics for 1997 was approximately $6.6 billion, followed by the sale
of chemical products (cleaners, degreasers, etc.) at $6.1 billion. Janitorial
supplies and accessories were the third largest segment of the market with sales
measured to be approximately $1.9 billion.
The Company believes that the market for janitorial products has grown due
to the growth of the economy in general and an increasing concern of building
owners and managers for health and safety. The Company also believes that the
overall market is growing due to increasing customer demands for a greater
variety of products and services, including contract cleaning, training and
education.
According to the same survey, industrial and manufacturing companies
account for the largest customer group for janitorial goods with $3.6 billion in
aggregate purchases, followed by commercial property owners and educational
institutions at nearly $2 billion each, and next followed by health care
companies at nearly $1.6 billion. Additional market opportunity exists with
respect to sales to restaurants/clubs, retail establishments, residential
properties, government, recreational facilities, transportation companies,
hotels/motels, and religious facilities.
B. Industry Structure and Trend
The Company believes that the sanitary/janitorial supply industry is
undergoing a period of consolidation. The Company believes that due to the
large number of small companies in the industry, and the presence of only a few
large enterprises, there exists an opportunity to consolidate the market. There
are a few large companies engaged in the business of supplying and distributing
sanitary/janitorial supplies, but their consolidation efforts have been targeted
at relatively large companies with $50 million or more in annual revenues.
Despite this activity, the Company believes that there is currently no one
dominant player in the industry.
In this environment, management recognizes that there are a significant
number of small, profitable sanitary/janitorial supply companies that may be
desirable acquisition targets for consolidation. These small companies may be
receptive to acquisition offers because they are currently facing difficult
competition from the larger companies, as well as those companies that are
increasing in size through the on-going consolidation in the industry. Though
smaller in size, these companies can often successfully compete in their region
with the larger suppliers and service providers by offering greater levels of
service and niche products not offered by the larger competitors. However, the
Company believes that these
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smaller companies are increasingly feeling the competitive pressure from larger
companies who are able to offer lower prices and take advantage of economies of
scale. Additionally, many of these small companies are family-owned businesses
that lack the depth and breadth of management and financing skills, marketing
expertise, resources, and access to productivity enhancing technology necessary
to expand their businesses further.
Management believes that consolidation in the janitorial/sanitary supply
industry will continue at a rapid rate for the foreseeable future due to
industry characteristics including: (i) economies of scale that drive
profitability, (ii) need for compliance with government regulations for safety
and the environment, (iii) advantages of vertical integration; and (iv) the
increased application of technology to monitor inventory, delivery schedules,
ordering and related activities.
(1) Economies of Scale
By consolidating businesses, the Company may be able to reduce its
costs by eliminating costly repetitive services and increase profit by obtaining
cheaper per unit costs. For example, delivery costs of janitorial supplies tend
to make up a substantial percentage of cost of goods sold. By consolidating
small companies, the Company can reduce delivery costs by shipping in bulk and
negotiating lower delivery fees or investing in a delivery system of its own. In
addition, the Company estimates that only 3% of the total cost of cleaning
service relates to the costs of materials sold; the rest is labor, sales,
marketing and delivery expenses. Thus, from the economic viewpoint of the
Company's current or potential customers, the suppliers' efficient delivery of
value-added service is becoming increasingly important, especially concerning
training and education to reduce the customers' labor costs.
(2) Compliance with Government Regulations
There are a number of government agencies that set standards and
regulations on the use and handling of chemical products and for sanitary
conditions. Included in these agencies are the Occupational Safety and Health
Administration (OSHA) which regulates chemicals related to occupational safety,
the Environmental Protection Agency (EPA) chartered to protect land, air, and
water, and the Consumer Product Safety Commission (CPSC) which regulates the use
and labeling of chemicals and products. These agencies issue rulings that
directly affect the practices and purchases of the sanitary/janitorial
supplier's customers. Maintenance and distribution of many of the industry's
products are subject to extensive regulation at the federal, state and local
levels.
With the continuous change in the regulations being imposed upon the
janitorial and cleaning supplies industry, the individual companies in the
industry, in particular the small to mid-size companies, are likely to
experience an increase in costs in their compliance programs. The Company
believes that consolidation is being fueled in part by a consolidated company's
ability to finance such compliance programs and the reduction in expense through
allocation of the expense throughout the consolidated company. In addition, a
consolidated company may have the resources available to hire environmental
consultants in order to assist it in complying with the environmental laws and
regulations as they are continuously enacted.
(3) Advantages of Vertical Integration
The Company believes that the consolidation of the industry is also
being fueled by the push toward integrated supply. Distributors are looking to
simplify the purchasing process and reduce the number of suppliers with which
they must interact. This has two key effects. First, it provides opportunities
for distributors to reach geographically dispersed customers, thereby expanding
its markets and market share. Second, it fuels the acquisition trend as large
wholesale distributors look to expand
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their product lines. By acquiring a manufacturing company, a distributor may
increase the number of products it may offer because, in addition to the large
number of products manufacturers may produce, many manufacturers carry unique
products they have developed which are not carried by other manufacturers.
(4) Application of Technology
The janitorial/sanitary supply industry, as is true with most
wholesale distributors, is just beginning to embrace the application of
technology to improve operations and service levels. The most notable
technology opportunities concern the Internet. Again, the Company believes that
the ability of a consolidated company to pool revenues to explore cutting edge
technologies available will spur such consolidation. The Company plans to
embrace the use of the Internet to better achieve its goals and to secure its
position as a competitive element in the janitorial/sanitary supply market.
The emergence of the Internet, as a low cost, ubiquitous
communications channel, has created significant opportunities for those willing
to embrace this new channel. It affords the opportunity to reach manufacturers
and customers more efficiently and streamline the acquisition process. The
Company estimates that most sanitary supply manufacturers have Internet access,
yet less than half of the distributors are on-line. The Internet allows
customers to keep up-to-date on product offerings, order products more
efficiently, and obtain valuable information regarding product use and safety.
The Company intends to implement a company-wide, Internet based network linking
its distributors with the Company. The Company also intends to reach retail
customers through an Internet-based electronic commerce program that would allow
consumers to order products through the Company's web site by using credit cards
and receive next-day delivery through a nationally recognized overnight carrier
service.
The Company plans to implement its eCommerce program in four phases
with the goal of fully implementing such program by January 1, 2001. During the
first phase, the Company retained Telcom.net, an Internet web site developer, to
implement the Company's initial informational web site http://www.evclean.com in
July of 1999. In addition, the Company entered into an agreement with
b2bstores.com, Inc. ("b2bstores"), a California-based designer and producer of
Internet-based electronic commerce programs and on-line "stores." Pursuant to
the agreement ("b2bstores Agreement"), b2bstores has implemented the Company's
initial eCommerce web site (http://www.b2bgoods.com).
The Company, Richard Kandel ("Kandel"), Randall Davis ("Davis") and
Steven Etra were the principal stockholders of b2bstores prior to its initial
public offering on February 15, 2000. Since its inception in June 1999 until the
initial public offering, b2bstores' working capital requirements had been
satisfied through capital contributions made by the Company, Kandel, Davis and
Mr. Etra and loans made to it by the Company. In June 1999, the Company, Kandel,
Davis, Mr. Etra, and others purchased an aggregate of 3,410,000 shares of
b2bstores common stock for $27,500 in the form of $11,000 in cash and the
transfer to b2bstores of all of their rights, title and interest in
www.b2bstores.com and all related assets, including intellectual property.
In June, July, November, December 1999 and January 2000, the Company
made loans to b2bstores in the aggregate principal amount of approximately
$1,199,836. These loans carried an interest rate of 8% per annum and were paid
in full on February 18, 2000. In August 1999 in a private offering by b2bstores,
Kandel purchased 66,666 shares at $1.88 per share, Kandel and Son Profit
Sharing Plan, of which Kandel is the trustee, purchased 100,000 shares at $1.88
per share, Steven Etra purchased 92,000 shares at $1.88 per share, and SRK
Associates, Inc., a company controlled by Steven Etra, purchased 10,667 shares
at $1.88 per share.
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B2bstores completed its initial public offering on February 15, 2000
in which it issued 4,000,000 shares of its common stock. Immediately before the
b2bstores' initial public offering of February 15, 2000, the Company owned
2,000,000 shares of the b2bstores common stock, constituting approximately 49.7
% of the total outstanding b2bstores common stock while Kandel, Davis and Steven
Etra each owned additional 1,233,333 shares (30.7%), 333,333 shares (8.3%) and
169,334 shares (4.2%) of b2bstores common stock, respectively.
On February 15, 2000, Steven Etra purchased 30,000 shares and Gemini
Capital LLC, a company in which Steven Etra is an officer, director, and
minority stockholder, purchased 3,500 shares of b2bstores' common stock at $8.00
per share as part of the initial public offering. Also on February 15, 2000,
after trading of b2bstores' registered shares commenced, Steven Etra purchased
2,000 shares at $7.625 per share. On February 25, 2000, Lances Property
Development Pension Plan, a company 50% owned by Steven Etra, purchased 1,000
shares of b2bstore common stock at $12.625.
On March 13, 2000, after the public offering of b2bstores common
stock, and the additional purchases of b2bstores' common stock by Steven Etra
and his affiliates, the Company, Kandel, Davis, and Steven Etra each owned
approximately 24.9%, 15.4%, 4.1% and 2.5% of the outstanding b2bstores common
stock, respectively.
The Company, Kandel, Davis, and Steven Etra entered into lock-up
agreements (the "Lock-Up Agreements") in favor of Gaines Berland, Inc. and Nolan
Securities, Inc. (the "Underwriters") in connection with the b2bstores' initial
public offering, which restricted certain dispositions of the shares which were
beneficially held by the Company, Kandel, Davis, and Steven Etra immediately
prior to the initial public offering for a one year period commencing February
15, 2000. On March 14, 2000, the Underwriters granted a waiver under the Lock-Up
Agreement to permit the Company to sell 1,000,000 of its 2,000,000 shares. Upon
receiving the waiver, the Company sold 1,000,000 shares of the Common Stock in a
private placement to ZERO.NET, Inc., a Delaware corporation, at $7.00 per share
for an aggregate of $7,000,000. The shares purchased by ZERO.NET, Inc. will also
be subject to a twelve month lock-up agreement. After the Company's sale to
ZERO.NET, Inc., the Company owned 1,000,000 shares of the b2bstores' common
stock, constituting 12.5% of the total outstanding b2bstore common stock as of
March 20, 2000. The sale of the 1,000,000 shares of b2bstores common stock is
described in the Company's Current Report on Form 8-K filed with the SEC on
March 20, 2000.
The Company has also guaranteed some of b2bstores obligations to
certain vendors. As of March 20, 2000, b2bstores owed in aggregate less than
$10,000 to such vendors to whom the Company provided guarantees. The Company has
also guaranteed b2bstores lease. B2bstores annual lease payments under the lease
total $75,000. The b2bstores' lease expires on August 31, 2001. The Company
received no compensation or other consideration for acting as b2bstores'
guarantor.
C. The Company's Products, Sales and Marketing
Kandel & Son distributes approximately 1,000 janitorial/sanitary products
to customers in the New York City metropolitan area, where it has been in
business for 48 years. NISSCO serves as the purchasing agent for a nationwide
network of distributors consisting of over 270-member sanitary/janitorial supply
and related paper products companies which account for over $45 million in
annual purchases of janitorial/sanitary supplies and related paper products. CIC
is a San Antonio- based regional manufacturer, distributor and retail vendor of
cleaning supplies to customers located within Southern Texas. Superior operates
three distribution centers within the State of Kentucky from which it
distributes cleaning products. June Supply is a distributor of janitorial goods
with various customers throughout the state of Texas. The Company has not
integrated the operations of the Subsidiaries, nor
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does the Company intend to do so in the foreseeable future, as they occupy
different geographic market niches.
In the aggregate, the multiple combined businesses of the Company
distribute over 1,200 products to over 1,000 customers directly in New York,
Texas and Kentucky and, through NISSCO, throughout all 50 states. The Company
competes principally on the basis of price and value-added services such as
next-day delivery, training, customer support and technological innovation in
distribution.
