<PAGE>
FORM 10-KSB
Annual report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended: May 31, 1999
WHITNEY AMERICAN CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
0-22907 84-1070022
(Commission File Number) (I.R.S. Employer Identification Number)
8150 Leesburg Pike, Suite 1200, Vienna, Virginia 22182
(Address of Principal Executive Offices)
(703) 893-0582
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.00001 PAR VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __________ No _____ X_____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ]
The registrant's revenue for its most recent fiscal year. $ 13,514,743
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The aggregate market value of the voting and non-voting common equity 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, was not
determinable.
At May 31, 1999, a total of 4,266,020 shares of common stock were outstanding.
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PART I
Item 1. Description of Business.
DEVELOPMENT OF THE BUSINESS
Whitney American Corporation (the "Company"), is a holding company which,
through its wholly-owned operating subsidiary, Kemron Environmental Services,
Inc., provides environmental investigation and engineering services;
environmental assessments; consulting and site remediation services; and
environmental testing and analytical services.
The Company was incorporated on June 18, 1987, under the laws of the State of
Delaware. The Company's initial activities were directed towards the raising of
capital. Pursuant to an Agreement and Plan of Reorganization, Industrial Waste
Processing, Inc., a Nevada corporation ("IWP"), was merged with and into the
Company on October 20, 1988 and subsequently changed its name to Industrial
Waste Processing, Inc. On April 17, 1989, the Company's parental affiliate
Pacific Energy and Mining Company ("PEMC") reacquired all of the Company's
outstanding obligations. The Company had been inactive from April 1989 through
February 1998 with no significant assets. In February 1997, the Company filed
with the Delaware Secretary of State a Certificate of Amended and Restated
Certificate of Incorporation that, among other things, changed the Company's
name back to Whitney American Corporation.
In keeping with the Company's strategic business plan, the Company, on March 10,
1998, acquired Kemron Environmental Services, Inc.(Kemron). Kemron was
acquired through a tax-free stock exchange agreement. Kemron merged with and
into the Company, effectively changing the state of domicile of the Company as a
result of Kemron being the surviving corporation. Upon consummation of the Stock
Exchange Agreement, the stockholders of Kemron became the owners in the
aggregate of approximately 86% of the outstanding common stock of the Company.
Pursuant to the Stock Exchange Agreement, an additional 3,500,000 shares of
common stock, $.00001 par value, of the Company were issued in exchange for the
existing common stock of Kemron. The transaction was treated as a reverse
acquisition, recorded at historical cost under the purchase method. Therefore,
the results of operations and other historical information of Kemron presented
in this report are those of the Company.
Concurrent with the reverse acquisition with and into Whitney, the Company
entered into a Stock Exchange Agreement with three additional entities: Exeter
Group, Inc. ("Exeter"), Coastline International, Inc. ("Coastline"), and New
Horizons, Inc. ("New Horizons"). As a result of management differences and the
Company's lack of management control over these entities, the Company entered
into separate rescission agreements on October 19, 1998, April 26, 1998 and May
12, 1998, respectively, which collectively address the Company and Exeter,
Coastline and New Horizons agreements that involved the return of the respective
shares originally issued by the Company in connection with the failed mergers.
However, under terms of the settlement agreements, the Company was successful in
recovering all but 190,973 shares of common stock and stock options for 135,532
shares of common stock, originally issued in connection with the failed mergers.
BUSINESS OPERATIONS
The Company, through its wholly-owned subsidiary, provides a wide range of
environmental consulting and analytical services to the public and private
sectors.
Consulting and Engineering Services Group
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The Company, through its operating subsidiary, provides services under three
separate regional consulting offices located in Atlanta, Georgia; Marietta,
Ohio; and Vienna, Virginia. Environmental consulting services are performed for
a wide variety of governmental and private-sector clients, predominantly in the
areas of water pollution control, and investigation and remediation of soils and
ground waters that have been contaminated with hazardous or non-hazardous
contaminants. The consulting activities involve providing expert scientific,
engineering, and regulatory policy analyses to clients that are regulated
directly
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under various federal, state, and local environmental laws and regulations. The
remediation services involve providing design, fabrication, installation and
operations and maintenance of technologies to reduce the levels of contamination
in soils and ground waters.
Each regional office is responsible for the project management and ultimate
profitability of its operation. Contracts are competitively bid and are on a
fixed price, time and materials, and cost reimbursable basis. The length of
most contracts is less than one year; however, larger remediation and operation
and maintenance contracts may extend to two or three years for completion.
The consulting services group provides investigations and pre-acquisition audits
of environmentally contaminated waste sites such as disposal units,
manufacturing facilities, abandoned sites, and military bases covered under RCRA
and CERCLA regulations. The related activities performed for investigations
include sampling and analysis of sediment for contamination; test borings to
evaluate geological conditions; installation, development, and sampling of
groundwater monitoring wells. Site investigations and assessments ascertain
whether contamination exists and, if so, the consulting services will propose
the most cost effective solutions to mitigate this contamination.
The consulting services group has considerable experience in designing remedial
action plans that eliminate or reduce the release of hazardous contaminants into
the environment. Remedial alternatives are analyzed for effective solutions
while remaining cost effective. The consulting service's various alternatives
proven through successful site work include in-situ treatment, soil aeration and
bioremediation, groundwater air sparging, and soil vapor extraction. These
alternatives can provide cost-effective and environmentally-sound solutions to
contamination problems without the need to take more extensive efforts of
excavation, pumping, and off-site disposal.
One of the principal consulting services provided is underground storage tank
(UST) testing, removal, investigation and remediation. Contracts under which
the Company's operating subsidiary are currently performing include Fortune 100
companies and the State of Georgia under the state-funded Georgia UST Management
Program.
Other services provided through the Company's operating subsidiary include
asbestos services such as asbestos surveys, abatement design and abatement
monitoring programs. Additional services include; lead based paint assessments,
monitoring, and remediation; wetland delineation and mapping, permitting,
functional value assessment, and mitigation/restoration; and ecological
investigations concerning the effects of effluents and land-disturbing
activities on aquatic biota.
Analytical Services
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The Company operates a comprehensive environmental laboratory equipped with
fully-automated, state-of-the-art instrumentation. The laboratory, located in
Marietta, Ohio, performs services under unit based pricing which can be
contracted for individual job orders or master service agreements. The longer
duration projects are typically in support of an operation and maintenance phase
of contaminated sites that require monitoring of cleanup levels through all
stages of remediation.
Sample analysis conducted at the laboratory includes soil, water, biological
samples, sludge and waste. The Company's laboratory operation has experience
in most standard methods for sample testing as defined through EPA, NIOSH, ASTM,
and APHA. The services also extend to providing consultation and
recommendations in the design phase of any sampling project.
