<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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SUMMIT ENVIRONMENTAL CORPORATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 333-48659 73-1537206
-------------- ----------------------- -------------
(state of (Commission File Number) (IRS Employer
incorporation) I.D. Number)
</TABLE>
414 East Loop 281, Suite 7
Longview, TX 75605
800-522-7841
-------------------------------------------------------
(Address and telephone number of registrant's principal
executive offices and principal place of business)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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
--- ---
As of June 30, 1999, there were 7,528,494 shares of the Registrant's
Common Stock, par value $0.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<PAGE> 3
SUMMIT ENVIRONMENTAL CORPORATION, INC.
BALANCE SHEET
As of the end of the six months ended June 30, 1999 and the twelve
months ended December 31, 1998
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Unaudited Audited
------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 260,987 $ 744,704
Accounts Receivable 171,865 173,456
Less Allowance (30,000) (30,000)
Inventory 721,493 399,060
Prepaid Items 6,095 0
Accrued income tax refund 7,252 7,252
----------- -----------
Total Current Assets 1,137,692 1,294,472
----------- -----------
PROPERTY AND EQUIPMENT AT COST
Equipment 24,789 21,203
Accumulated depreciation (3,886) (1,942)
----------- -----------
Net property and equipment 20,903 19,261
----------- -----------
OTHER ASSETS
Prepaid royalties 400,000 250,000
Organization Cost 129,291 129,291
Less accumulated amortization (22,623) (9,697)
Patents and Licenses 2,435,000 2,435,000
Less: Accumulated amortization (104,958) (23,792)
----------- -----------
Total Other Assets 2,836,710 2,780,802
----------- -----------
Total Assets $ 3,995,305 $ 4,094,535
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 22,335 $ 19,201
Accrued Liabilities 17,946 17,283
Notes Payable - related party 500,000 500,000
Notes Payable - other 0 1,738
----------- -----------
Total Current Liabilities 540,281 538,222
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001; 10,000,000 shares
authorized, no shares issued
Common stock, par value $.001; 40,000,000 shares
authorized, 7,528,494 & 7,406,694
shares issued and outstanding respectively 7,529 7,406
Additional paid in capital 4,462,200 4,154,823
Deficit accumulated (1,014,705) (605,916)
----------- -----------
Total stockholders' equity 3,455,024 3,556,313
----------- -----------
Total liabilities and stockholders' equity $ 3,995,305 $ 4,094,535
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE> 4
SUMMIT ENVIRONMENTAL CORPORATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1999 June 30, 1998
Unaudited Audited
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (408,788) $ (42,856)
Adjustments to reconcile net earnings (loss) to cash
used in operating activities
Amortization 94,092 7,022
Depreciation 1,944 1,901
Change in assets and liabilities:
Accounts receivable 1,591 (46,305)
License fee receivable -- (80,000)
Inventory (322,433) (31,602)
Prepaid items (156,095) (6,555)
Accounts payable 3,134 27,397
Accrued expenses 663 6,946
Commission payable -- 44,673
----------- -----------
Net cash used in operating activities (785,892) (119,379)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Due from stockholders -- (804,350)
Acquisition of property and equipment (3,586) (17,302)
Advances to officers -- (1,500)
Organization costs -- (94,719)
Acquisition of licenses -- (155,000)
----------- -----------
Net cash used in investing activities (3,586) (1,072,871)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds -- 6,554
Loan principal repayments (1,738) (2,321)
Proceeds from sale of stock 307,500 1,472,428
----------- -----------
Net cash provided by financing activities 305,762 1,476,661
----------- -----------
NET INCREASE (DECREASE) IN CASH (483,716) 284,411
Cash - Beginning of period 744,704 5,001
----------- -----------
Cash - End of period $ 260,988 $ 289,412
----------- -----------
The accompanying notes are an integral part of these statements.