Products distributed by the Subsidiaries are generally shipped by truck
or other common carriers to local distributors who keep an inventory of the most
popular products. Less commonly ordered products can be shipped via UPS or other
delivery service for next day delivery or by the same common carriers for less
time-sensitive deliveries. Products ordered by customers over the Internet will
be shipped to such customers directly by the Company's master distributors,
which maintain regional distribution centers across the United States. The
Company conducts its businesses with the master distributors through customary
purchase orders.
The Company purchases products, through master distributors, from a
wide variety of manufacturers. Master distributor refers to a large distributor
with national or regional distribution capabilities. Master distributors the
Company uses include Bunzl/Papercraft, TEC Products, Inc., La Gass Bros., Inc.
and Sweet Paper Company. The Company believes that virtually all of its products
are available from multiple sources and the loss of one or even several sources
would not have a material adverse effect on the Company's business. Further, the
Company does not have any ongoing or long-term contractual obligations with any
local or master distributors. Similarly, the Company sells to over 1,000
customers, none of which accounts for more than 3% of the Company's sales on an
annual basis. Accordingly, the Company is not overly dependent on any one or few
customers. NISSCO acts as purchasing agent for a nationwide network of
distributors. NISSCO derives its revenues from a 5% rebate from manufacturers on
all purchases made by group members. NISSCO shares this rebate with its
distributors, passing on 2% of the aggregate rebates to the distributors.
D. Competition
The market for janitorial/sanitary supplies has only a few large,
well-capitalized competitors and consists of a large number of small companies
servicing local and regional markets. The larger suppliers in the industry
include:
Unisource Worldwide
W.W. Grainger
Corporate Express
ResourceNet International
Waxie Sanitary Supply
Most of these corporations have multiple divisions, with one of those
being in the sanitary/janitorial supply industry. The Company is not currently a
significant competitor in the industry in terms of annual sales, and its market
share is negligible. However, the Company believes that, through an aggressive
plan of acquisitions, it can become a significant industry competitor within 18
months to two years. There can, of course, be no assurance that the Company will
be successful in identifying attractive acquisition targets, negotiating
advantageous acquisition terms or obtaining the financing necessary to sustain
growth through acquisitions. Failure of the Company to achieve any one of these
goals could force it to substantially curtail its acquisition plans. If the
Company were forced to do so, it would focus its activities on attempting to
foster internal sales growth and profitability, but such growth
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would be much slower than under the Company's current plans and the Company's
plan to become a significant industry leader could be in jeopardy.
The Company believes that, while the larger distributors are the main
competition in the industry, many of the independent janitorial/sanitary supply
distributors still maintain a healthy and profitable local market share.
Competition is, however, forcing prices down and leaving the independently run
companies more vulnerable. With the market being serviced by what the management
considers only a few large competitors, most of the overall market, based on
total sales, is divided among a large number of smaller competitors.
B2bstores sells through the Internet many of the same
janitorial/sanitary products and other office supply products that the Company
sells through its web site. Therefore, b2bstores may be deemed a competitor of
the Company in that regard. The Company has agreed with b2bstores that, in
connection with its eCommerce program, the Company will sell its products on the
Internet only through the b2bgoods.com or the b2bstores.com site and that it
will not sell on its web site any products other than its current products,
until it owns less than 10% of b2bstores' outstanding common stock.
Kandel, the Chairman and Chief Executive Officer of the Company, serves
as the chairman of the board of b2bstores. He has entered into a three-year
employment agreement with b2bstores, effective November 1999. Pursuant to the
terms of such agreement, Kandel will be required to devote 50% of his business
time to the operations of b2bstores. Kandel's position as a director, officer
and stockholder of each of the Company and b2bstores may create or appear to
create potential conflicts of interest when he is faced with decisions that
could have different implications for the Company and b2bstores. These decisions
may relate to:
. potential acquisitions of businesses;
. intercompany agreements;
. the establishment of e-commerce marketing arrangements and
other areas of competition;
. the issuance or disposition of securities; and
. the election of directors.
Given Kandel's roles with both the Company and b2bstores and the
potentially competitive position of each business, he may not always be able to
align his interest with the interests of both businesses. Kandel will refrain
from participating in any decision or other action as a director or officer of
either company if it presents such a conflict of interest.
In addition, Davis, President and Director of the Company, and Steven
Etra, Secretary, Treasurer and Director of the Company, hold 4.1% and 2.5%
respectively of the b2bstores common stock as of March 20, 2000. Davis's and
Steven Etra's positions as directors, officers, and stockholders of the Company
and as stockholders of b2bstores may create or appear to create potential
conflicts of interest when they are faced with decisions that could have
different implications for the Company and b2bstores. Both Davis and Steven Etra
will refrain from participating in any decisions or other actions as directors
or officers of the Company if it presents such a conflict of interest.
E. Acquisition Program
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The Company's objective is to build a strong presence in the
janitorial/sanitary supplies distribution industry at a middle market level
through the implementation of the Company's acquisition program. In the first
stage of its acquisition program, the Company intends to acquire approximately
six to eight sanitary supply distributors, which fit the Company's profiles for
suitable acquisition targets. According to the Company's target profile, a
suitable acquisition target will:
. have annual revenue in the $2 million to $10 million range;
. have net pre-tax profits of at least 10% of gross revenue; and
. have management whose key members have expressed their
willingness to work for the Company on long-term basis.
There can be no assurance that the Company will obtain any additional
financing on terms satisfactory to it. The failure of the Company to obtain
additional financing will have a materially adverse effect on its ability to
implement its acquisition strategy.
F. Trademarks
The Company has no trademarks, patents or other licenses that are
material to the conduct of its business.
G. Research and Development
The Company has no material research and development expenses.
H. Employees
The Company, through the Subsidiaries, currently employs approximately
ninety (90) full-time employees. Four of the Company's drivers and warehousemen
are members of various collective bargaining units, with contracts extending to
September 1, 2001. The Company has not experienced any work stoppages and
believes its relationships with its employees are satisfactory.
I. Governmental Regulations
There are a number of government agencies that set standards and
regulations on the use and handling of chemical products and for sanitary
conditions. Included in these agencies are the Occupational Safety and Health
Administration (OSHA) which regulates chemicals related to occupational safety,
the Environmental Protection Agency (EPA) chartered to protect land, air, and
water, and the Consumer Product Safety Commission (CPSC) which regulates use and
labeling of chemicals and products. These agencies issue rulings that directly
affect the practices and purchases of the sanitary/janitorial supplier's
customers.
Maintenance and distribution of many of the Company's products are
subject to extensive regulation at the federal, state and local levels. In
particular, the Company is subject to regulations involving storage of hazardous
materials promulgated by the Federal Environmental Protection Agency and the
Occupational Safety and Health Act. As such, the Company's business is dependent
upon continued compliance with governmental regulations regarding the operations
of the Company's facilities. The Company believes that it is in substantial
compliance with all such regulations that are applicable to its business.
However, failure to maintain and demonstrate compliance with all such
regulations could
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result in the preclusion of handling certain product lines, result in mandated
clean up expenditures, and could have a material adverse effect on the business
and prospects of the Company.
The costs to the Company of complying with environmental regulations
are not material.
(c) Risk Factors
The Company's business is subject to a variety of risks, including the
risks described below. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks and uncertainties not known to
the Company or that the Company currently deems immaterial may also have a
material adverse effect on the Company. If any of the following risks actually
occur, the Company's business, financial condition and results of operations
could be materially and adversely affected.
A. Limited Operating History
The Company and the businesses the Company has acquired since January,
1999 have been operating as separate entities with a certain degree of operating
autonomy. To properly manage the enterprise on a profitable basis, the Company
must institute certain necessary common systems and procedures. To facilitate
common management, the Company intends to integrate the computer, accounting,
and financial reporting systems, and certain of the operational, administrative,
banking, and insurance procedures of the businesses the Company acquires.
However, the Company cannot be certain that it will successfully institute these
common systems and procedures. In addition, the Company cannot be certain that
its recently assembled management group will be able to successfully manage the
businesses the Company acquires. Further, the Company cannot be certain that the
recently assembled management team will be able to successfully manage the
businesses it acquires as a combined entity and effectively implement its
operating or growth strategies.
The Company has a limited operating history as a combined entity upon
which to evaluate the performance and prospects of the Company. There can be no
assurance that the combined entities will operate profitably, that management of
the Company will be successful in implementing the Company's business plan, in
identifying attractive acquisition candidates, in negotiating acquisitions at
prices advantageous to the Company or at all, in building the corporate
infrastructure to support operations at the levels called for by the Company's
business plan, and in concluding a successful sales and marketing plan to attain
significant penetration of the market for its products. There can be no
assurance that the Company will generate sufficient revenues to meet its
expenses or to achieve or maintain profitability.
B. Substantial Leverage and the Ability to Service Debt
The Company is highly leveraged, with substantial debt service in
addition to its ongoing operating expenses and planned capital expenditures. The
Company's level of indebtedness will have several important effects on its
future operations and could have important consequences to holders of the
Company's Common Stock, including, without limitation, (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
interest and principal on its indebtedness, (ii) the Company's leveraged
position will substantially increase its vulnerability to adverse changes in
general economic, industry and competitive conditions, and (iii) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes may be limited.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent on the Company's future performance, which
will be subject to general economic, industry and competitive conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. If the Company is not able to generate
sufficient cash flow from operations in the future to service its debt, it may
be required,
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among other things, to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, to sell
selected assets, or to reduce or delay planned capital expenditures. There can
be no assurance that any such measures would be sufficient to enable the Company
to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
A portion of the Company's outstanding debt includes a large portion of
the remaining principal outstanding under a promissory note in the original
principal amount of $900,000 dated August 1, 1999, between the Company and
Charles H. Davis, father of Randall K. Davis, President and a Director of the
Company, executed by the Company in connection with the acquisition of CIC (the
"Davis Note"). Repayment of the Davis Note is secured by a security interest in
all accounts receivable, inventory, accounts or proceeds resulting from
dispositions of accounts receivable and inventory of CIC (the "Non-Stock
Collateral"), and all the capital stock of CIC (the "Stock Collateral").
Pursuant to a Pledge and Security Agreement dated as of August 1, 1999, in the
event of a default in any payment on the Davis Note, and the expiration of any
cure periods under the Davis Note, Charles H. Davis and Randall K. Davis may
execute upon the Non-Stock Collateral, and/or elect to repurchase CIC by
canceling the Davis Note (thereby discharging the balance of the unpaid
principal and interest of the Davis Note) and delivering to the Company the
balance of the Series D Stock and shares of the Company's Common Stock received
upon conversion of the Series D Stock still held by Charles H. Davis and Randall
K. Davis. If Charles H. Davis and Randall K. Davis elect the second option, the
effect would be that all amounts paid by the Company to Randall K. Davis and
Charles H. Davis, including the $400,000 paid in respect of the assumed debt,
the $500,000 paid in cash, any amounts of principal and interest paid in respect
of the Davis Note and the redemption price of $1,600,000 plus $29,071.04 in
interest paid in cash for the Series D Shares on March 16, 2000, would be
forfeited and CIC would revert to Charles H. Davis and Randall K. Davis.
In connection with the acquisition of Superior, the Company executed a
secured promissory note in the original principal amount of $1,200,000 dated
August 13, 1999, between the Company and Stephen Haynes, payable in 12 equal
quarterly principal payments of $100,000, bearing interest at a rate of 8% per
annum, and maturing on August 13, 2002 (the "Haynes Note"). Repayment of the
Haynes Note is secured by a security interest in all accounts receivable,
inventory, accounts or proceeds resulting from dispositions of accounts
receivable and inventory of Superior. Pursuant to a Security Agreement dated as
of August 1, 1999, between the Company and Stephen Haynes in the event of a
default in any payment on the Haynes Note, and the expiration of any cure
periods under the Haynes Note, Mr. Haynes may execute upon the collateral and
cause the noncompetition provisions contained in his employment agreement with
Superior to become void.
In March of 1999, the Company raised $3,000,000 in conjunction with the
offering of 300 units. The units offered were comprised of debt securities (the
"Notes") paying an interest rate of 12.75% per annum and warrants to purchase
Common Stock at $4.25 per share. The Notes provide that upon a default on the
payment of interest or principal that is not cured within 30 days of notice of
default, the interest to be paid on the unpaid principal of the Notes shall
increase from 12.75% to 15% until the default is cured. The Notes have a
maturity date of April 1, 2002. A default on the payment of interest or
principal of the Notes, and the failure of the Company to cure such default
within the applicable cure period, would result in a substantial additional
obligation by the Company to the holders of the Notes.