SUPPLIERS AND CUSTOMERS
The operating subsidiary purchases equipment and supplies for the laboratory
operation and consulting services. The laboratory operation engages in the most
significant volume of purchase activity with vendors and suppliers. Supplies
for the laboratory include kits for water/soil sample shipment, glassware, gases
such as Argon and Nitrogen, solvents such as deionized water, and general office
supplies. Although
<PAGE>
the laboratory has maintained ongoing relations with various suppliers, there
are no dependencies with any individual vendors. Pricing is reevaluated on a
periodic basis and almost all supplies can be obtained through other suppliers
at competitive prices.
The consulting services has teaming agreements with various subcontractors
based on the type of project work, qualifications and location of subcontractor,
and competitiveness of pricing. The relationship with outside consulting
companies is based solely on the project work and as projects turnover, so will
the consulting service's subcontractor support. There are no contractual
arrangements with subcontractors for which the Company's operating subsidiary
has long-term commitments.
The customers of the laboratory and consulting services include both private
sector clients and government or publicly funded entities. In fiscal 1999, the
Company estimates that approximately 59% of its operating subsidiary's revenues
were derived from private sector clients and 41% from government contracts.
The primary clients that represent 60% of the Company's operating subsidiary's
sales include Union Carbide Corporation, Earth Tech, Landrum & Brown, State of
Georgia, Department of Energy, U.S. Air Force, and the U.S. Army Corp of
Engineers.
LICENSES
The Company, through its operating subsidiary, is licensed and/or certified in
all jurisdictions where required in order to conduct its operations. In
addition, certain management and staff members are licensed and/or certified by
various governmental agencies as professional engineers, professional geologist,
subsurface evaluators, hazardous materials manager, remedial site manager,
asbestos supervisors, and asbestos inspectors.
INSURANCE
The Company's operating subsidiary maintains liability insurance for claims
arising from job performance for both consulting and analytical services. The
policy, which provides a $1.0 million limit per claim and $2.0 million in the
aggregate, insures against both property damage and bodily injury arising from
contracting activities of the operating subsidiary. The policy is written on an
"occurrence" basis which provides coverage for insured risks that occur during
the policy period, irrespective of when a claim is made. Higher policy limits
of up to $7.0 million are available for individual projects. The operating
subsidiary also provides worker's compensation insurance, at statutory limits,
which covers the employees of the Company's operating subsidiary engaged in
laboratory and field service activities.
Certain contracts of the Company's operating subsidiary require performance and
payment bonds for which bonding programs are maintained to satisfy these
requirements.
COMPETITIVE CONDITIONS
The environmental industry is highly competitive and includes both small firms
and large diversified firms, which have the financial, technical and marketing
capabilities to compete on a national level. The industry is comprised of
dozens of large firms and several hundred small firms. The small firms tend to
be more regionalized and concentrated to certain geographical locations. Much
of the work awarded to the Company's operating subsidiary is the result of
competitive pricing, its reputation for quality, and work performance history.
REGULATORY MATTERS
There are relatively few federal, state or local regulations that are directly
applicable to the Company's operating subsidiary. In general, the consulting
services group provides technical advice to clients who are
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directly affected by federal, state and local regulations. These services do,
however, include conducting investigations and preparing reports according to
federal and state guidance documents that have been developed under numerous
federal and state regulatory programs. The analytical services group must
conduct sample analyses based on certain regulatory standards and methods as
directed through client specifications. It is, therefore, imperative that the
Company's operating subsidiary keep abreast of changes under regulatory programs
as well as new promulgations.
In the course of conducting investigations of hazardous waste sites, the
consulting services group must comply with various federal and state regulations
regarding the shipping of hazardous materials and the disposition of potentially
hazardous investigation-derived wastes. The shipping of hazardous materials
(generally soil and water samples from waste sites under investigation) is
governed by the Hazardous Materials Transportation Act of 1974 (HMTA), which
establishes rules for the packaging, marking, labeling, and acceptable condition
of hazardous materials offered for intrastate or interstate transportation, and
the Hazardous Materials Transportation Uniform Safety Act of 1990, which amended
HMTA with regard to, among other things, highway routing, shipping papers, and
training requirements. Disposition of investigation-derived wastes may be
regulated under either the Toxic Substances Control Act (TSCA) if the wastes
contain polychlorinated biphenyls (PCBs), or the Resource Conservation and
Recovery Act (RCRA) if the wastes contain other hazardous materials.
Site remediation involves the actual handling of contaminated materials, and so
the consulting services group's remediation activities are subject to numerous
federal, state and local environmental regulations. The regulations most often
applied to remediation sites are federal regulations promulgated under RCRA,
TSCA, the Clean Air Act (CAA), and the Clean Water Act (CWA), or the state-
designated counterparts to those federal regulations. In general, remediation
technologies must be permitted under one or more of these laws.
All site investigation and remediation activities are governed by Occupational
Safety and Health Administration (OSHA) requirements. These regulations set
forth requirements for engineering and administrative controls, work area
practices, proper supervision, training, medical surveillance, and
decontamination practices for worker and off-site protection.
The Company believes it is in compliance with all of the federal, state and
local statutes and regulations which affect its consulting and remediation
businesses.
EMPLOYEES
Through the acquisition of the operating subsidiary Kemron Environmental
Services, Inc., the Company now has 137 full-time employees, located at the
Vienna, Virginia, Marietta, Ohio, and Atlanta, Georgia offices. This consists
of senior management, professional staff, scientists, chemists, field
technicians, and staff employees within the consulting services offices, the
laboratory, and the headquarters facility. The staff employees include
accounting, administrative, sales and clerical personnel.
Exchange Act Registration
The company voluntarily filed with the Securities and Exchange Commission
("SEC") a registration statement on Form 8-A (file no. 0-22907) in order to
register the Company's common stock under Section 12(g) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), which became effective on
September 29, 1997. The Company had previously filed with the SEC certain
annual, quarterly and other reports on a voluntary basis, but pursuant to that
Exchange Act registration, the Company now is required to file periodic reports
and other information with the SEC as required by the Exchange Act.
Item 2. Description of Property
As of May 31, 1999, the Company, through its operating subsidiary, leases four
facilities and does not own any real estate. The headquarters office is
combined with consulting office space in Vienna, VA (8500
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square feet), a portion of which is subleased to another tenant (2900 square
feet). The laboratory facility located in Marietta, OH represents the largest
portion of leased space (18,000 square feet). Other consulting offices are
located in Atlanta, GA (7500 square feet) and Marietta, OH (2000 square feet and
separate from laboratory facility).
Production equipment of the laboratory includes analytical instruments such as
gas chromatographs, high pressure liquid chromatographs, autosamplers, atomic
absorption spectrophotometers, and inductively coupled plasma instruments. A
significant level of investment in the laboratory has taken place to secure
current technology and enhance computerization in the analytical processes. The
more recent acquisitions of laboratory equipment have been transacted under
equipment lease arrangements.