</TABLE>
4
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SUMMIT ENVIRONMENTAL CORPORATION, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30 June 30
Audited
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 59,771 $ 59,187 $ 78,319 $ 59,187
COST OF SALES 24,783 38,149 29,555 38,149
----------- ----------- ----------- -----------
Gross Profit 34,988 21,038 48,764 21,038
----------- ----------- ----------- -----------
OPERATION EXPENSES
General and administrative 183,190 122,146 369,351 161,175
Depreciation and amortization 48,018 8,923 96,036 8,923
Interest expense 43 351 97 351
----------- ----------- ----------- -----------
Total operating expense 231,251 131,420 465,484 170,449
----------- ----------- ----------- -----------
Net Earnings (Loss) from operations (196,263) (110,382) (416,720) (149,411)
----------- ----------- ----------- -----------
OTHER INCOME
Interest income 2,728 -- 7,932 --
Sale of license -- 100,000 -- 100,000
----------- ----------- ----------- -----------
Total Other Income 2,728 100,000 7,932 100,000
----------- ----------- ----------- -----------
NET EARNINGS (LOSS)
BEFORE INCOME TAX (193,535) (10,382) (408,788) (49,411)
Income tax benefit -- 6,555 -- 6,555
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ (193,535) $ (3,827) $ (408,788) $ (42,856)
=========== =========== =========== ===========
NET EARNINGS (LOSS)
PER SHARE $ (.025707) $ (0.007384) $ (.054699) $ (.094190)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES 7,528,494 5,182,870 7,473,450 4,549,950
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements.
</TABLE>
5
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SUMMIT ENVIRONMENTAL CORPORATION, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
The balance sheet of Summit Environmental Corporation, Inc., the "Company", at
December 31, 1998, the statement of operation for the six months ended June 30,
1998 and the statement of cash flows for the six months ended June 30, 1998 have
been taken from the Company's audited financial statements at that date. The
balance sheet at June 30, 1999, the statement of operations for the three months
ended June 30, 1999, the three months ended June 30, 1998, the six months ended
June 30, 1999 and the statement of cash flows for the six months ended June 30,
1999 have been prepared by the Company without audit. The financial statements
have been prepared in conformity with generally accepted accounting principles
and contain such adjustments as management feels are necessary to present
fairly, in all material aspects, the financial position and results of operation
of the Company.
1. SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Summit Environmental Corporation, Inc. (the "Company") was organized in
accordance with the Business Corporation Act of the State of Texas on
February 2, 1998, for the purpose of merging (the "Merger") with Summit
Technologies, Inc., a Texas corporation. The Company continued to exist
as the surviving corporation under its present name pursuant to the
provisions of the Texas Business Corporation Act. The Merger was
effected on December 2, 1998 as a tax-free reorganization accounted for
as a pooling of interests.
The Company manufactures and markets environmentally friendly non-toxic
chemicals cleaners and fire suppression materials along with herbal and
cosmetic health products. The products are proprietary or are under
exclusive license. Marketing efforts include "infomercials" and other
television and radio promotion, videotapes, and personal
demonstrations. Products are marketed domestically and internationally.
Revenue Recognition
Revenues from sales of materials and products are recorded at the time
the goods are shipped or when title passes.
Cash
The Company maintains cash balances at a financial institution located
in Longview, Texas, which at times may exceed federally insured limits.
The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and
cash equivalents.
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Inventory
Inventory is recorded at the lower of cost or market, with the cost
being determined by the first-in, first-out method.
Intangible Assets
Patents, licenses and organization costs are recorded at cost.
Amortization is computed on the straight-line method over fifteen years
for patents and licenses and over five years for organization costs.
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred income taxes are determined using the liability method under
which deferred tax assets and liabilities are determined based upon
differences between financial accounting and tax bases of assets and
liabilities.
Property and Equipment
Depreciation and amortization are provided in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives by the straight-line method.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
Major repairs or replacements of property and equipment are
capitalized. Maintenance, repairs and minor replacements are charged to
operations as incurred.
When units of property are retired or otherwise disposed of, their cost
and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is included in operations.