C. Operating Losses
From its incorporation on December 9, 1997, through the present, the
Company has incurred significant operating losses. Such deficits reflect the
cost of developmental and other start-up activities, including the development
and integration of the consolidation process, as well as the requirement of
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recording significant depreciation and amortization of newly purchased assets on
the books of the Company. The Company also anticipates that it will continue to
incur net operating losses for the foreseeable future. While management believes
that it has developed a plan of operations that when combined with its previous
acquisitions, if successfully implemented, should permit the Company to achieve
and sustain profitable operations, no assurance can be given that the Company's
operations will be profitable in the future.
D. Risks Related to Acquisition Strategy
One of the Company's principal growth strategies is to increase its
revenues and the markets it serves through the acquisition of janitorial and
sanitary supplies companies. Future acquisitions, as well as those acquisitions
the Company has already made, involve a number of special risks that could
materially and adversely affect the Company's business, financial condition and
results of operations. These special risks include:
. failure of the acquired businesses to achieve the results
expected;
. diversion of the management's attention to the assimilation
of the operations and personnel of the acquired companies;
. potential failure to gain operating efficiencies and
difficulty of integrating acquisitions into the Company's
existing operations;
. the inability to retain key personnel of the acquired
businesses;
. unexpected costs or liabilities in the acquired business;
. adverse short-term effects on the Company's operating
results; and
. the amortization of acquired intangible assets.
The Company expects to face competition for acquisition candidates,
which may limit the number of acquisition opportunities and may lead to higher
acquisition prices. The Company cannot be sure that it will be able to identify,
acquire or profitably manage additional businesses.
The Company is dependent on the infusion of additional capital to
support its planned program of growth through acquisitions and expansion of its
existing business. There can be no assurance that the Company will receive
adequate capital. Failure to obtain such financing would effect the business and
prospects of the Company and could threaten the Company's ability to reach its
goals.
The Company cannot readily predict the timing, size, and success of its
acquisition efforts or the capital it will need for these efforts. The Company
intends to use its Common Stock for all or a portion of the consideration for
future acquisitions. These issuances could have a dilutive effect on the holders
of the Company's Common Stock outstanding at such time. If the Common Stock does
not maintain a sufficient market value or potential acquisition candidates are
unwilling to accept the Common Stock as part of the consideration for the sale
of their businesses, the Company may be required to utilize more of its cash
resources to pursue its acquisition program. Using cash for acquisitions limits
the financial flexibility of the Company and makes the Company more likely to
seek additional capital through future debt or equity financings. If the Company
seeks more debt, it may have to agree to financial covenants that limit its
operational and financial flexibility. If the Company seeks more equity, it may
dilute the
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ownership interests of the Company's then-existing stockholders. When the
Company seeks additional debt or equity financings, it cannot be certain that
additional debt or equity will be available to the Company at all or on terms
acceptable to the Company. If the Company cannot secure additional financing on
acceptable terms, it may be unable to pursue its acquisition strategy
successfully and it may be unable to support its growth strategy.
Management expects to expend significant time and effort in evaluating,
completing and integrating acquisitions and opening new facilities through a
structure of operating subsidiaries. Moreover, the SEC's rules and regulations
governing periodic reports require separate audited financial information for
subsidiaries that are deemed "significant" based on certain financial criteria.
If adequate financial information is unavailable regarding any such additional
subsidiary, the Company may incur significant expenses to comply with such
regulations or cause the Company to "write-off" assets or revenues, thereby
understating the financial condition or results of the Company.
E. Competition
The sanitary and janitorial supplies market is highly competitive and
is served by numerous small, owner-operated private companies, public companies
and several large regional and national companies. In addition, relatively few
barriers prevent entry into the industry. As a result, any organization that has
adequate financial resources and access to a minimum of technical cleaning
expertise may become a competitor of the Company. Competition in the industry
depends on a number of factors, including price. Certain of the Company's
competitors may have lower overhead cost structures and may, therefore, be able
to provide their products and services at lower rates than the Company can
provide such products and services. Many of these competitors have long-standing
operations and long-standing relationships with large customers such as
hospitals and governmental agencies. In addition, many of the Company's
customers belong both to NISSCO and to buying groups that compete with NISSCO.
There can be no assurance that the Company's competitors, including such
competing buying groups, will not be able to use their competitive advantages in
competing in price, offering more extensive lines of products or more favorable
payment terms or otherwise, resulting in material adverse effects on the
business of the Company. In addition, some of the Company's competitors are
larger and have greater resources than are available to the Company. The Company
cannot be certain that its competitors will not develop the expertise,
experience, and resources to provide products and services that are superior in
both price and quality to the products and services of the Company. Similarly,
the Company cannot be certain that it will be able to maintain or enhance its
competitive position in the market.
F. Government Regulation
Maintenance and distribution of many of the Company's products are
subject to extensive regulation at the federal, state, and local levels. In
particular, the Company is subject to regulations involving storage of hazardous
materials promulgated by the Federal Environmental Protection Agency and the
Occupational Safety and Health Act. As such, the Company's business is dependent
upon continued compliance with governmental regulations regarding the operations
of the Company's facilities. The Company believes that it is in substantial
compliance with all such regulations that are applicable to its business.
However, failure to maintain and demonstrate compliance with all such
regulations could result in the preclusion of handling certain product lines and
in mandated clean up expenditures.
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G. Potential Exposure to Environmental Liabilities
The operations of the Company are subject to various environmental laws
and regulations, including those dealing with the handling and disposal of waste
products. As part of the cleaning and janitorial supplies manufacturing process,
one or more of the operating Subsidiaries may store and use some raw materials
which are deemed to be hazardous materials and are closely regulated. As a
result of past and future operations, the Company may be required to incur
environmental remediation costs and other clean-up expenses. In addition, the
Company cannot be certain that it will be able to identify or be indemnified for
all potential liabilities relating to any acquired business.
There can be no assurance that the aggregate amount of any
environmental liabilities that might be asserted against the Company or any or
all of its operating Subsidiaries, in any such proceeding will not be material.
The Company cannot predict the types of environmental laws or
regulations that may from time to time be enacted in the future by federal,
state, or local governments, how existing or future laws or regulations will be
interpreted or enforced, or what types of environmental conditions may be found
to exist at its facilities. The enactment of more stringent laws or regulations
or a more strict interpretation of existing laws and regulations may require
additional expenditures by the Company, some of which could be material.
H. Product Liability and Insurance
The business of the Company involves substantial product liability
risks associated with the handling, storing, and usage of cleaning products.
While the Company believes its practices and procedures provide safeguards that
comply with industry standards, it is not possible to eliminate all risks in
this regard. The Company maintains product liability insurance in amounts it
believes are usual and customary for a business of its size in its industry,
though there can be no assurance that in the event of a finding of liability on
the part of the Company for use of its products, that the amount of recovery
would not be substantially in excess of the limits under the Company's insurance
policies. If the Company were to incur product liability in excess of its
insurance limits, it would have a material adverse impact on the Company's
business and prospects.
I. Dependence on Key Personnel; Need For Additional Personnel
The success of the Company is substantially dependent on the
performance of its senior management and key employees, as well as its Board of
Directors. In addition, the Company's plan to establish operations at the levels
established by its business plan requires that the Company recruit additional
management personnel. There can be no assurances that the Company will be able
to locate and hire, and if hired, retain adequate additional management
personnel. The Company has entered into employment agreements with its Chairman
and Chief Executive Officer, Richard Kandel, and its President and a Director,
Randall K. Davis, upon terms and conditions the Company believes are reasonable
and customary for companies its size in its industry. The loss of key personnel
or the inability to hire and retain qualified executives and other employees
could have a material adverse effect on the business, financial condition, and
results of operations of the Company. Although the Company has a $3 million "key
man" term life insurance policy Richard Kandel, Chairman and Chief Executive
Officer of the Company, it currently has no plans to extend coverage to any
other personnel.
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J. Potential Risks of Low Priced Stocks
Historically, the price per share of the Company's Common Stock on the
NASD OTC Bulletin Board and the "Pink Sheets" has been below $5.00 per share
with minimal trading. Accordingly, the Common Stock is within the definition of
"penny stock," as contained in certain rules and regulations of the SEC. Under
those regulations, any broker-dealer seeking to effect a transaction in a penny
stock not otherwise exempt from the rules must first deliver to the potential
customer a standardized risk disclosure document in a form required by the SEC
which provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salespersons in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. This information must be given to the customer orally or in writing
before the transaction and in writing before or with delivery of the customer's
confirmation of the transaction. Under the penny stock rules, the broker-dealer
must make a special determination of the suitability of the suggested investment
for the individual customer and must receive the customer's written consent to
the transaction. The effect of these rules is to limit the trading market and
adversely effect the liquidity of the Common Stock.
K. Holding Company Structure
The Company is a holding company, the principal assets of which consist
of the capital stock of its Subsidiaries. The Company conducts no business on
its own independent of the Subsidiaries. Accordingly, the Company will be
dependent on the earnings and cash flows of the Subsidiaries for dividends and
distributions to meet its expenses and to pay any cash dividends or
distributions to holders of the Preferred Stock and holders of the Common Stock
(if and when they are authorized by the Board of Directors). The cash flows
generated by CIC are separated from those of the Company and the Company is
severely limited to the purposes to which such cash flow may be placed.
According to the terms of a pledge and security agreement entered into by and
between the Company and Charles H. Davis, father of Randall K. Davis, the
Company's President and one of its Directors, CIC may not, among other things,
disperse or dividend out of CIC any amounts of money or assets other than in the
ordinary course of business of CIC. Risk related to cash flow of the Company, as
well as the Company's dependence upon the Subsidiaries for earnings, is lessened
to some extent by the access of the Company to capital markets for investment
capital to support its expenses and fuel the growth of the operating businesses,
though there can be no assurance that the Company will be successful in
completing financing activities or that such capital will be available. Failure
of the Subsidiaries to generate operating profits and positive cash flow would
have a material adverse effect on the financial condition of the Company.
L. No Cumulative Voting; Control by Existing Stockholders
(Management Control)
Holders of the Company's Common Stock are not entitled to accumulate
their votes for the election of directors or otherwise. Accordingly, the holders
of a majority of the Common Stock present at a meeting of stockholders will be
able to elect all of the directors of the Company and the minority stockholders
will not be able to elect a representative to the Company's Board of Directors.
Since the Board of Directors elects officers and effectively controls the day to
day operations through control of the Company management, current management is
effectively able to control the outcome of all matters submitted to the
Company's stockholders for approval, including extraordinary transitions such as
mergers or sale of all or substantially all the assets of the Company.
As of April 13, 2000, the Company's executive officers and directors
and its affiliates beneficially own approximately 4,606,454 shares of Common
Stock, including beneficially held derivative securities, representing
approximately 68.7% of the aggregate outstanding shares of Common
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Stock and, if acting in concert, are able to exert significant control over the
affairs of the Company and the outcome of any matter submitted to a vote of
stockholders.
ITEM 2. DESCRIPTION OF PROPERTY.
(a) The Company's executive offices are located at 211 Park Avenue,
Hicksville, NY 11801, where Kandel & Son's offices are located. The Company also
maintains offices at the offices of CIC at 1023 Morales Street, San Antonio, TX
78207. At this time the Company does not pay rent at either location, as Kandel
& Son and CIC are the lessees for the respective premises. NISSCO and Kandel &
Son currently lease their properties from unrelated parties and CIC and Superior
lease their facilities from their former owners. Management of the Company
believes that the rental rates for each of these facilities is at least as
favorable as market terms. Combined rent expense for NISSCO, Kandel & Son, CIC
and Superior is estimated to be approximately $463,000 for the next 12 months.
In addition, the Company has guaranteed the lease of b2bstores, which has a
total annual lease payment under its lease of $75,000.
(b) The Company does not invest in real estate, other than as incident to
its business.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation, nor is it aware of any
threatened litigation or similar proceeding that would, if initiated and
resolved against the Company, have a material adverse effect on the Company, its
properties or its prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the stockholders during
the fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Company's Common Stock was approved for quotation on the NASD OTC
Bulletin Board under the symbol "EVCL" and began trading on May 21, 1998.