The consulting offices are equipped with field vehicles, sampling devices, and
equipment for remediation processes such as air sparging and soil vapor
extraction.
Item 3. Legal Proceedings
The Company has two separate lawsuits pending that involve employment practices.
The outcome of these lawsuits are currently unknown; however, management
believes it will prevail in its defense, and resolution of the matters will not
have an adverse effect on the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Company's outstanding common shares were traded in extremely small volumes
during this reporting period. The more recent trades have ranged in value from
$.07 to $.09 per share. The Company's common stock is quoted "name only" in the
over-the-counter market under the symbol "WHAM" on the OTC Electronic Bulletin
Board operated by the National Association of Securities Dealers, Inc. Although
some trading activity has occurred over the past reporting year, there is no
assurance that an active market ever will arise in the Company's shares.
<TABLE>
<CAPTION>
FISCAL 1999
HIGH LOW
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<S> <C> <C>
First Quarter 5.75 0.62
Second Quarter 1.03 0.07
Third Quarter 0.10 0.06
Fourth Quarter 0.07 0.07
</TABLE>
Holders
The Company's common stock is held of record by approximately 178 persons, which
does not include shares held in nominee or "street" name.
Dividends
The Company does not expect to pay cash dividends on its capital stock in the
foreseeable future. Payment of dividends in the future will depend on the
Company's earnings and its cash requirements at that time.
Item 6. Financial Statements.
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The following table reflects selected consolidated financial data for the
Company for the two fiscal years ended May 31, 1999 and 1998.
<TABLE>
<CAPTION>
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For the Years Ending May 31,
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OPERATING DATA 1999 1998
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<S> <C> <C>
Contract revenues $ 13,515 $ 10,771
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Gross profit 3,950 2,792
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Income from operations 1,170 587
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Other income (expense) (170) (475)
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Income before income taxes 1,000 112
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Net income 1,000 112
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COMMON SHARE DATA
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Net income per common share:
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Basic 0.24 0.03
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Diluted 0.21 0.03
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Weighted average common shares outstanding
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Basic 4,237 3,541
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Diluted 4,685 3,646
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BALANCE SHEET DATA
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Working capital $ 1,080 $ 200
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Total assets 4,949 4,291
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Long-term obligations 338 287
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Total stockholders' equity 1,819 816
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</TABLE>
Item 7. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements and information relating to the
Company that are based on the beliefs of its management as well as assumptions
made by and information currently available to its management. When used in
this report, the words "anticipate", "believe", "estimate", "expect", "intend",
plan and similar expressions, as they relate to the Company or its management,
are intended to identify forward-looking statements. These statements reflect
management's current view of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should any of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in this
report as anticipated, estimated or expected. The Company's realization of its
business aims will depend in the near future principally on the successful
completion of its acquisition of operations as discussed below.
WHITNEY AMERICAN CORPORATION
Whitney American Corporation (WHAM) was incorporated on June 18, 1987 under the
laws of the State of Delaware with the intended purpose of raising capital to
acquire business concerns. Whitney American Corporation had not had any active
business operations since April 1989, other than occasionally searching for a
business to acquire, until the acquisition on March 10, 1998. In keeping with
the Company's strategic
<PAGE>
business plan, the Company, on March 10, 1998 acquired Kemron Environmental
Services, Inc. (Kemron). The company was acquired through a tax-free stock
exchange agreement. Kemron, as the only operating entity of the Company, was
considered the surviving company.
FINANCIAL CONDITION OF THE COMPANY AT MAY 31, 1999 VS MAY 31, 1998
As stated above, except for a brief interlude in 1988, Whitney American (the
Company) did not have any business operations or income since 1989, until it
acquired Kemron as noted above. Therefore, the acquisition made Kemron the
surviving company. Consequently, most of the financial information and data
presented herein is the financial information and data pertaining to Kemron
Environmental Services, Inc., the wholly-owned subsidiary of the Company.
The financial condition of the Company improved considerably for the fiscal year
ended May 31, 1999 as compared to the prior fiscal year. Total stockholders
equity increased 123% from $815,806 to $1,819,150 for the year ended May 31,
1999. The current ratio increased to 1.40 for the year ended May 31, 1999 as
compared to 1.06 for the prior year. Net income generated in the current fiscal
year was the main reason for the significantly improved financial position. The
additional proceeds achieved from company profits have been applied towards the
repayment of debt. The line of credit has decreased from $1,490,000 as of May
31, 1998 to $350,000 as of May 31, 1999.
Total assets increased by $658K while total liabilities decreased by $346K as of
May 31, 1999 as compared to May 31, 1998. This is principally the result of
increased revenues, especially in the final quarter of fiscal year 1999, which
in turn generated increased client receivables as of May 31, 1999. Total
accounts receivables were $439K higher as of May 31, 1999 compared to prior
year. In addition, the company invested approximately $700K in new laboratory
instruments and field equipment. After the depreciation provision, the net book
value of property and equipment has increased by $216K as of May 31, 1999. The
company has secured lease and financing arrangements for most all equipment
acquisitions, thereby maintaining optimal credit availability.
These changes in financial condition improved the Company's credit position with
its senior lender, allowing the credit line to be renegotiated to more
favorable terms on the borrowing rate. The Company maintains a line of credit
of $1.8 million with the bank, secured by the Company's accounts receivable.
The line of credit has provided a significant source of the Company's cash
requirements. The actual balance on the line of credit will fluctuate during
the period based on financing activities. There are no significant working
capital requirements pending at May 31, 1999. The Company's available line of
credit is expected to be sufficient to meet the Company's needs for the
foreseeable future.
RESULT FROM OPERATIONS AT MAY 31, 1999 VS MAY 31, 1998
The Company continued to demonstrate strong operating performance during the
fiscal year ending May 31, 1999. The gross revenue increased by $2.8 million, a
26% from the previous fiscal year, while income from operations increased by
$583,038, representing a 99% increase for the year ended May 31, 1999. Net
income improved by a total of $887,243 for the year ended May 31, 1999, over
seven times the net income of $112,401 reported for the prior fiscal year.
Income per share increased from a $.03 per share in fiscal 1998 to $.24 per
share for the current fiscal year.
The Company's performance for the current fiscal year was very positive. As
there is every indication that the environmental industry has stabilized, the
company continues to move towards penetrating additional markets and client
base. The strong operating performance for the fiscal year ended May 31, 1999
was accomplished through several actions taken by management including, but not
limited to the following:
(1) Over the past two years, the Company has aggressively put forth a
marketing plan to develop further diversification of existing client
base, thereby minimizing any dependency on the Company's core clients.