The estimated service lives used in determining depreciation and
amortization are:
<TABLE>
<CAPTION>
Description Estimated Service Life
<S> <C>
Office furniture and equipment 5-7 years
Leasehold improvements 4 years
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Per Share Information
Per share information is based on the weighted average number of common
stock and common stock equivalent shares outstanding. Only basic
earnings per share are shown, as there are no dilutive items. During
1998 a 33.6-for-one stock split of the Company's common stock was
authorized. Net earnings (loss) per share has been adjusted to reflect
the split on a retroactive basis.
Convertible Notes
As of July 1999, the board of directors has authorized the Company to
offer 300, $10,000 convertible notes, 10% interest, convertible into
common stock at $1.25 per share. With each note there are 2,000
warrants exercisable through June 30, 2002 at $1.50 per share for
Common Stock.
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<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. PATENT
On November 2, 1998, the Company purchased via issuance of common stock
and a note payable, patent rights and intellectual property to various
fire suppression products for a purchase price of $2,375,000. This
purchase requires cash payments of $500,000 and 750,000 shares of
common stock of the Company to be issued and delivered to BioGenesis
Enterprises, Inc. The shares were issued on February 1, 1999.
3. LICENSES
Licenses for limited exclusive marketing rights to various herbal
health products have been acquired for fees totaling $60,000 from a
related party. Under the agreements, the Company must meet annual
production quotas. The grantor of the licenses is the
manufacturer/supplier of the products.
4. LEASES
The Company is obligated under various operating leases for equipment,
vehicles, and office and warehouse space. Management expects that, in
the normal course of business, leases that expire will be renewed by
other leases; thus it is anticipated that future minimum lease
commitments will not be less than the amount shown for the period
ending December 31, 1998.
5. COMMON STOCK
Common Stock Options
The 1998 Stock Option Plan (the "Plan") of the Company whereby, at the
discretion of the directors or of a Stock Option Committee appointed by
the board of directors, invited employees of the Company or directors
of the Company or consultants to the Company will have the option of
subscribing to common shares of the Company based on a price determined
by the directors or Stock Option Committee. The number of shares
subject to the Plan is 500,000. No options have been granted in
accordance with this plan.
Contingency Concerning Some Shares
During the proposed merger period with Summit Environmental
Corporation, Inc. ("SECI"), SECI filed a registration statement with
the Securities and Exchange Commission ("the Commission") on March 26,
1998 related to the proposed merger, naming the Company as the entity
proposed to be merged with SECI. The Company subsequently sold 810,840
shares of its common stock in an offering intended to be exempt from
registration pursuant to the provisions of Section 4(2) of the
Securities Act of 1933 and of Regulation D, Rule 506 of the Commission.
It is possible, but not certain, that the filing of the registration
statement by SECI and the manner in which the Company conducted the
sale of the 810,840 shares of common stock constituted "general
advertising or general solicitation" by the Company. General
advertising and general solicitation are activities that are prohibited
when conducted in connection with an offering intended to be exempt
from registration pursuant to the provision of Regulation D, Rule 506
of the Commission. The Company does not concede that there was no
exemption from registration available for this offering. Nevertheless,
should the aforementioned circumstances have constituted general
advertising or general solicitation, the Company would be denied the
availability of Regulation D, Rule 506 as an exemption from the
registration requirements of the Securities Act of 1933 when it sold
the 810,840 shares of common stock after March 26, 1998. Should no
exemption from registration have been available with respect to the
sale of these shares, the persons who bought them
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<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
would be entitled, under the Securities Act of 1933, to the return of
their subscription amounts if actions to recover such monies should be
filed within one year after the sales in question.
Of the 810,840 shares of common stock, 54,000 shares were never funded,
leaving 756,840 shares and $1,129,594 stockholder's equity that may be
refunded. The last of the contingency stock was sold by the Company
June 30, 1998. As of June 30, 1999, no request for refund has been
received.
6. RELATED PARTY TRANSACTIONS
The following transaction occurred between the Company and related
parties:
The Company acquired a patent from BioGenesis Enterprises, Inc.