Pursuant to the amended NASD Rule 6530 and 6540, which became effective on
January 4, 1999, the Company's Common Stock was de-listed from NASD OTC Bulletin
Board effective on November 18, 1999, due to the Company's failure to clear with
the SEC all of its outstanding comments on its general form for registration of
common stock on Form 10-SB filed with the SEC on June 18, 1999, by the "phase-
in" deadline of November 17, 1999, as set by the NASD OTC Compliance Unit. Upon
de-listing from the NASD OTC Bulletin Board, the Company's Common Stock became
eligible for trading in the "pink sheets" published by the National Quotation
Bureau, LLC ("Pink Sheets"). On February 25, 2000, the Company cleared all
outstanding comments of the SEC on its Form 10-SB and became eligible for re-
listing of their Common Stock on the NASD OTC Bulletin Board. As of April 13,
2000, however, the Company had not been able to compel the necessary market
makers to submit applications to quote the Company's Common Stock. Therefore,
the Company has not been re-listed on the NASD OTC Bulletin Board, and is still
being quoted in the Pink Sheets. There can be no assurance that the Company will
be successful in getting the Company's Common Stock relisted with the NASD OTC
Bulletin Board.
There is currently a limited trading market for the Company's Common
Stock. The following chart lists the high and low closing bid prices for the
shares of the Company's Common Stock, as reported by the National Quotation
Bureau, LLC for each quarter within the last two fiscal years. These prices are
between dealers and do not include retail markups, markdowns or other fees and
commissions, and may not represent actual transactions.
1998 High Low
-----------------------------------------------
May 21 - June 30 $3.25 $ .25
July 1 - September 30 $3.75 $1.50
October 1 - December 31 $4.25 $2.50
1999 High Low
-----------------------------------------------
January 1 - March 31 $5.625 $3.50
April 1 - June 30 $5 $3.25
July 1 - September 30 $6.25 $5
October 1 - December 31 $8.00 $6.00
2000 High Low
-----------------------------------------------
January 1 - March 31 $9.00 $5.00
The closing bid and asking price on April 12, 2000 was $2.00 and $7.625
per share, respectively.
(b) Holders
There were 101 record holders of the Company's Common Stock as of April
13, 2000, after broker inquiry.
(c) Dividends
The Company has paid no dividends on its Common Stock to date, nor does
it anticipate doing so in the foreseeable future. Any future determination to
pay dividends will be at the discretion of the Board
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of Directors and will be dependent upon there being sufficient capital and
surplus as required by the Statutes, the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. There can be no assurance that the Company will ever
choose to declare such a dividend or that if it did that such funds would be
legally available for payment of such dividends.
(d) Recent Sales of Unregistered Securities.
(1) The Company was incorporated in December of 1997. At that
time, an aggregate of 3,000,000 shares of Common Stock were issued to five
founding stockholders; Kandel (800,000), The Palmeto Group, Inc. (1,500,000),
Delta Financial Resources, Inc. (250,000), Barry Bendett (200,000) and Strateia
(250,000), at a price of $.01 per share in reliance upon the exemption for
offerings not involving a public offering pursuant to Section 4(2) of the
Securities Act of 1933. The Palmeto Group, Inc., an affiliate of Kandel, later
transferred 1,500,000 shares of Common Stock to Kandel.
(2) In December of 1997 and January of 1998, the Company offered
and sold an aggregate of 390,000 shares of Common Stock to approximately 43
investors at an offering price of $.50 per share, for aggregate offering
proceeds of $195,000 in reliance upon the exemption from registration provided
by Rule 504 of Regulation D.
. At the time of this offering, the Company was a
development stage company with a specific business plan
and such plan included:
(i) Consolidation of sanitary and janitorial supplies
industry;
(ii) Specific, identifiable probable acquisition targets
such as Kandel & Son, NISSCO and Air Reactor, Inc.,
a New York corporation among others; and
(iii) Electronic commerce program.
. The company received total offering proceeds of $195,000,
less than the $1,000,000 limit of Rule 504(b)(2).
. All of the investors received an offering memorandum
disclosing material information relating to the Company's
businesses and risk factors.
(3) In December of 1998, the Company sold an aggregate of 300,000
shares of Common Stock to approximately 11 investors, at an offering price of
$2.50 per share for aggregate proceeds of $750,000, in reliance upon Rule 504 of
Regulation D; but the Company also relies on the exemption from registration
provided by Rule 506 of Regulation D and Section 4(2) and 4(6) of the Securities
Act of 1933.
. All of the 11 investors were "accredited investors" as
defined in Rule 501.
. All of the investors received an offering memorandum
disclosing material information relating to the Company's
businesses and risk factors.
. All of the investors represented and warranted that:
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(i) they understood that the securities being purchased
are not registered under the Securities Act of 1933;
(ii) the securities are being acquired solely for the
investor's own account, for investment purposes
only, and are nor being purchased with a view to or
in connection with, any resale, distribution,
subdivision or fractionalization thereof;
(iii) they had no agreement or other arrangement, formal
or informal, with any person to sell, transfer or
pledge any of the securities being purchased or
which would guarantee to the investor any profit, or
to protect the investor against any loss with
respect to the securities, and the investor has no
plans to enter into any such agreement or
arrangement;
(iv) they understood that they should bear the economic
risk of the investment for an indefinite period of
time due to the lack of trading market for the
securities and the securities cannot be resold or
otherwise transferred unless applicable state
securities laws are complied with or exemption
therefrom are available;
(v) they understood that the securities cannot be sold
or assigned without registration and/or
qualification under any applicable state securities
laws or exemptions from such laws;
(vi) they understood that the Company has no obligation
to register the securities under the Securities Act
of 1933 or to register or qualify the securities
under any state securities laws, or to take any
action, through the establishment of exemption(s) or
otherwise, to permit the transfer thereof.
(4) In December of 1998, the Company sold 70,000 shares of Series
E Stock to Steven Etra, Secretary, Treasurer and a Director of the Company, in
a negotiated private transaction, for proceeds to the Company of $175,000, in an
isolated private transaction in reliance upon the exemption from registration
provided by Rule 506 of Regulation D.
(5) In January of 1999, the Company sold 70,000 shares of Common
Stock to a single accredited investor at a price of $2.50 per share for
aggregate proceeds to the Company of $175,000. The transaction was effected in
reliance upon the exemption from registration provided by Rule 506 of Regulation
D.
(6) In January of 1999, the Company issued 500,000 shares of its
Series A Stock to Kandel, Chairman and CEO of the Company, in connection with
the acquisition of Kandel & Son. The issuance was made in reliance upon an
exemption from registration under Section 4(2) of the Securities Act.
(7) In January of 1999, the Company undertook to issue to Thomas
B. Haines, a former Director of the Company, an aggregate of 1,000,000 shares of
Common Stock, subject to adjustment, as partial consideration for the
acquisition of NISSCO. In connection with the sale, the Company issued 250,000
shares of Common Stock to Mr. Haines at the closing of the acquisition, and
250,000 shares were issued to Mr. Haines on January 15, 2000. In addition,
pursuant to the acquisition agreement, an undetermined number of shares, but in
no case less than 500,000 shares of Common Stock, were to be issued by the
Company on January 15, 2001. On April 6, 2000, the Company's Board of Directors
unanimously consented to issue the remaining 500,000 shares to Mr. Haines in
April 2000. These issuances were made in reliance on the exemption from
registration under Section 4(2) of the Securities Act.
20
<PAGE>
(8) In March of 1999, the Company sold an aggregate of 100,000
shares of Common Stock to an accredited investor at a price of $2.50 per share
for aggregate proceeds of $250,000 in a transaction in reliance upon the
exemption from registration provided by Rule 506 of Regulation D.
(9) In April of 1999, the Company sold an aggregate of 50,000
shares of Common Stock to Colnic Investment Corporation ("Colnic"), a private
investment company controlled by Davis, President of the Company, at a price of
$2.50 per share for aggregate proceeds of $125,000 in a transaction in reliance
upon the exemption from registration provided by Rule 506 of Regulation D.
(10) In April of 1999, Steven Etra, the Secretary, Treasurer and a
Director of the Company, was granted options for 125,000 shares of the Common
Stock and SRK Associates, LLC was granted options for 25,000 shares of the
Common Stock, both at an exercise price of $3.50. Robert Moehler, the former
president of the Company, was granted options for 25,000 shares of the Common
Stock at an exercise price of $4.25. All of these grants were made in
consideration for past and on-going consulting services rendered to the Company.
These are the only stock options thus far granted by the Company. These
transactions were done in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
(11) In May of 1999, the Company sold an aggregate of 100,000
shares of Common Stock to an accredited investor at a price of $2.50 per share
for aggregate proceeds of $250,000 in a transaction in reliance upon the
exemption from registration provided by Rule 506 of Regulation D.
(12) In June of 1999, the Company sold an aggregate of 300 units,
each unit consisting of a 12.75% Subordinated Promissory Note due April 1, 2002
in the principal amount of $10,000 and 2,400 common stock purchase warrants. The
warrants have an exercise price of $4.25 and are exercisable for a four year
period which began 180 days after issuance. The units were sold to a total of 59
accredited investors and two sophisticated investors. The units were sold for
$10,000 per unit for aggregate offering proceeds of $3,000,000 in reliance upon
the exemption from registration provided by Rule 506 of Regulation D.
(13) In June of 1999, the Company sold an additional 50,000 shares
of Common Stock to Colnic at a price of $2.50 per share for aggregate proceeds
of $125,000 in a transaction in reliance upon the exemption from registration
provided by Rule 506 of Regulation D.
(14) In July of 1999, the Company sold an additional 10,000 shares
of Common Stock to SRK Associates, LLC, a company controlled by Steven Etra,
Secretary, Treasurer and a Director of the Company, at a price of $2.50 per
share for aggregate proceeds of $25,000 in a transaction in reliance upon the
exemption from registration provided by Rule 506 of Regulation D.
(15) In July of 1999, the Company sold an additional 6,000 shares
of Common Stock to Blair Etra, wife of Steven Etra, Secretary, Treasurer and a
Director of the Company, at a price of $2.50 per share for aggregate proceeds of
$15,000 in a transaction in reliance upon the exemption from registration
provided by Rule 506 of Regulation D.
(16) In July of 1999, the Company issued 25,000 shares of Common
Stock to Harrington, Ocko & Monk, LLP, the former outside counsel to the
Company, at a price of $5.00 per share in consideration for legal services
rendered, in a transaction in reliance upon the exemption from registration
under Section 4(2) of the Securities Act.
21
<PAGE>
(17) In August of 1999, the Company, in connection with the
purchase of CIC, issued, as partial consideration for CIC, 320,000 shares of
Series D Stock to Davis, President of the Company, and Charles H. Davis, his
father, in a transaction in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. The Series D Stock was ultimately redeemed
by the Company on March 16, 2000 at a redemption price of $5.00 per share plus
accrued dividends.
(18) In August of 1999, in connection with the purchase of
Superior, the Company issued 50,000 shares of Common Stock to Stephen Haynes,
President of Superior, as partial consideration for Superior in a transaction in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act.
(19) On December 15, 1999, the Company sold an aggregate of 253.4
units, each unit consisting of a 100 Shares of Series B Cumulative Convertible
Preferred Stock and 1000 common stock purchase warrants. The warrants have an
exercise price of $5.00 and are exercisable for a five year period which began
upon issuance. These units were sold to a total of 60 accredited investors at
$10,000 per unit for aggregate offering proceeds of $2,534,000 in reliance upon
the exemption from registration provided by Rule 506 of Regulation D. On
December 30, 1999, the Company sold an additional 2.5 units to Barry Gordon, a
former Director of the Company, for $25,000 as part of the same offering.
(20) In mid-January, 2000, the Company began a new private
placement of a maximum of 137,500 units at $8.00 per unit, each unit consisting
of two (2) shares of Common Stock and one (1) common stock purchase warrant. The
warrants have an exercise price of $4.25 and are exercisable for a three year
period which began upon issuance. On February 29, 2000, the Company sold an
aggregate of 122,500 units to approximately 18 accredited investors for
aggregate proceeds to the Company of $980,000 in reliance upon the exemption
from registration provided by Rule 506 of Regulation D. The Company closed the
private placement on February 29, 2000. The Company will use the proceeds from
this offering to continue its acquisition program as well as for working capital
purposes.