Fiscal year 1999 proved to be a successful achievement of this
marketing effort, as new clients accounted for over $1M of sales for
the consulting services
<PAGE>
group and $640 thousand of sales for the laboratory. The most
significant contracts awarded with new clients include Landrum & Brown
for phase I/II studies at Cleveland Hopkins Airport and Laroche
Industries for risk management plans at their various plan sites.
(2) The Company has made efforts to expand the service production capacity
at the laboratory facility under three separate phases. The first
phase has involved a significant investment in new laboratory
instrumentation and robotic equipment, over $700,000 of purchased and
leased equipment has been introduced to the facility in the past year
to streamline processes and ensure the highest quality standards can
be attained for the Company's laboratory clients. The second phase was
the conversion of 1600 square feet of existing warehouse space into
laboratory space. This buildout was completed in the Spring 1999 and
has provided critical interim space requirements. These first two
phases have combined to solve the problem of extending the lab's
ceiling on service production capacity. Over the past two years, there
have been time periods in which production capacity has become an
issue as the lab continues to experience increased revenues and
backlog.
The third phase of the laboratory facility involves a proposed major
expansion effort of 7500 square feet scheduled for completion in the
Spring 2000. This added facility space will provide the laboratory
enough capacity to increase to a $10M plus/annual revenue operation.
(3) Further reductions have been achieved in overhead expenses for the
fiscal year ended May 31, 1999. Office space has been realigned for
both the Atlanta and Vienna offices. The Atlanta office was relocated
in October 1998 to a building better configured to the consulting
group's space requirements. In addition, the Vienna office was
successful in consolidating its office space and securing a tenant to
sublease the excess space. The amount of overhead labor stemming from
"bench time" has decreased because of the increased contract work for
the consulting group which has increased labor utilization.
(4) Major enterprise-wide service agreements such as long distance phone
service and professional liability insurance have been renegotiated
during the fiscal year with additional rate reductions.
The encouraging operating performance of fiscal year 1999 is expected to
continue and the Company will be looking towards further sales expansion by
focusing on the primary services offered by the Company, while still devoting
attention and resources to the diversification strategy. Some of the following
accomplishments illustrate how the business goals are already being achieved:
(1) The laboratory has established itself as one of the premiere
operations for analytical services under both the Army Corp and AFCEE
programs. This has fostered expansion of the federal sector work for
the laboratory both through existing contracts and through outside
consultant contracts, supporting their federal contacts as a
subcontractor. The sales growth experienced over the past fiscal year
in the laboratory operation has been mostly linked to this federal
sector market.
(2) Additional sites awarded under the Georgia Underground Storage Tank
Program (GUST) contract along with the work involving the report
reviews of other contractor's corrective action plans (CAP A and CAP B
reports), providing additional $480 thousand of services under the
GUST contract for fiscal year 1999.
(3) Establishment of projects with new clients that are anticipated to
cultivate long term relationships with expanded environmental services
such as risk management planning, health and safety audits/training,
water resources, waste water treatment, and UIC permitting. New
accounts for the Company include Larouche Industries, Heavy Duty
Electric, ConAgra, Texaco, and Coca-Cola Enterprises.
<PAGE>
Results Of Diversification Strategy
The Company, with the acquisition made in the fiscal year 1998, attempted to
begin implementing its long term strategy of identifying viable companies for
acquisition. The acquisition of Kemron provided the Company with a very
reputable company in the environmental market to serve as a platform for its
diversification strategy.
The Company has launched a new initiative by creating an Emerging Technologies
Division within Kemron. The mission of the new initiative is to identify
companies with new, innovative and emerging technologies and to assist those
companies to meet and/or comply with regulatory requirements which the
technologies may require and to also consult, advise and assist those companies
with the commercialization of the technologies. The Company already has secured
contracts from three companies with technologies in sludge reduction, waste odor
control and water purification and is under discussion with several other
companies with similar or related technologies. The Company hopes to be able to
provide services using these technologies.
Discussion Of Material Items
(i) Short term and long term liquidity
The Company's short and long term liquidity continues to improve as a result of
the profits generated during the fiscal year 1999. Kemron's senior lender, just
subsequent to the year ended May 31, 1999, renewed Kemron's working line of
credit for a $1.8M borrowing capacity. Without lending for a line of credit, the
Company would be adversely affected.
(ii) Internal and external sources of liquidity
The only internal sources of liquidity available to the Company are the earnings
of it principal operating subsidiary, Kemron. External resources may become
available depending on the success of the effort to raise equity capital. The
Company has explored opportunities with outside investment groups for the
possibility of raising equity capital for the Company. As of the reporting
date, the Company does not have any such agreements and cannot make any
predictions as to the success of this effort in the future.
(iii) Material Commitments for Capital Expenditures and Expected Sources
The Company has approved the Marietta, Ohio facility expansion to consolidate
both the laboratory and consulting offices. The development plans are
preliminary but it is anticipated to involve approximately 12,500 square feet of
new office and warehouse space which will adjoin the current laboratory
facility. It is intended that this expansion effort will be financed through a
bank under a conventional mortgage with an estimated cost of approximately $600
thousand.
As discussed earlier, the company has already incurred significant capital
expenditures during fiscal year 1999 through purchases of laboratory equipment
and further automation of all regional offices. The capital expenditures shall
be limited over the forthcoming fiscal year, this will mostly entail the
replacement of equipment that may be taken out of service. Total budgeted
expenditures are not expected to exceed $250 thousand.
(iv) Known Trends, Events, or Uncertainties
The only known trends, events, or uncertainties that have had or that are
reasonably expected to have a material impact on the net sales or revenue or
income from continuing operations is the very positive rebound which the
environmental industry, as a whole, seems to be experiencing. After four to
five volatile years experiencing considerable shutdowns, bankruptcies, mega
mergers and acquisitions, the industry seems to be stabilizing. This is
particularly true in the environmental testing segment of the market. The
Company anticipates that this trend will continue and that it will contribute
towards its
<PAGE>
projected 10% increase in total revenue during the fiscal year ending May 31,
2000 which management believes will result in an increase to net revenue.
(v) Significant elements of income or loss that do not arise from the
Company's operations.
The fiscal year 1998 reported $249 thousand loss attributed to the failed merger
of other subsidiaries. This was presented in the form of a note receivable
write-off of $170 thousand and charges relating to the failed merger equalling
$79 thousand. However, there were no significant income or loss events to
report during fiscal year 1999.
(vi) Causes for Material Changes
There are no causes nor material changes in one or more line items of the
Company's financial statements between the periods ending May 31, 1999 and May
31, 1998.
(vii) Seasonal Aspects
The environmental market as a whole may be subject to seasonal factors,
particularly harsh winters. Prolonged periods of cold temperatures impact the
ability to conduct field activities which then may reverberate throughout the
industry. While the engineering and consulting activities may be somewhat
affected, Kemron's laboratory operation is very susceptible to this factor.