(BioGenesis) on November 2, 1998 (see footnote number 2). The purchase
agreement requires the Company to pay BioGenesis a periodic royalty of
$.50 per 16-oz. Can and an equivalent (approximately 7%) on all other
product categories using the fire suppressant technology. One-half of
all periodic royalty fees due to BioGenesis will be credited against
the advance royalty fee (until fully recovered) and one-half will be
paid to BioGenesis in cash on the 30th of each month based upon
invoiced sales through the close of the preceding month. The Company
has prepaid royalties to BioGenesis totaling $250,000 as of December
31, 1998, and $400,000 as of June 30, 1999.
7. INCOME TAXES
Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities as measured by the currently enacted tax rates. Deferred
tax expense or benefit is the result of the changes in deferred tax
assets and liabilities.
Deferred income taxes arise principally from the temporary differences
between financial statement and income tax recognition of depreciation,
bad debts and net operating losses.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and the accompanying notes thereto and is
qualified in its entirety by the foregoing and by more detailed financial
information appearing elsewhere. See "Item 1. Financial Statements."
RESULTS OF OPERATIONS - SECOND QUARTER OF 1999 COMPARED TO SECOND
QUARTER OF 1998
Summit Environmental's revenues for Q2 1999 were flat compared to Q2
1998. Gross margin, however, was 42 percent for Q2 1999 compared to 36 percent
for Q2 1998. This improvement in gross margin was primarily due to increase in
sales of fire suppressant through revenue sharing agreements.
Operating expenses increased significantly during Q2 1999 compared to
Q2 1998. Marketing expenses increased from $34,305 in Q2 1998 to $56,004 in Q2
1999.
Salaries increased by 72 percent in Q2 1999 compared to Q2 1998. The
majority of the $20,000 increase was in salaries to officers of the company,
specifically the addition of Paula Parker and Don Hendon.
Amortization and depreciation increased by four-fold in Q2 1999
compared to Q2 1998. This reflects the acquisition by Summit of the patent
rights to its fire suppressant.
Summit had a net loss from operations of $193,535 for Q2 1999 compared
to a net loss of only $3,827 on comparable sales for Q2 1998. As described
above, this increase was due primarily to an increase in marketing expense and
an increase in amortization and depreciation.
RESULTS OF OPERATIONS - FIRST HALF OF 1999 COMPARED TO FIRST HALF OF
1998
Sales from operations increased by 32 percent for the first half of
1999 compared to the first half of 1998. Gross margin on these sales was 62
percent in the first half of 1999 compared to gross margin of only 36 percent in
the first half of 1998.
Operating expenses, however, increased by 173 percent during the first
half of 1999 compared to those in the first half of 1998. The principal
increases in operating expenses in the first half of 1999 were marketing -
$79,449 as compared to $34,305 in the first half of 1998 - and depreciation and
amortization - $96,036 as compared to only $8,923 in the first half of 1998.
We experienced a net loss of $408,788 in the first half of 1999 as
compared to a net loss of $42,856 in the first half of 1998. The loss per share
of common stock was $0.05 for the first half of 1999 compared to a net loss per
share of $0.09 in the first half of 1998.
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<PAGE> 11
Our inventory increased from $399,060 at December 31, 1998 to $721,493
on June 30, 1999. This increase is deliberate and reflects an improvement in our
ability to handle large orders we expect to receive this year.
Other balance sheet items that reflect significant changes from
December 31, 1998 to June 30, 1999 are cash - down from $744,704 to $260,987 and
prepaid royalties - up from $250,000 to $400,000.
The net loss of $408,788 during the first half of 1999 was financed
partly from the $307,500 proceeds of sale of 121,800 shares of common stock and
partly from $96,036 in amortization and depreciation.
OUTLOOK
This outlook section contains a number of forward-looking statements,
all of which are based on current expectations. Actual results may vary
considerably.