All sales of securities in transactions Nos. 4, 5, 8, 9, 11, 12, 13,
14, 15, 19 and 20 listed above were made pursuant to subscription agreements and
investor questionnaire containing representations and warranties, and eliciting
information intended to enable the Company to establish the facts and
circumstances entitling the Company to rely upon the exemptions from the
registration requirements of the Securities Act under Rule 506 of Regulation D.
All of the investors in those transactions have represented and warranted that:
. there was reasonable opportunity to ask questions and receive
answers from the Company concerning the offering;
. all questions were answered to full satisfaction;
. the Investor is capable of evaluating the merit and risks of the
investment;
. the investor is relying only on independently gathered
information to invest;
. the securities are being acquired for investment purposes only;
. the investor is an "accredited investor" as defined in Regulation
D (except for one sophisticated investor in the June 1999 unit
offering);
. the securities are not registered under the Securities Act;
22
<PAGE>
. the securities are "restricted securities" as defined in Rule
144;
. the securities cannot be sold or otherwise transferred unless
they have first been registered under the Securities Act and all
applicable state securities laws are complied with, or the
securities qualify for exemption from such registration; and
. the certificates representing the securities purchased bear
restrictive legends.
In addition, none of such Rule 506 offerings involved general
solicitation or advertising and all of the certificates issued bore restrictive
legends as described in the subscription agreements.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The matters discussed in this Form 10-KSB contain certain
forward-looking statements and involve risks and uncertainties (including
changing market conditions, competitive and regulatory matters, etc.) detailed
in the disclosure contained in this Form 10-KSB and the other filings with the
SEC made by the Company from time to time. The discussion of the Company's
liquidity, capital resources and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effect of any changes to the Company's operations. Accordingly,
actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein. Among the important factors that could cause actual results
to differ materially from those indicated by such forward-looking statements are
those discussed in "Business-Risk Factors" in this Report.
This item should be read in conjunction with the financial statements
and other items contained elsewhere in this report.
During the 12-month period following the date of this Form 10-KSB, the
Company intends to substantially expand its business through the completion of
several acquisition transactions. An acquisition program such as that being
conducted by the Company requires virtually constant access to capital in order
to enable the Company to purchase companies. The Company has obtained much of
the immediate capital needed for fiscal year 2000 through the private sale
in March of 2000 of 1,000,000 of its shares in b2bstores.com, Inc. for $7.00 per
share which netted $6,750,000 in proceeds. These net proceeds will also be
utilized in liquidating some of the long-term debt, enabling the Company to
drastically reduce the cost related to that debt.
In December of 1999, the Company began a new private placement of a
minimum of 200 units and a maximum of 800 units at $10,000 per unit, each unit
consisting of 100 shares of Series B Cumulative Convertible Preferred Stock and
1000 common stock purchase warrants. On December 15, 1999, the Company sold an
aggregate of 253.4 units to approximately 60 accredited investors for gross
aggregate proceeds to the Company of $2,534,000. As part of the same offering,
the Company sold an additional 2.5 units to Barry Gordon, a former Director of
the Company, for aggregate proceeds of $25,000. The Company closed the private
placement as December 31, 1999. The proceeds from this offering will be used for
the acquisition program as well as working capital purposes.
In mid-January 2000, the Company began a new private placement of a
maximum of 137,500 units at $8.00 per unit, consisting of two shares of Common
Stock and one common stock purchase warrant. The Company closed the new private
placement as of February 29, 2000, at which time it had sold 122,500 units to
approximately 18 accredited investors for gross aggregate proceeds of $980,000.
The proceeds from this offering will be used for the acquisition program as well
as working capital purposes.
23
<PAGE>
The aforementioned transactions should satisfy the Company's cash
requirements for the next twelve months, including acquisitions and working
capital.
The Company has no material research and development expenditures nor
does it anticipate that it will have any such expenditures in the next twelve
months.
The Company's additions to plant and equipment will be incident to the
acquisitions that have been previously discussed. If the Company is successful
in completing its acquisitions as planned, the number of employees of the
Company, including the Subsidiaries, could expand to as many as approximately
250 by the end of calendar 2000.
Results of Operations
The historical results of operations of Kandel & Son for the year ended
December 31, 1998 have been retroactively restated and included in the results
of operations of Enviro-Clean of America, Inc & Subsidiaries for the year ended
December 31, 1998 in a manner similar to a pooling of interests.
The operations of the Company for the year ended December 31, 1998 have
been restated to include the operations of Kandel & Son as if the acquisition
had occurred prior to January 1, 1998.
Results of operations for the year ended December 31,1999 and 1998:
The net sales increased $5,487,591 for the year ended December 31, 1999
("1999") as compared to the year ended December 31,1998 ("1998") from $1,793,817
to $7,281,408. This increase is attributable to the operations of four acquired
companies being consolidated with the Company in 1999. NISSCO was acquired in
January 1999, CIC and Superior were acquired in August 1999, and June Supply was
acquired in December 1999. Net sales of Kandel & Son are comparable for each
period, as both price and volume remained relatively constant.
The gross profit percentage increased from 46% for 1998 to 48% for
1999. This increase is mostly attributable to the inclusion of NISSCO in 1999.
NISSCO averages a gross profit percentage of approximately 70% because it sells
services rather than products.
The operating expenses increased from $898,600 for 1998 to $4,203,352
for 1999, approximately 368%. The majority of this increase, approximately
$3,300,000, is attributable to the inclusion of NISSCO, CIC, Superior and June
Supply in 1999. Additionally, amortization of goodwill was recorded on the
acquisitions of approximately $540,500 during 1999. Kandel & Son's expenses were
comparable between 1999 and 1998.
The Company had a net loss in 1999 of $1,131,125, or $.26 per share, as
compared to a net loss of $146,782, or $.05 per share in 1998. If the
amortization of goodwill, a non-cash expense, were eliminated in 1999, the
Company would have had a net loss of approximately $590,600 in 1999.
Liquidity and Capital Resources
The Company's only activities in the year ended December 31, 1998
consisted of extensive research, developing and refining of its business plan,
sales of its securities to raise initial capital, the placing of deposits for
the NISSCO and Kandel & Son acquisitions and related administrative expenses,
including professional fees. For the year ended December 31, 1998, the Company's
financial statements have been restated to include the accounts of Kandel & Son
as if Kandel & Son had been acquired at January 1, 1998.
24
<PAGE>
The Company has funded its requirements for working capital and
acquisitions through a series of equity private placements and the issuance of
long-term debt. During the year ended December 31, 1999, the Company issued a
total of 386,000 shares of common stock for $965,000. In addition, as of June 1,
1999, the Company received net proceeds of $2,350,113 on the issuance of 12.75%
promissory notes due April 1, 2002 and common stock purchase warrants in the
aggregate amount $3,000,000. The Company's only significant use of cash during
the year ended December 31, 1999 was the balance of cash paid for the companies
acquired of $4,149,356.
For the year ended December 31, 1999, the Company's cash flows from
operations was negative $98,489 as a result of a net loss of $1,131,125 and
adjustments to arrive at cash provided by operating activities of depreciation
and amortization of $749,510 a decrease in accounts receivable of $315,719, a
decrease in prepaid expenses of $31,287 an increase in allowance for doubtful
accounts of $107,343, stock issued in consideration of professional fees of
$125,000, offset by a decrease in inventory of $22,608 offset by a decrease in
accounts payable of $318,831.
The Company expects its capital requirements to remain the same for
2000 as it continues its acquisition program and invests in expanded
administrative and sales and marketing infrastructure to support increasing
sales volume. The Company's future liquidity and capital funding requirements
will depend on the extent to which the Company is successful in implementing its
acquisition program.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Exhibit 99(iv), "Enviro-Clean of America, Inc. and Subsidiaries
Consolidated Financial Statements" is incorporated herein by this
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information concerning the Company's directors and officers
required by Item 9 is incorporated by reference to the information set forth in
the Company's Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, expected to be filed within 120 days of the Company's fiscal year
end.
ITEM 10. EXECUTIVE COMPENSATION.
The information concerning the compensation of the Company's executives
required by Item 10 is incorporated by reference to the information set forth in
the Company's Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, expected to be filed within 120 days of the Company's fiscal year
end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial owners
and management required by Item 11 is incorporated by reference to the
information set forth in the Company's Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, expected to be filed within 120 days of the
Company's fiscal year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related transactions
required by Item 12 is incorporated by reference to the information set forth in
the Company's Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, expected to be filed within 120 days of the Company's fiscal year
end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following is a list of exhibits filed as part of this Form 10-KSB.
Where so indicated, exhibits which were previously filed are incorporated by
reference.
Exhibit No Description
- ----------- --------------------------------------------------------------
2(i) Stock Purchase Agreement among Enviro-Clean of
America, Inc., Enviroacq I Co. and Kandel & Son dated
as of January 1, 1999 (Exhibit 2(i)). (1)
2(ii) Stock Purchase Agreement among Enviro-Clean of
America, Inc. Enviroacq II Co. and NISSCO/Sunline,
Inc. dated as of January 1, 1999 (Exhibit 2(ii)). (1)
2(iii) Agreement & Plan of Merger among Enviro-Clean of
America, Inc., Cleaning Ideas, Inc., Cleaning Ideas
Corp., Charles Davis, Carolyn Davis and Randall Davis
dated as of August 1, 1999 (Exhibit 2(i)). (2)
27
<PAGE>
2(iv) Stock Purchase Agreement among Enviro-Clean of
America, Inc., SCS Acquisition Corp., Superior
Chemical & Supply, Inc. and Stephen Hayes (Exhibit
2(iii)). (2)
2(v) Stock Purchase Agreement among Enviro-Clean of
America, Inc. , June Supply Corp., June Supply-San
Antonio, Inc. and Michael Rose and Alan Stafford
dated as of August 31, 1999 (Exhibit 2(i)). (4)
3(i) Articles of Incorporation of the Company (Exhibit
3(i)). (1)
3(ii) By-Laws of the Company (Exhibit 3(ii)). (1)
4(i) Certificate of Designation for the Company's Series A
Stock (Exhibit 4(i)). (1)
4(ii) Certificate of Designation for the Company's Series E
Stock (Exhibit 4(ii)). (1)
4(iii) Subscription Agreement between the Company and Steven
Etra regarding the purchase and sale of the Series E
Stock (Exhibit 3(iii)). (3)
4(iv) Certificate of Designation for the Company's Series D
Preferred Stock (Exhibit 4(i)). (2)
4(v) Certificate of Amendment to the Certificate of
Designation for the Company's Series A Stock (Exhibit
3(v)). (3)
4(vi) Form of 12.75% Subordinate Note (Exhibit 3(vi)). (3)
4(vii) Form of the Warrant Certificate (Exhibit 3(vii)). (3)
4(viii) Pledge and Security Agreement between the Company and
Charles H. Davis (Exhibit 4(viii)). (2)
4(ix) Security Agreement between the Company and Stephen
Haynes (Exhibit 2(i)). (2)
4(x) Registration Rights Agreement among the Company,
Charles H. Davis and Randall K. Davis (Exhibit
4(ii)). (2)
4(xi) Pledge and Security Agreement between the Company and
Michael Rose (Exhibit 2(ii)). (4)
4(xii) Pledge and Security Agreement between the Company and
Alan Stafford (Exhibit 2(iii)). (4)
4(xiii) Certificate of Designation for the Company's Series B
Stock (Exhibit 3(xi)). (7)
27(i) Financial data schedule. *
99(i) Form of Lock-up Agreement executed by Enviro-Clean of
America, Inc., Richard Kandel, Randall K. Davis and
Steven Etra. (Exhibit 99(i)). (6)
28
<PAGE>
99(ii) Waiver of Lock-Up Agreement for one million shares of
b2bstores.com, Inc. stock held by Enviro-Clean of
America, Inc. (Exhibit 99(i)). (6)
99(iii) Stock Purchase Agreement dated March 13, 2000 between
ZERO.NET, Inc. and Enviro-Clean of America, Inc. for
the sale of one million shares of b2bstores.com, Inc.