Testing laboratories are volume sensitive operations with a substantial fixed
operating cost. Strategic marketing of clients located in geographic areas with
warm weather and careful planning are a prerequisite for profitable winter
months. Kemron's laboratory operation experienced a very positive 1999 and 1998
winter, unlike the harsh winter of 1997, which resulted in a much improved
fiscal 1999 performance by the laboratory.
YEAR 2000
The company is in process of upgrading its computer applications to ensure
functionality with respect to the Year 2000. The Year 2000 issue affects most
corporations and concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date-sensitive
information relating to the Year 2000 and beyond. The Company believes it is
pursuing appropriate courses of action to identify and address Year 2000
readiness.
The principal operating functions that are dependent on information systems have
been identified, primarily the accounting system and operating systems that
support the laboratory instruments. Most of the related information systems
have already been converted and tested for Year 2000 compliance. Any remaining
Year 2000 initiatives are scheduled to be complete by mid-year 1999.
The Company is giving consideration to the status of compliance by third party
suppliers. Failure by third party suppliers to become Year 2000 compliant could
impact the Company's ability to obtain products or services as scheduled, which
could potentially result in delays in meeting clients orders. The Company has
undertaken initiatives to review the Year 2000 readiness of clients which are
material to the Company's business. Failure by material customers to become Year
2000 compliant could result in the company's inability to obtain or perform work
on a timely basis for such customers, leading to delays in receipt of revenue.
A formal contingency plan will not be formulated unless the Company identifies
specific areas where there is substantial risk of Year 2000 problems occurring,
and no such areas have been identified as of this date.
Item 8. Changes in and Disagreements with Accountants or Accounting and
Financial Disclosure.
<PAGE>
On June 23, 1998, the Company engaged Reznick Fedder & Silverman P.C. to replace
Gelfond Hochstadt Pangburn & Co. as its independent auditors. This change was
necessary primarily as a result of logistical reasons with the Company's
headquarters relocation to Vienna, VA.
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of The Exchange Act.
Identification of Directors and Executive Officers
Directors are elected for one-year terms or until the next annual meeting of
shareholders and until their successors are duly elected and qualified. Officers
hold office at the pleasure of the Board of Directors. The table below sets
forth the name, age, position and tenure of each director and executive officer.
Mr. Heishman, as secretary, is not considered "executive" officers. All
Directors have tenures effective since March 10, 1998 when each individual
assumed office following the Stock Exchange Agreement.
<TABLE>
<CAPTION>
Year
First
Name Elected Position Held and Tenure
---- ------- ------------------------
<S> <C> <C>
Juan J. Gutierrez 1998 Chairman, Chief Executive Officer, Director
John M. Dwyer 1998 Vice President, Director
Dave Vandenberg 1998 Vice President, Director
John S. Heishman 1998 Secretary/Treasurer, Director
</TABLE>
Biographical Information
The following is a brief account of the business experience during at least the
past five years of each director and executive officer, including the principal
occupation and employment during that period.
JUAN J. GUTIERREZ, 57, is Chairman and CEO of the Company. He has been Chairman
and CEO of Kemron Environmental Services, Inc. since 1983, when he purchased
Kemron. He is also Chairman and CEO of InterAmerica Technologies, Inc., a
software development and systems integration company which he founded in 1971.
Both companies have enjoyed rankings on the list of the 500 largest Hispanic-
owned businesses compiled by Hispanic Business magazine. Mr. Gutierrez has
received numerous achievements and community awards, including being selected by
the U.S. Hispanic Chamber of Commerce as the 1984 Hispanic Businessman of the
Year, and receiving the 1994 Small Business Administration's Lifetime Minority
Business Achievement Award. He is a graduate of Pan American University at
Edinberg, Texas.
JOHN M. DWYER, 39, is a Director of the Company and a Vice President of Kemron.
Mr. Dwyer is responsible for the management and administration of Kemron's
Consulting and Engineering Division, including profit and loss performance, as
well as Kemron's marketing and business development. He has been with Kemron for
over 19 years and brings a wealth of experience and expertise in the
development, design, and execution of small and large scale environmental
programs involving hazardous waste, site investigations, remedial construction,
environmental assessments and permitting assistance services, as well as leaking
underground storage tanks. Mr. Dwyer holds an A.S. degree in computer and
electrical technology from the Southern Institute of Technology.
DAVID VANDENBERG, 43, is a Director of the Company, and a Vice President of
Kemron. He is a 1979 graduate of the University of Wisconsin with degrees in
Chemistry and Business. With 20 years of experience in the environmental field,
through the changes in legislation, market conditions and growth of the
environmental service industry. He has managed the growth of a 3 person
environmental laboratory to
<PAGE>
a staff of over 80 professionals, and today Kemron's Ohio Valley Laboratory is
one of the nation's largest, most respected environmental laboratories. Mr.
Vandenberg is responsible for the laboratory's sales and marketing strategies,
operation oversight and profit and loss performance.
JOHN S. HEISHMAN, 34, is the Secretary/Treasurer and a Director of the Company,
and is responsible for Finance and Contract Administration for the Company. He
has over 12 years of finance and accounting experience in both commercial and
federal contracting. Mr. Heishman joined Kemron's management team in 1996 and
has brought vast experience in forecasting/budgeting, cash management, financial
analysis, corporate and operational accounting. Prior to joining Kemron, Mr.
Heishman worked for Computer Sciences Corporation and in public accounting with
Ernst & Young. He holds a BBA in accounting from James Madison University, and
is a Certified Public Accountant in Virginia.
Item 10. Executive Compensation
Cash Compensation
The following sets forth the compensation earned by the Company's Chief
Executive Officer and any highly compensated executive officers. There has been
no supplemental compensation of restricted stock awards, stock appreciation
rights, or long term incentive plans. Bonus plans are strictly based on
performance objectives within each individual fiscal year. Mr. Wilbur's position
was effectively eliminated in July 1997, therefore, compensation only represents
a partial year.
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Juan J. Gutierrez, CEO 1999 $114,063 $91,000 $ -0-
1998 $ 50,000 -0- -0-
John M. Dwyer, 1999 $114,711 $45,500 $ -0-
Vice President 1998 96,736 18,000 13,607
David Vandenberg, 1999 $108,519 $45,500 $ -0-
Vice President 1998 96,736 22,500 13,607
Mark Wilbur, COO 1999 $ -0- $ -0- $ -0-
1998 16,908 -0- -0-
</TABLE>
The salary for Juan J. Gutierrez for fiscal year 1998 represents noncash
compensation based on estimated services provided for the period. There was no
accrual recognized for this salary, as it was treated as additional paid in
capital to the Company.