Summit has recently entered into the following contracts or
distribution agreements that we expect to produce the indicated results:
1. We have entered into an exclusive distribution agreement with
Convenience Service Group, a company that places products in over 130,000
convenience stores across the United States and Canada. For Convenience Service
Group to maintain its exclusive distributorship for convenience stores, it must
produce sales of $5,000,000 of FirePower 911(TM) during the first year of the
agreement. It will place additional products of Summit in its convenience store
network after FirePower 911(TM) is successfully introduced. FirePower 911(TM)
will first hit the shelves between August 15 and September 1, 1999.
2. Through International Aero, Inc. we have executed an agreement with
a United Kingdom distributor with 40 sales representatives that cover the
European Union. The initial order for our fire suppressants is expected to be
$500,000. This marketing firm is a fire products sales organization.
3. We have executed a contract with a New York City exporter that was
granted the exclusive right to sell our fire suppressant products in thirteen
countries in South America. The first year's product's quota for the exclusive
distribution right is $925,000. The second year's quota is $1,600,000. The first
shipment to the government in Chile has already been ordered - US$60,000 for
five-gallon containers of FlameOut(TM) for the Forestry Service of Chile.
4. We have developed a proprietary, biodegradable, crank wash cleaner
called Ultimate Clean 668 that is manufactured by BioGenesis Enterprises, Inc.
exclusively for us. Solar Turbines, Inc., a division of Caterpillar Inc., has
approved the cleaner to be used on its turbine fleet. We are in the process of
obtaining the approval by other turbine manufacturers to use Ultimate Clean 668
on their turbines.
We already have, through our authorized representatives, a worldwide
network to market and distribute this product, and purchase orders have been
received for this product. We anticipate sales of
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<PAGE> 12
approximately $460,000 from the Solar Turbines fleet during the rest of
1999.
In addition to the above, we expect to commence a vigorous marketing
effort using infomercials in September 1999. The producer of the infomercials is
The Video Agency of Studio City, California. The initial preparation is being
edited at Paramount Studios. Three direct response television ads will be
extracted from this 30-minute production. The program will air nationally on
either the Discovery, Learning, or Bravo Channels, or on CNBC. It will be
rebroadcast once every other week for six months. We believe this program will
generate investor interest, support the convenience store retail sales
initiative and produce direct sales from the home office.
Further, we are negotiating contracts with a Malaysian group for it to
be a regional distributor in that region. During July, we executed agreements
with distributors for Japan and Hong Kong. Production estimates cannot be made
at this time, because we are awaiting official notice of the acceptance of our
testing standard for both FirePower 911(TM) and FlameOut(TM).
MANAGEMENT'S STATEMENT ON Y2K
Summit's information technology system is Y2K compliant based on
communications with our hardware and software providers and in-house testing. We
have no non-information technology systems affecting business operations. We
have no multiple computer systems.
Third parties with whom we have material relationships have confirmed
that they expect no business interruptions. We expect no cost directly relating
to fixing Y2K issues, such as modifying software and hiring Y2K solution
providers. We estimate no material lost revenues due to Y2K issues, and we are
establishing a contingency plan.
Summit's future results of operations and the other forward-looking
statements contained herein involve a number of risks and uncertainties. Among
the factors that could cause actual results to differ materially are the
following: inability of the Company to obtain needed additional capital, loss of
personnel - particularly chief executive officer B. Keith Parker - as a result
of accident or for health reasons, interruptions in the supply of inventory from
manufacturers of the inventory, the development of a competing fire suppressant
by a well-capitalized competitor that either is able to develop a new product
with the same attributes as the Company's fire suppressant or is able to
discover the additives to the Company's fire suppressant that give it its unique
and superior qualities, and an accident involving life or serious bodily harm
that fairly or unfairly would bring into question the safety of using the
Company's fire suppressant products.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
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<PAGE> 13
(B) FORMS 8-K
None
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 9, 1999 Summit Environmental Corporation, Inc.
By/s/B. Keith Parker
-------------------------------------
B. Keith Parker, Chief Executive
Officer
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