(Exhibit 99(i)). (6)
99(iv) Enviro-Clean of America, Inc. and Subsidiaries
Consolidated Financial Statements for the Fiscal
Years Ended December 31, 1999 and 1998 and
Independent Auditors' Report. *
_______________________________
* Filed Herewith.
(1) Incorporated by reference to the Company's Form 10-SB filed with the
SEC on June 16, 1999.
(2) Incorporated by reference to the Company's Report on Form 8-K filed
with the SEC on September 3, 1999.
(3) Incorporated by reference to the Company's Report on Form 10-SB/A
filed with the SEC on October 22, 1999.
(4) Incorporated by reference to the Company's Report on Form 8-K filed
with the SEC on November 10, 1999.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed with the SEC on November 15, 1999 and as amended on
December 8, 1999 and on January 28, 2000.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on March 20, 2000.
(7) Incorporated by reference to the Company's Report on Form 10-SB/A
filed with the SEC on December 16, 1999.
(b) Reports on Form 8-K:
(1) The Company filed an 8-K/A on October 29, 1999 which amended
the 8-K that the Company had filed on September 9, 1999 to report the
acquisition of Cleaning Ideas, Inc. and subsidiary and the acquisition of
Superior Chemical and Supply, Inc. under Item 2. The following financial
statements were filed on the Form 8-K/A:
(i) Financial Statements of Cleaning Ideas for the fiscal year ended
September 30, 1997, September 30, 1998 and for the period ended July
31, 1999.
(ii) Financial Statements of Superior for the fiscal year ended December 31,
1997, December 31, 1998 and for the period ended July 31, 1999.
(iii) Pro Forma Consolidated Financial Statements for the year ended December
31, 1998 and for the period ended June 30, 1999.
(iv) Financial Statements of Cleaning Ideas for the fiscal year ended
September 30, 1997, September 30, 1998 and for the period ended July
31, 1999.
(v) Financial Statements of Superior for the fiscal year ended December 31,
1997, December 31, 1998 and for the period ended July 31, 1999.
(vi) Pro Forma Consolidated Financial Statements for the year ended December
31, 1998 and for the period ended June 30, 1999.
(2) On November 22, 1999, the Company received comments from the
SEC regarding the financial statements included in the 8-K/A filed on October
29, 1999. The Company then filed an additional 8-K/A on December 8, 1999, in
order to comply with the comments. The following financial statements were filed
on the Form 8-K/A, filed December 8, 1999:
29
<PAGE>
(i) Financial Statements of Cleaning Ideas for the fiscal year ended
September 30, 1997, September 30, 1998 and for the period ended July
31, 1999; and Financial Statements of Superior for the fiscal year
ended December 31, 1997, December 31, 1998 and for the period ended
July 31, 1999.
(ii) Pro Forma Consolidated Financial Statements for the year ended December
31, 1998 and for the period ended June 30, 1999.
(3) The Company filed an 8-K on November 10, 1999 to report the
acquisition of June Supply-San Antonio, Inc. under Item 2. The following
financials were subsequently filed on Form 8-K/A on January 11, 2000:
(i) Financial Statements of June Supply-San Antonio for the fiscal years
ended December 31, 1997, December 31, 1998 and for the period ended
August 31, 1999.
(ii) Pro Forma Consolidated Financial Statements for the year ended December
31, 1998 and for the period ended August 31, 1999.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Enviro-Clean of America, Inc. has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Antonio, State of Texas, on April 25, 2000.
ENVIRO-CLEAN OF AMERICA, INC.
By /s/ Randall K. Davis
----------------------------------
Randall K. Davis, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities indicated
and on April 25, 2000.
Signature Title
--------- -----
/s/ Richard Kandel Chairman of the Board and Chief
- --------------------------------------------
Richard Kandel Executive Officer
/s/ Randall K. Davis President and Director
- --------------------------------------------
Randall K. Davis
/s/ Steven Etra Secretary, Treasurer and Director
- --------------------------------------------
Steven Etra
/s/ Gary Granoff Director
- --------------------------------------------
Gary Granoff
/s/ Mark A. Rice Director
- --------------------------------------------
Mark A. Rice
/s/ Jan Pasternack Chief Financial Officer
- --------------------------------------------
Jan Pasternack
31
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- --------------- -------------------------------------------
27(i) Financial Data Schedule.
99(iv) Enviro-Clean of America, Inc. and Subsidiaries
Consolidated Financial Statements.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ENVIRO-CLEAN
OF AMERICA INC. & SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,833,478
<SECURITIES> 0
<RECEIVABLES> 2,539,908
<ALLOWANCES> 156,349
<INVENTORY> 1,683,220
<CURRENT-ASSETS> 5,978,417
<PP&E> 1,602,505
<DEPRECIATION> 1,246,793
<TOTAL-ASSETS> 14,985,700
<CURRENT-LIABILITIES> 2,826,447
<BONDS> 5,608,399
4,451
0
<COMMON> 6,834,000
<OTHER-SE> 995,074
<TOTAL-LIABILITY-AND-EQUITY> 14,985,700
<SALES> 7,281,408
<TOTAL-REVENUES> 7,281,408
<CGS> 3,788,288
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,203,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497,728
<INCOME-PRETAX> (1,207,960)
<INCOME-TAX> (76,835)
<INCOME-CONTINUING> (1,131,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,131,125)
<EPS-BASIC> (0.31)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99(iv)
---------------
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet F-2
Statement of Operations F-3
Statement of Changes in Stockholders' Equity F-4
Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Enviro-Clean of America, Inc.
We have audited the accompanying consolidated balance sheet of Enviro-Clean of
America, Inc. & Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enviro-Clean of America, Inc. &
Subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 11, 2000, except for the first
and second paragraphs of Note
12 as to which the date is
April 1, 2000.
F-1
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
=======================================================================================
December 31, 1999
- ---------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash $ 1,833,478
Accounts receivable, net of allowance for doubtful accounts of $156,349 1,547,567
Inventory 1,683,220
Loan receivable - related party 835,992
Prepaid expenses and other current assets 72,740
Prepaid income taxes 5,420
- ---------------------------------------------------------------------------------------
Total current assets 5,978,417
Fixed Assets - less accumulated depreciation and amortization of $1,246,793 355,712
Deferred Income Tax Asset, net of valuation allowance of $ -
Goodwill 8,651,571
- ---------------------------------------------------------------------------------------
Total Assets $14,985,700
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,543,776
Notes payable - related parties 1,282,671
- ---------------------------------------------------------------------------------------
Total current liabilities 2,826,447
Long-term Liabilities:
Notes payable - related parties - subordinated 2,461,055
Notes payable - related parties 1,864,673
- ---------------------------------------------------------------------------------------
Total liabilities 7,152,175
- ---------------------------------------------------------------------------------------
Commitments
Redeemable Preferred Stock - $.001 par value; authorized 5,000,000 shares;
70,000 shares of convertible stock designated as Series E stock -
$2.50 stated value; issued and outstanding 70,000 shaers 175,000
- ---------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred Stock Series A - $.001 par value; stated value $5.00;
authorized, issued and outstanding 500,000 shares 2,500,000
Preferred Stock Series B - $.001 par value; stated value $100.00;
authorized 80,000 shares, issued and outstanding 25,590 shares 2,559,000
Preferred Stock Series D - $.001 par value; stated value $5.00;
authorized, issued and outstanding 320,000 shares 1,600,000
Common stock - $.001 par value; authorized 20,000,000 shares,
issued and outstanding 4,451,000 shares 4,451
Common stock to be issued 2,075,000
Additional paid-in capital 3,772,236
Accumulated deficit (4,852,162)
- ---------------------------------------------------------------------------------------
Stockholders' equity 7,658,525
- ---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $14,985,700
=======================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
=======================================================================================
<S> <C> <C>
Year ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------
Net sales $ 7,281,408 $ 1,793,817
Cost of sales 3,788,288 973,497
- ---------------------------------------------------------------------------------------
Gross profit 3,493,120 820,320
- ---------------------------------------------------------------------------------------
Operating expenses:
Salaries 1,370,992 242,298
Professional fees 710,728 121,372
Depreciation and Amortization 69,157 36,605
Amortization of goodwill 540,556 -
Marketing 87,756 123,998
Rent 270,021 39,076
Interest 497,728 63,925
Other 1,154,142 335,251
- ---------------------------------------------------------------------------------------
Total operating expenses 4,701,080 962,525
- ---------------------------------------------------------------------------------------
Loss before income tax (benefit) expense (1,207,960) (142,205)
Income tax (benefit) expense (76,835) 4,577
- ---------------------------------------------------------------------------------------
Net loss (1,131,125) (146,782)
Preferred stock dividends (192,462) -
- ---------------------------------------------------------------------------------------
Net loss attributable to common stockholders $(1,323,587) $ (146,782)
=======================================================================================
Loss per common share - basic and diluted $ (.31) $ (.05)
=======================================================================================
Weighted-average number of common shares outstanding 4,271,764 3,196,546
=======================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
===================================================================================================================================
Preferred Stock Common Stock Common Additional
Number Number Stock to Paid-in Accumulated Stockholders'
of Shares Amount of Shares Amount Be Issued Capital Deficit Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period from December 9, 1997
(date of inception) to
December 31, 1998:
Issuance of common stock for cash
at $.001 per share - - 3,000,000 $3,000 - - - $ 3,000
Issuance of common stock for cash
at $.50 per share - - 179,000 179 - $ 89,321 - 89,500
Issuance of common stock for cash
at $.50 per share - - 211,000 211 - 105,289 - 105,500
Issuance of common stock for cash
at $2.50 per share - - 300,000 300 - 684,715 - 685,015
Kandel & Son, Inc. accumulated
deficit
Net income of Kandel for the
one month period ended $ 60,505 60,505
September 30, 1997 4,921 4,921
Distribution to stockholder from
Kandel during September 1997 - - - - - - (97,496) (97,496)
Distribution to stockholder - - - - - - (555,499) (555,499)
Net loss - - - - - - (146,782) (146,782)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 3,690,000 3,690 - 879,325 (734,351) 148,664
Issuance of common stock
for cash at $2.50 per share - - 386,000 386 - 964,614 - 965,000
Issuance of warrants - - - - - 678,672 - 678,672
Issuance of preferred stock for
cash at $100.00 per share 25,590 $2,559,000 - - - - - 2,559,000
Issuance of preferred stock in
connection with acquisition 820,000 4,100,000 - - - - - 4,100,000
Net income of Kandel for
the three months ended
December 31, 1998 - - - - - - (27,170) (27,170)
Distribution to stockholder - - - - - - (2,767,054) (2,767,054)
Common stock issued in connection
with acquisition of NISSCO/
Sunline, Inc. - - 250,000 250 - 624,750 - 625,000
Common stock issued in connection
with acquisition of June Supply
-San Antonio, Inc. - - 100,000 100 - 499,900 - 500,000
Common stock issued in consideration
of professional fees - - 25,000 25 - 124,975 - 125,000
Common stock to be
issued at $2.50 per share - - - - $1,875,000 - - 1,875,000
Common stock to be issued at $4.00
per share in connection with
acquisition of Superior - - - - 200,000 - - 200,000
Preferred stock dividends - - - - - - (192,462) (192,462)
Net loss - - - - - - (1,131,125) (1,131,125)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 845,590 $6,659,000 4,451,000 $4,451 $2,075,000 $3,772,236 $(4,852,162) $ 7,658,525
See Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
=================================================================================================
<S> <C> <C>
Year ended December 31, 1999 1998
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,131,125) $(146,782)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 69,157 36,605
Amortization of goodwill 540,556
Non-cash interest expense 139,797
Shares issued for services 125,000
Increase in allowance for doubtful accounts 107,343 34,984
Changes in operating assets and liabilities net of acquisitions:
(Increase) decrease in accounts receivable 315,719 (9,429)
Decrease in inventory 22,608 14,302
(Increase) decrease in prepaid expenses and other current assets 36,707 (44,277)
Increase in prepaid income taxes (5,420)
Decrease (increase) in other assets 5,775
Increase (decrease) in accounts payable and accrued expenses (318,831) 128,552
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (98,489) 19,730
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition deposits (800,000)
Acquisition of subsidiaries (2,173,028)
Purchase of property and equipment (43,599) (20,708)
Increase in notes receivable (807,672) (28,320)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,024,299) (849,028)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 965,000 883,015
Proceeds from issuance of preferred stock 2,559,000
Proceeds from subscriptions received in advance for preferred stock - 175,000
Repayment of notes payable - related parties (1,192,932) (111,338)
Proceeds from notes payable - related parties- subordinated 3,000,000 -
Dividends paid (102,270) -
Distribution (294,224)
Repayment of line of credit (98,918)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,835,656 946,677
- ------------------------------------------------------------------------------------------------
Net increase in cash 1,712,868 117,379
Cash at beginning of year 120,610 3,231
- ------------------------------------------------------------------------------------------------
Cash at end of year $ 1,833,478 $ 120,610
================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 3,190 $ - 0 -
================================================================================================
Interest $ 297,067 $ 63,925
================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
F-5
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. PRINCIPAL BUSINESS ACTIVITY AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the accounts of
Enviro-Clean of America, Inc. and its Subsidiaries (collectively the "Company").