Compensation Pursuant to Plans
No compensation was paid to executive officers pursuant to any plan during the
fiscal year just ended
Other Compensation
None
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership Following Acquisitions
The following table sets forth as of the report date, the names of persons who
own of record, or were known by the Company to own beneficially, more than five
percent of its total issued and outstanding common stock and the beneficial
ownership of all such stock as of that date by executive officers and directors
of the Company and all such executive officers and directors as a group. Exept
as otherwise noted, each person listed below is the sole beneficial owner of the
shares and has sole investment and voting power as to such shares.
<TABLE>
<CAPTION>
Name and Address Amount & Nature of Percent of
Title of Class Of Beneficial Owner Beneficial Ownership Class
<S> <C> <C> <C>
Common Stock, Juan J. Gutierrez 3,450,000 73.2% 1,2
$.00001 par value 8150 Leesburg Pike, Suite 1200
Vienna, Virginia 22182
SAME David Vandenberg 191,666 4.1% 2
109 Starlite Park
Marietta, Ohio 45750
SAME John M. Dwyer 191,666 4.1% 2
1300 Spring Street
Atlanta, Georgia 30309
SAME John S. Heishman - 0 - - 0 -
8150 Leesburg Pike, Suite 1200
Vienna, Virginia 22182
SAME InterAmerica Technologies, Inc. 887,778 18.8% 1
8150 Leesburg Pike, Suite 1400
Vienna, Virginia 22182
<S> . All executive officers and
Directors as a group (4 persons) 3,833,332 81.3%
</TABLE>
/1/Mr. Gutierrez is the sole owner of InterAmerica Technologies, Inc., and
claims beneficial ownership of shares held by that entity.
/2/Include shares of the common stock subject to purchase upon the exercise of
options granted under the Company's 1997 Compensatory Stock Option Plan,
including 350,000 (Juan Gutierrez), 25,000 (John Dwyer), and 25,000 (David
Vandenberg).
Changes in Control
None
Item 12. Certain Relationships and Related Transactions
The President/CEO has provided a personal guarantee to the Company operating
subsidiary's principal lender along with other financial lenders for equipment.
The Company is attempting to discharge the personal guarantee with each lender
as the Company's credit position continues to strengthen.
<PAGE>
The laboratory facility in Marietta, OH is leased through a related party. In
addition, certain administrative resources are provided through a separate
related party. Refer to the notes to the audited financial statements for
further details.
The company has no understandings with its officers or directors, or other
shareholders, pursuant to which such persons have agreed to contribute capital
to the Company or otherwise provide funds to the Company. There are no other
reportable transactions involving promoters, executive officers, or directors of
the Company as required by Item 404 of Regulation S-B.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with this report, except
those indicated as having previously been filed with the Securities and
Exchange Commission and are incorporated by reference to another
report, registration statement or form. References to the "Company"
mean Whitney American Corporation.
3.0 Certificate of Incorporation (incorporated by reference to
Exhibit 3.0 to Registration Statement No. 33-17397-D, effective
March 7, 1988)
3.05 Certificate of Amended and Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 3.1 to Form
8-K dated February 12, 1997)
3.1 Bylaws of the Company (incorporated by reference to Exhibit 3.1
to Registration Statement No. 33-173797-D, effective March 7,
1988)
3.2 Amendment to Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-17397-D, effective
March 7, 1988)
3.3 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to Form 8-K dated February 12, 1997)
4.0 Specimen Stock Certificate (incorporated by reference to
Registration Statement No. 33-17397-D effective March 7, 1988)
10.2 1997 Stock Option Plan (incorporated by reference to Exhibit 10.1
to Form 8-K dated February 12, 1997)
10.3 1997 Employee Stock Compensation (incorporated by reference to
Exhibit 10.2 to Form 8-K dated February 12, 1997)
(b) The Company filed the following Current Reports on Form 8-K during the
three months ended May 31, 1999.
Filing of Form 8-K on May 12, 1999 of Settlement Agreement between the
Company and Costa Real Corporation, Coastline International, New
Horizons, Heatherlynn Colburn, Charles Colburn III, Twenty First
Century Trust, and Hector I. Hernandez, Sr.
Filing of Form 8-K on April 26, 1999 for the resignation of Hector I.
Hernandez from the Board of Directors.
(c) Financial statements and supplementary data.
<TABLE>
<CAPTION>
<S> <C>
Financial Statements Independent Auditors' Report - Reznick, Fedder, & Silverman F-1
Consolidated Balance Sheets as of May 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended May 31, 1999 and 1998 F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Changes in Stockholders' Equity for the years
ended May 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended May 31, 1999 and 1998 F-5
Notes to Financial Statements F-7
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITNEY AMERICAN CORPORATION
By /s/ JUAN J. GUTIERREZ
----------------------
JUAN J. GUTIERREZ
PRESIDENT AND CEO
DATED: SEPTEMBER 10, 1999
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Juan J. Gutierrez Chief Executive Officer, President September 10, 1999
- ------------------------ and Chairman of the Board
Juan J. Gutierrez
/s/ John M. Dwyer Executive Vice President September 10, 1999
- ------------------------ and Director
John M. Dwyer
/s/ Dave Vandenberg Executive Vice President September 10, 1999
- ------------------------ and Director
Dave Vandenberg
/s/ John S. Heishman Secretary, Treasurer September 10, 1999
- ------------------------ and Director
John S. Heishman
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Whitney American Corporation
We have audited the accompanying consolidated balance sheets of Whitney
American Corporation and Subsidiary, as of May 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Whitney American Corporation and Subsidiary as of May 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Reznick, Fedder & Silverman
- -------------------------------
Bethesda, Maryland
July 28, 1999
F-1
<PAGE>
Whitney American Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
May 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,000 $ 1,000
Accounts receivable, net of allowance
of $199,963 and $172,830 3,775,797 3,336,701
Prepaid expenses and other assets 94,989 50,627
------------- -------------
Total current assets 3,871,786 3,388,328
------------- -------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Leasehold improvements 244,566 158,052
Equipment 2,412,945 2,326,841
Automobiles 251,930 188,546
Furniture and fixtures 36,186 42,232
------------- -------------
2,945,627 2,715,671
Less accumulated depreciation and amortization 1,944,316 1,930,126
------------- -------------
Net equipment and leasehold improvements 1,001,311 785,545
------------- -------------
OTHER ASSETS
Intangibles, net of amortization 17,744 20,133
Deposits and other net assets 58,409 62,804
Note receivable - 34,593
------------- -------------
Total other assets 76,153 117,530
------------- -------------
Total assets $ 4,949,250 $ 4,291,403
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit $ 350,000 $ 1,490,000
Note payable, current maturities 3,829 59,568
Notes payable - related party, current maturities - 45,992
Notes payable - equipment, current maturities 205,930 61,873
Capital lease liability, current maturities 142,127 52,912
Accounts payable and accrued expenses 1,572,344 968,926
Accrued payroll and related liabilities 412,216 361,705
Due to related parties 105,745 147,174