All intercompany balances, profits and transactions have been eliminated in
consolidation.
The consolidated statements give retroactive effect to the merger of Kandel and
Son, Inc. ("Kandel"). On January 15, 1999 the Company completed a transaction
whereby effective January 1, 1999 Enviro-Clean of America, ("Enviro-Clean")
merged with Kandel. Thereafter Kandel became a wholly owned subsidiary of
Enviro-Clean. Prior to the merger Kandel's fiscal year-end was August 31 and
Enviro-Clean's was December 31. Subsequent to the merger, the Company adopted a
calendar year-end. As a result of the change in fiscal year and the merger
accounted for as a pooling of interests, the Company's financial statements have
been restated to retroactively combine Kandel's financial statements as if the
merger had occurred at the beginning of the earliest period presented. The
consolidated statements of operations, cash flows and stockholders' deficiency
for the year ended December 31, 1998 reflect the results of operations and cash
flows of Enviro-Clean for the period from December 9, 1997 (date of inception)
to December 31, 1998 combined with Kandel for the year ended September 30, 1998.
As a result of Enviro-Clean and Kandel having different fiscal years and the
change in the Company's fiscal year, Kandel's results of operations for the
three-month period ended December 31, 1998 have been excluded from the reported
results of operations. There were no intervening events that materially affect
the results of operations of the companies. Kandel's revenue for the three-
month period ended December 31, 1998 was $443,142. Kandel's net income for the
three-month period ended December 31, 1998 was $27,170.
The principal business activity of the Company is the manufacturing and
wholesale distribution of sanitary maintenance supplies and paper products.
The Company also provides buying services and group discounts to wholesale
distributors of sanitary maintenance supplies, paper goods and related products.
The Company recognizes revenue when products are shipped.
The Company maintains cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash.
Merchandise inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out and average cost methods.
F-6
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Inventory is comprised of the following:
Raw materials $ 36,340
Work-in-process 65,400
Finished goods 1,581,480
- --------------------------------------------------
$1,683,220
==================================================
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment is provided for by the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized over the shorter of the economic life of the improvement or the lease
term.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates by management. Actual
results could differ from these estimates.
At each balance sheet date, the Company evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include: (i) current operating results, (ii) projected future operating
results, and (iii) any other material factors that effect the continuity of the
business.
Preferred stock dividends in arrears, which represent dividends declared, but
unpaid at December 31, 1999, totaled $90,192. Preferred stock dividends declared
for the year ended December 31, 1999 totaled $192,462. As of January 1, 2000,
all dividends declared through December 31, 1999, have been paid in full.
The estimated fair values of the loans receivable and notes payable approximate
their carrying amounts based on terms of the instruments and rates currently
available to the Company for similar loans.
Basic net loss per common share is based on the weighted-average number of
shares outstanding during the period while diluted net loss per common share
considers the dilutive effect of stock options and warrants reflected under the
treasury stock method. Both basic net loss per share and diluted net loss per
share are the same since the Company's outstanding warrants, escrow shares and
common stock to be issued have not been included in the calculation because
their effect would have been antidilutive.
Goodwill aggregating $8,651,571 at December 31, 1999 arising from business
acquisitions accounted for under the purchase method is being amortized over 10
years using the straight-line method. Accumulated amortization amounted to
$540,556 at December 31, 1999.
Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
accompanying financial statements.
F-7
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. ACQUISITIONS:
On January 1, 1999, the Company and Kandel & Son, Inc. ("Kandel"), a New York-
based sanitary supply distribution company, agreed to merge. The Company paid
$1,350,000 in cash and exchanged 500,000 shares of Series A Preferred Stock for
all of the outstanding common stock of Kandel. Kandel's sole stockholder,
Richard Kandel, received $684,404 of the $1,350,000 cash payment and the
$665,596 remaining balance was used to pay the obligations of Kandel. This
acquisition has been accounted for at historical cost in a manner similar to a
pooling of interests since Richard Kandel was the majority stockholder of the
Company at the time of the acquisition. As such, the excess of cost over book
value of net assets acquired of approximately $3,377,000 will be deemed a
distribution to Richard Kandel. The historical results of operations of Kandel
for the year ended December 31, 1998 have been retroactively restated and
are included in the results of operations of Enviro-Clean of America, Inc. &
Subsidiaries for the year ended December 31, 1998 in a manner similar to a
pooling of interests.
On January 1, 1999, the Company entered into an agreement to purchase all of the
stock of NISSCO/Sunline, Inc. ("NISSCO"), a Florida-based company engaged in
group marketing of sanitary/janitorial supplies. The aggregate purchase price
for this acquisition was $3,000,000, consisting of $500,000 in cash and
1,000,000 shares of the Company's common stock. The common stock will be issued
to the seller in installments as defined in the agreement. This acquisition was
treated as a purchase for accounting purposes, with the purchase price allocated
based on the fair value of assets acquired and liabilities assumed.
The excess of the fair value of the net assets acquired over the purchase price,
aggregating $2,977,213 has been calculated as follows:
Purchase price $ 3,000,000
- ----------------------------------------------------------------
Cash 17,259
Accounts receivable 507,331
Property and equipment 57,487
Other assets 2,001
Accounts payable (419,670)
Loans payable (141,621)
- ----------------------------------------------------------------
Net assets acquired 22,787
- ----------------------------------------------------------------
Excess of cost over fair value of net assets
acquired (goodwill) $ 2,977,213
================================================================
The operations of NISSCO are included in the consolidated financial statements
from January 1, 1999, the date of acquisition.
The seller received 250,000 shares on January 15, 1999 and will receive 250,000
shares on January 15, 2000, and 500,000 shares on January 15, 2001. All shares
have been valued at $2.50 per share, the fair market value of the Company's
common stock on January 1, 1999. If on January 15, 2001, the Company's average
bid price per share for the 10 days preceding January 15, 2001 is not at
F-8
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
least $5.00 per share, the Company shall issue additional shares of common stock
to the seller such that the aggregate value of the shares issued on January 15,
2001 shall be $2,500,000.
On August 1, 1999, the Company entered into an agreement to purchase all of the
stock of Cleaning Ideas, Inc. & Subsidiary ("Cleaning Ideas"), a Texas-based
manufacturer and distributor of cleaning supplies. The aggregate purchase price
for this acquisition was $3,000,000, consisting of $500,000 in cash, $900,000 in
promissory notes and 320,000 shares of Series D Preferred Stock for all of the
outstanding stock of Cleaning Ideas. The estimated fair market value of the
Company's common stock on the acquisition date was approximately $5.50 per
share. Because of a lack of trading volume or tradability, a discount of
approximately 8% was taken into account when valuing the stock issued relating
to the acquisition. A lower discount was used for this acquisition than was
used for the acquisition of Superior Chemical & Supply, Inc. ("Superior")
consummated on the same date because of the higher value placed on the preferred
stock as a result of the preferred stock dividends issued in this transaction.
This acquisition was accounted for as a purchase. During March 2000, the Series
D Preferred Stock was redeemed and all unpaid dividends accrued were paid in
full.
The excess of the fair value of the net assets acquired over the purchase price,
aggregating $2,770,990, has been calculated as follows:
Purchase price $ 3,000,000
- ----------------------------------------------------------------
Cash 238,190
Accounts receivable 248,544
Inventory 395,482
Property and equipment 72,853
Other assets 27,561
Accounts payable (353,620)
Loans payable (400,000)
- ----------------------------------------------------------------
Net assets acquired 229,010
- ----------------------------------------------------------------
Excess of cost over fair value of net assets
acquired (goodwill) $ 2,770,990
================================================================
The operations of Cleaning Ideas are included in the consolidated financial
statements from August 1, 1999, the date of acquisition.
On August 1, 1999, the Company entered into an agreement to purchase all of the
stock of Superior Chemical & Supply, Inc. ("Superior"), a Kentucky-based
distributor of cleaning supplies. The aggregate purchase price for the
acquisition was $1,800,000, consisting of $400,000 in cash, $1,200,000 in
promissory notes and 50,000 shares of the Company's common stock valued at $4.00
per share. The estimated fair market value of the Company's common stock on the
acquisition date was
F-9
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
approximately $5.50 per share. Because of the lack of trading volume or
tradability, a discount of approximately 25% was taken into account when valuing
common stock to be issued relating to the acquisition. The common stock will be
issued to the seller in installments, as defined in the agreement. The
acquisition was accounted for as a purchase.
The excess of the fair value of the net assets acquired over the purchase price,
aggregating $1,509,607, has been calculated as follows:
Purchase price $ 1,800,000
- ----------------------------------------------------------------
Cash 8,098
Accounts receivable 198,270
Inventory 192,821
Property and equipment 36,141
Accounts payable (127,488)
Loans payable (17,449)
- ----------------------------------------------------------------
Net assets acquired 290,393
- ----------------------------------------------------------------
Excess of cost over fair value of net assets
acquired (goodwill) $ 1,509,607
================================================================
The operations of Superior are included in the consolidated financial statements
from August 1, 1999, the effective date of the acquisition.
The seller will receive 10,000 shares within 90 days of the end of each fiscal
year ending December 31, provided Superior's target amount is met each year.
The target amount is pretax earnings of Superior amounting to $250,000 per annum
prorated for the period ended December 31, 1999, and increased by 5% for each
year under the agreement. If the target amount is not met in any year, the
number of shares to be delivered from escrow shall be equal to the product of
10,000 multiplied by a fraction, the numerator of which shall be the Superior's
pretax earnings for such year and the denominator of which shall be the target
amount for such year. In the event that Superior does not meet the target
amount in any year, and Superior exceeds the target amount in the year, Superior
may apply an amount equal to the extent by which the Superior's pretax earnings
exceed the target amount for such year, to the prior year's target amount and
cause a proportionate amount of the escrowed shares that were withheld the prior
year to be released to the stockholders. In no event shall the aggregate number
of shares issued in respect of any two-year period exceed 20,000.
Effective September 1, 1999 the Company entered into an agreement to purchase
all of the stock of June Supply-San Antonio, Inc. & Subsidiary ("June"), a
Texas-based janitorial and maintenance supply wholesale distributor. The
aggregate purchase price for this acquisition is $3,939,951, consisting of
$2,264,951 in cash, $1,175,000 in promissory notes, and 100,000 shares of the
Company's common stock, valued at $5.00 per share. The estimated fair market
value of the Company's common stock on the last week of trading before the
acquisition date was approximately $6.50 per share. Because of the lack of
trading volume or
F-10
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
tradability, a discount of approximately 23% was taken into account when valuing
the common stock to be issued relating to the acquisition. This acquisition was
accounted for as a purchase.
The excess of the fair value of the net assets acquired over the purchase price,
aggregating $1,934,318, has been calculated as follows:
Purchase price $ 3,939,951
- ----------------------------------------------------------------
Cash 728,376
Accounts receivable 837,396
Inventory 998,627
Property and equipment 123,942
Other assets 14,548
Accounts payable (676,891)
Loans payable (20,365)
- ----------------------------------------------------------------
Net assets acquired 2,005,633
- ----------------------------------------------------------------
Excess of cost over fair value of net assets
acquired (goodwill) $ 1,934,318
- ----------------------------------------------------------------
The operations of June are included in the consolidated financial statements
from September 1, 1999, the effective date of acquisition.