------------- -------------
Total current liabilities 2,792,191 3,188,150
------------- -------------
LONG-TERM DEBT
Notes payable, net of current maturities 19,343 -
Notes payable - equipment, net of current maturities 44,146 201,557
Capital lease liability, net of current maturities 274,420 85,890
------------- -------------
Total long-term liabilities 337,909 287,447
------------- -------------
Total liabilities 3,130,100 3,475,597
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.00001 par value, 5,000,000 shares
authorized, none issued - -
Common Stock, net of subscriptions receivable, $.00001 par value,
50,000,000 shares authorized, 4,266,020 and 4,211,020 shares
issued and outstanding 42 42
Additional paid-in capital 1,658,684 1,654,984
Retained earnings (accumulated deficit) 160,424 (839,220)
------------- -------------
Total stockholders' equity 1,819,150 815,806
------------- -------------
Total liabilities and stockholders' equity $ 4,949,250 $ 4,291,403
============= =============
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
Whitney American Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE FROM SERVICES $ 13,514,743 $ 10,771,227
COST OF SERVICES 9,565,061 7,978,704
--------------- ---------------
GROSS PROFIT 3,949,682 2,792,523
--------------- ---------------
OPERATING EXPENSES
Overhead 1,436,764 1,184,625
General and administrative 1,242,392 913,978
Bad debts 100,629 107,061
--------------- ---------------
Total operating expenses 2,779,785 2,205,664
--------------- ---------------
INCOME FROM OPERATIONS 1,169,897 586,859
OTHER INCOME
Interest - 10,775
Gain on sale of assets 13,617 -
Other 984 -
--------------- ---------------
14,601 10,775
--------------- ---------------
OTHER EXPENSES
Interest (184,854) (219,734)
Loss on sale of assets - (15,932)
Impairment of note receivable - (170,000)
Failed merger costs - (79,567)
--------------- ---------------
(184,854) (485,233)
--------------- ---------------
INCOME BEFORE INCOME TAXES 999,644 112,401
INCOME TAXES - -
--------------- ---------------
NET INCOME $ 999,644 $ 112,401
=============== ===============
Basic net income per common share $ 0.24 $ 0.03
=============== ===============
Weighted average common share outstanding 4,237,321 3,541,308
=============== ===============
Diluted net income per common share $ 0.21 $ 0.03
=============== ===============
Weighted average common share outstanding 4,685,321 3,646,075
=============== ===============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
Whitney American Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings
-------------------------- (accumulated
Shares Amount paid-in capital deficit) Total
------------- -------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1997 315 $ 3 $ 1,612,300 $ (951,621) $ 660,682
Redemption of common stock (16) - (570) - (570)
Sale of common stock 16 - 30,477 - 30,477
Stock issuance - Merger 4,053,173 37 (63,604) - (63,567)
Subscription receivable - - (13,000) - (13,000)
Stock options exercised 157,532 2 39,381 - 39,383
Additional paid in capital - - 50,000 - 50,000
Net income - - - 112,401 112,401
------------- -------- ---------------- ----------------- --------------
Balance, May 31, 1998 4,211,020 42 1,654,984 (839,220) 815,806
Stock issuance 25,000 - 3,700 - 3,700
Stock options exercised 30,000 - - - -
Net income - - - 999,644 999,644
------------- -------- ---------------- ----------------- --------------
Balance, May 31, 1999 4,266,020 $ 42 $ 1,658,684 $ 160,424 $ 1,819,150
============= ======== ================ ================= ==============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
Whitney American Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 999,644 $ 112,401
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 455,924 353,110
(Gain) loss on sale of assets (13,617) 15,932
Allowance for doubtful accounts 27,133 (65,785)
Impairment of note receivable - 170,000
Failed merger costs - 41,676
Additional paid in capital - 50,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (466,229) 131,754
(Increase) decrease in prepaid expenses and other assets (44,362) 133,267
(Increase) decrease in deposits 4,395 (20,933)
Increase (decrease) in accounts payable and accrued expenses 607,118 (303,359)
Increase (decrease) in accrued payroll and related liabilities 50,511 (53,399)
Increase (decrease) in accounts payable - related party (41,429) 10,306
-------------- ------------
Net cash provided by operating activities 1,579,088 574,970
-------------- ------------
Cash flows from investing activities
Purchases of property and equipment (307,214) (300,479)
Proceeds received from sale of fixed assets 32,000 2,987
Proceeds received from discontinued operations - 29,423
Notes receivable funded - (184,500)
Proceeds from notes receivable 34,593 -
-------------- ------------
Net cash used in investing activities (240,621) (452,569)
-------------- ------------
Cash flows from financing activities
Net payment on line of credit (1,140,000) (40,000)
Payment of note payable (61,196) (40,432)
Payment of notes payable - equipment (68,354) (81,350)
Proceeds from note payable 24,800 100,000
Proceeds from note payable - equipment 55,000
Payments on related party advances (45,992) (90,618)
Principal payments under capital lease obligations (102,725) (22,910)
Proceeds from issuance of common stock - 53,479
Redemption of common stock - (570)
-------------- ------------
Net cash provided by (used in) financing activities (1,338,467) (122,401)
-------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS - -
Cash and cash equivalents, beginning 1,000 1,000
-------------- ------------
Cash and cash equivalents, end $ 1,000 $ 1,000
============== ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
Whitney American Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 184,854 $ 176,594
============ ===========
Supplemental disclosures of noncash transactions:
Liabilities assumed in the acquisition of Whitney American Corporation $ 105,740 $ 101,862
============ ===========
Fair value of stock and options issued in connection with failed merger $ - $ 37,891
============ ===========
Fair value of stock issued in exchange for services $ 3,700 $ -
============ ===========
Liabilities for equipment under capital leases $ 380,469 $ 145,211
============ ===========
Salary contributed $ - $ 50,000
============ ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1999 and 1998
1. ORGANIZATION
Whitney American Corporation (the "Company") was incorporated in the State of
Delaware in June 1987. The Company, through its acquisition of Kemron
Environmental Services, Inc. ("Kemron"), acquired a multi-disciplinary
environmental engineering, consulting and remediation firm headquartered in
Vienna, Virginia. Incorporated in June 1975 in the State of New York, Kemron
provides environmental engineering, consulting and remediation services
principally to commercial and industrial clients and to Federal and state
environmental regulatory and non-regulatory agencies as well. Kemron also
provides environmental laboratory testing services to this client base. With
headquarters in Vienna, Virginia, Kemron maintains engineering and consulting
operations at Vienna, Virginia; Atlanta Georgia; and Marietta, Ohio. Kemron's
testing laboratory is also situated in Marietta, Ohio.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
---------------------------------------
The consolidated financial statements for the fiscal years ended May 31, 1999
and 1998 include the accounts and operations of the Company and its wholly
owned subsidiary, Kemron. The Company acquired Kemron during the fiscal year
1998 (see note 3) and began presenting results of operations on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated in consolidation.