The following pro forma information assumes that all acquisitions occurred on
January 1, 1999:
ENVIRO-CLEAN
of America, Inc.
and Subsidiaries
Net Sales 10,811,676
- ----------------------------------------------------------------------
Net Loss (1,427,621)
- ----------------------------------------------------------------------
Loss per share (0.33)
- ----------------------------------------------------------------------
Shares used in computing earnings per common share:
Basic loss per share 4,321,764
- ----------------------------------------------------------------------
3. FIXED ASSETS:
Fixed assets are comprised of the following:
Estimated
Useful Life
- ------------------------------------------------------------------------
Furniture, fixtures and equipment $ 755,692 5 years
Leasehold improvements 155,640 5 years
Transportation and delivery equipment 536,023 5 years
Computer hardware 155,150 3 years
- -------------------------------------------------------------------------
1,602,505
Less accumulated depreciation and amortization 1,246,793
- -------------------------------------------------------------------------
$ 355,712
=========================================================================
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The following are included in accounts payable and accrued expenses at
December 31, 1999:
Accounts payable $ 932,675
Interest 169,630
Dividends on Preferred Stock 90,192
Other accrued expenses 351,279
- ---------------------------------------------------
$1,543,776
5. COMMITMENTS AND CONTINGENCIES:
The Company leases office, warehouse, store space, other facilities and
equipment under a noncancelable operating lease expiring through October 31,
2005.
Future minimum lease payments under these leases at December 31, 1999 are as
follows:
F-11
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Year ending December 31,
2000 $ 553,000
2001 530,000
2002 503,000
2003 491,000
2004 324,000
Thereafter 74,000
- --------------------------------------
$2,475,000
======================================
Certain leases contain escalation clauses relating to operating expenses and
real estate taxes.
6. INCOME TAXES:
The difference between the income tax provision (benefit) computed at the
federal statutory rate and the actual tax provision (benefit) is accounted for
as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Taxes (benefit) computed at the federal statutory rate $(385,000) $(50,000)
Taxes computed at a rate below the federal statutory rate 88,165 30,000
Valuation allowance 220,000 20,000
- ------------------------------------------------------------------------------------------
$(76,835) $ 0
==========================================================================================
</TABLE>
The tax effects of loss carryforwards, temporary differences and the valuation
allowance that give rise to the deferred income tax asset at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $189,000 $20,000
Provision for doubtful accounts 24,000 -
Amortization of Goodwill 27,000 -
- --------------------------------------------------------------------------------------
240,000 20,000
Valuation allowance (240,000) (20,000)
- --------------------------------------------------------------------------------------
-0- -0-
======================================================================================
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $1,262,000 which
expire through 2019. Between December 1997 and December 1999, the Company
completed offerings of securities. Under Section 382 of the Internal Revenue
Code (the "Code"), these activities effect an ownership change and thus may
severely limit, on an annual basis, the Company's ability to utilize its net
operating loss carryforwards. The Company uses the lowest marginal U.S.
corporate tax of 15% to determine deferred tax amounts and the related valuation
allowance because the Company had no taxable earnings through December 31, 1999.
F-12
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. NOTES PAYABLE - RELATED PARTIES:
Notes payable - related party consist of the following:
On June 1, 1999, the Company received $3,000,000 in exchange for 300 units. Each
unit is comprised of a $10,000 face value note. The notes are due April 1, 2002
and pay interest in arrears quarterly on the face amount at a rate of 12.75% per
annum. Issued along with each unit were warrants to purchase 2,400 shares of
common stock (720,000 shares in aggregate) of the Company. The warrants are
exercisable at any time after November 27, 1999, through June 1, 2003 at an
exercise price of $4.25 per share. Based upon the fair value of the warrants on
the date of issue, the Company has discounted the carrying value of the notes by
$678,672, which represents the fair value of the warrants on the date of issue.
The discount is being amortized as additional interest over the term of the
notes.
$ 2,461,055
In August of 1999, a secured promissory note of $900,000 was issued pursuant to
the acquisition of Cleaning Ideas. The note is payable over two years in eight
equal quarterly installments of $112,500 plus interest at 8-3/4% per annum,
secured by the assets of Cleaning Ideas.
825,000
In August of 1999, a promissory note of $1,200,000 was issued pursuant to the
acquisition of Superior. The note is payable over 3 years in 12 equal quarterly
installments of $100,000 plus interest at 8% per annum, secured by the accounts
receivable and inventory of Superior.
1,133,334
In December of 1999, two promissory notes of $587,500 were issued pursuant to
the acquisition of June. The notes are payable over 3 years in 12 equal
quarterly installments of $48,958 plus interest at 8-1/2% per annum, secured by
the assets of June.
$ 1,175,000
Note payable - other 14,010
- --------------------------------------------------------------------------------
5,608,399
Less current maturities (1,282,671)
- --------------------------------------------------------------------------------
$ 4,325,728
================================================================================
During the year ended December 31, 1999 all interest expense, $497,728 was paid
to related parties.
8. RETIREMENT PLANS:
Kandel (a subsidiary) had both defined benefit and defined contribution plans.
All nonunion employees are eligible for participation following completion of
six months of service and the attainment of age 20-1/2. Participants begin to
vest after two years of service and are fully vested after six years.
Contributions for the years ended December 31, 1999 and 1998 were $- 0 - and
$20,000, respectively.
F-13
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Effective September 1, 1998, the Company terminated the defined benefit plan and
consolidated the assets with those of the defined contribution plan. Both plans
are in compliance with the Code and regulations and are properly funded.
9. STOCKHOLDERS' EQUITY:
Between January and October 1998, the Company received net proceeds of $790,515
from the issuance of 511,000 shares of common stock in connection with a private
placement.
In January 1999, the Company issued 70,000 shares of common stock for an
aggregate price of $175,000.
In March 1999, the Company issued 100,000 shares of common stock for an
aggregate price of $250,000.
In April 1999, the Company issued 50,000 shares of common stock for an aggregate
price of $125,000.
In May 1999, the Company issued 100,000 shares of common stock for an aggregate
price of $250,000.
In June 1999, the Company issued 50,000 shares of common stock for an aggregate
price of $125,000.
In July 1999, the Company issued 16,000 shares of common stock for an aggregate
price of $40,000.
In July 1999, the Company issued 25,000 shares of common stock to Harrington,
Ocko & Monk, LLP, outside counsel to the Company, at a price of $5.00 per share
in consideration for legal services rendered.
Effective on September 30, 1999, the Company entered into an agreement with
Richard Kandel, Chairman, chief executive officer and treasurer of the Company,
pursuant to which Mr. Kandel, as sole holder of the Series A Stock, consented to
the amendment of the Certificate of Designation for the Series A Stock to remove
the ability of the holder of the Series A Stock to put the Series A Stock to the
Company at any date after January 15, 2001 and to increase the conversion price
of the Series A Stock from $2.50 to $5.00.
In October 1999, the Company authorized the issuance of up to 80,000 shares of
Series B Cumulative Convertible Preferred Stock (the Series B Stock). The
Series B Stock has a stated value of $100 and bears a dividend at a rate of 10%
per annum. The Series B Stock is convertible into common stock at a conversion
price of $5.00.
The Company sold an aggregate of 255.9 units, each unit consisting of 100 shares
of Series B Stock and 1,000 common stock purchase warrants exercisable at $5.00,
to approximately 60 accredited investors for an aggregate amount of $2,559,000.
The Company closed the private placement as of December 31, 1999.
F-14
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. RELATED PARTY TRANSACTIONS:
During 1998, stockholders advanced various amounts to the Company for the
payment of expenses. Such advances totaled less than $25,000. All such amounts
were noninterest bearing and were repaid during the period.
On June 29, 1999, the Company and stockholders Messrs. Kandel, Davis and Etra
have invested in b2bstores.com, Inc. ("b2b"), a California-based company which
designs Internet-based electronic commerce programs. Mr. Kandel, the chairman
and chief executive officer of the Company, serves as chairman of the board of
b2b. b2b assisted the Company in the development of the Company's eCommerce
website. The Company has entered into an agreement with b2b in which b2b will
host five on-line stores at their website and the Company will receive 2-5% of
the top line revenue on each product sold at such stores.
The Company's initial investment of $6,000 in b2b represented approximately 55%
of the outstanding common stock of b2b. Subsequently, others have invested in
b2b lowering the Company's direct interest to approximately 49% of the
outstanding common stock at December 31, 1999. Richard Kandel, the Company's
principal stockholder, owns additional shares of b2b such that he has effective
control of both companies. The Company has accounted for its direct investment
in b2b under the equity method of accounting. The increase in equity resulting
from shares of stock sold to outsiders has been recorded as a capital
contribution to the Company.
During the year ended December 31, 1999, the board of directors of the Company
authorized a loan to b2b not to exceed $1,000,000, accruing interest at a rate
of 8% per annum, due January 31, 2000. At December 31, 1999 advanced working
capital loans to b2b totaled $824,836 plus accrued interest of $11,156. b2b
had an IPO during February 2000 and immediately repaid all amounts due including
all interest accrued to the Company.
The Company has guaranteed certain debt of b2b. As of December 31, 1999, such
debt was less than $45,000. Additionally, the Company is a guarantor on b2b's
office lease through August 2001 in the amount of $77,000 per year.
11. BUSINESS SEGMENT:
Prior to the Company's acquisition of NISSCO in January 1999, the Company
operated in one industry segment. Subsequent to the NISSCO acquisition, the
Company operated in two segments, the wholesale distribution of sanitary
maintenance products and providing buying services and group discounts to
wholesalers.
Summarized financial information by business segment for the year ended December
31, 1999 is as follows:
<TABLE>
<S> <C>
Revenue:
Products $5,818,702
Services 1,462,706
- --------------------------------------------------------
Total revenue $7,281,408
========================================================
</TABLE>
F-15
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C>
Profit from product sales $ 15,847
Profit from services 658,600
- --------------------------------------------------------
Total profit by segment 674,447
Amortization of goodwill 540,556
Interest expense 466,678
Professional fees 534,780
Corporate overhead - salaries 263,558
- --------------------------------------------------------
Net Loss $(1,131,125)
========================================================
Interest income:
Products $ 2,555
Services 4,658
- --------------------------------------------------------
Total interest income $ 7,213
========================================================
Interest expense:
Products $ 30,896
Services 134
Corporate Overhead 466,698
- --------------------------------------------------------
Total interest expense $ 497,728
========================================================
Depreciation and amortization:
Products $ 64,157
Services 5,000
- --------------------------------------------------------
Total depreciation and amortization $ 69,157
========================================================
Total Assets:
Products $ 3,863,708
Services 337,064
Corporate Overhead 10,784,928
- --------------------------------------------------------
Total assets $14,985,700
========================================================
Capital Expenditures:
Products $ 37,883
Services 5,716
- --------------------------------------------------------
$ 43,599
========================================================
</TABLE>
F-16
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. SUBSEQUENT EVENTS:
In April 2000, all of the Series A Convertible Preferred Stock was redeemed. The
Stock was redeemed at the conversion price of $5.00 per share plus all accrued
and unpaid dividends to date.
In April 2000, 20,790 outstanding shares of the Series B Cumulative Convertible
Preferred Stock ("Series B Stock") plus accrued and unpaid dividends, were
converted to the Company's Common Stock at a conversion price of $5.00 per share
of Common Stock. The Series B Stock had a stated value of $100 per share. In
addition, the remaining 4,800 outstanding shares of Series B Stock were redeemed
at the conversion price of $100.00 per share plus accrued and unpaid dividends.
In March 2000, all of the Series D Cumulative Convertible Preferred Stock was
redeemed. The stock was redeemed at the conversion price of $5.00 per share plus
all accrued and unpaid dividends to date.
In February 2000, the Company closed a private placement common equity offering
at $4.00 per share for net proceeds of $980,000.
On February 15, 2000, b2b completed an initial public offering which diluted the
percentage of the Company's holdings in b2b to 24.9%.
In March 2000, the Company sold 1,000,000 shares of b2b, representing one-
half of the Company's investment, in a private transaction, netting $6,750,000
in proceeds to the Company, and reducing the percentage of the Company's
holdings in b2b to 12.5%.
F-17