Concentration of Credit Risk
----------------------------
The Company provides services to customers in multiple industries such as oil
and gas, metals, chemicals, textiles and automotive. Approximately 41% of the
Company's customer base is comprised of the federal and state governments.
The majority of the Company's customers are located in the midwest, northeast,
and southeast regions of the United States.
Allowance for Doubtful Accounts
-------------------------------
The Company establishes an allowance for doubtful accounts based upon several
factors, such as credit risk and analysis of specific customer accounts.
F-7
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equipment and Leasehold Improvements
------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the assets. Amortization of leasehold improvements is computed on the term of
the lease or its useful life, whichever is less.
Segment Disclosures
-------------------
Effective for the year ended May 31, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures
about products and services, geographic areas and major customers.
Contract Revenue
----------------
The Company recognizes revenue as the related services are provided. On fixed
price contracts, revenue is recognized on the basis of the estimated
percentage of completion of services rendered. On cost reimbursement
contracts, revenue is recognized as costs are incurred and includes applicable
fees earned essentially in the proportion that costs incurred bear to total
estimated final costs. Materials and subcontract costs reimbursed by client
are included in revenue from services. Anticipated losses are recognized in
the period in which the losses are reasonably determinable.
A significant portion of contracts with the United States Government and State
Agencies are subject to audit and adjustment. Revenue has been recorded in
amounts expected to be realized on final settlement. Included in accounts
receivable are revenues from claims where recovery is probable in the opinion
of management.
F-8
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on
fair value of the equity instrument awarded (see note 16). The Company has
chosen to continue to account for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations.
Accordingly, compensation costs for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount the employee must pay to acquire stock.
Intangible Assets
-----------------
Intangible assets represent costs in excess of the net assets acquired by the
Company and are being amortized by the straight-line method over 15 years,
which is management's estimate of the remaining economic useful life.
Impairment of Long-Lived Assets
-------------------------------
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows will
be less than the carrying amounts of net assets. Impairment, if any, is
measured at fair value.
F-9
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the liability method prescribed by SFAS
No. 109, a deferred tax asset or liability is determined on the differences
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred income taxes are also recognized for operating
losses that are available to offset future taxable income.
Net Income per Common Share
---------------------------
Basic net income per common share is computed based upon the weighted average
number of common shares outstanding during the period.
Diluted earnings per share is computed on the basis of the average number of
shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method. In connection with the Merger (see note 3), the
weighted average shares outstanding for purposes of presenting net loss per
common share on a comparative basis has been retroactively restated to reflect
the effect of the recapitalization that occurred in the reverse acquisition.
<TABLE>
<CAPTION>
Year ended Year ended
May 31, 1999 May 31, 1998
----------------------- ------------------
<S> <C> <C>
Net income available to common shareholders (A) $ 999,644 $ 112,401
----------------------- ------------------
Average outstanding:
Common stock (B) 4,237,321 3,541,308
Employee stock options 448,000 104,767
----------------------- ------------------
Common stock and common stock equivalents (C) 4,685,321 3,646,075
----------------------- ------------------
Earnings per share:
Basic (A/B) $ 0.24 $ 0.03
======================= ==================
Dilutive (A/C) $ 0.21 $ 0.03
======================= ==================
</TABLE>
F-10
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The following disclosure of estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined using available market information, assumptions and valuation
methodologies.
Notes Receivable
Management believes that it is not practicable to estimate the fair value of
notes because notes with similar characteristics are not available from the
Company.
Line of Credit and Notes Payable
The carrying amounts approximate fair value.
3. MERGER
On March 10, 1998, Kemron Environmental Services, Inc. ("Kemron") merged with
and into Whitney American Corporation ("Whitney"). Pursuant to the merger
agreement, each outstanding share of Kemron common stock was converted into a
share of common stock of Whitney. Upon consummation of the Merger, the
stockholders of Kemron became the owners in the aggregate of approximately 86%
of the outstanding common stock of Whitney; and the directors and officers of
Kemron became directors and officers of Whitney. Prior to the Merger, Whitney
had no operating activities.
F-11
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
3. MERGER (Continued)
The Merger was treated as a reverse acquisition, with Kemron retaining the
majority voting interest in the merged entity. A reverse acquisition is a
business combination accounted for by the purchase method in which the
continuing entity is not assumed to be the acquirer. The substance of the
reverse acquisition is that of an initial public offering, and the acquisition
costs incurred by the Company have therefore been treated as a reduction in
paid-in capital. The Company has reflected in its consolidated financial
statements the assets, liabilities and equity of Kemron at their historical
book values. Accordingly, the consolidated results of the operations and
financial position of the Company for periods and dates prior to the Merger
are the historical results of the operations and financial position of Kemron
for such period and dates.
All historical shares of common stock and per-share amounts for periods prior
to the Merger have been retroactively adjusted to reflect the Whitney shares
issued to the Kemron shareholders at the time of the Merger.
4. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different services. The Company has two reportable segments: analytical and
consulting services. Analytical services include lab testing services for
varying analytical programs such as NPDES, RCRA, CERCLA and OSHA. Consulting
services provide investigations and assessment services at non-regulated
contaminated sites and at sites covered by RCRA and CERCLA regulations, which
investigations may include preliminary assessments, site investigations,
groundwater assessments, remedial investigations, feasibility studies, and
remedial action plans. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (note 2).
F-12
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
4. SEGMENT INFORMATION (Continued)
Sales, operating income (loss) and identifiable assets by reportable segment
for the years ended May 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
----------------- -----------------
<S> <C> <C>
Sales to unaffiliated customers:
Analytical services $ 7,071 $ 6,182
Consulting services 6,444 4,589
----------------- -----------------
Total $ 13,515 $ 10,771
================= =================
Operating income (loss):
Analytical services $ 807 $ 586
Consulting services 648 177
Other (285) (176)
----------------- -----------------
Total $ 1,170 $ 587
================= =================
Identifiable assets:
Analytical services $ 2,458 $ 1,875
Consulting services 1,344 1,283
----------------- -----------------
Total $ 3,802 $ 3,158
================= =================
</TABLE>
F-13
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Billed (includes retention of $212,412 and $196,599) $ 3,164,694 $ 2,888,524
Unbilled 811,066 621,007
Less allowance for doubtful accounts (199,963) (172,830)
----------------- -----------------
$ 3,775,797 $ 3,336,701
================= =================
</TABLE>
The unbilled receivables on long-term contracts consist primarily of month-end
revenue accrued but not billed as of May 31, 1999 and 1998. Such billings
occur in the following month.
The retention balances reported as of May 31, 1999 and 1998 include amounts of
$29,457 and $124,519, respectively, anticipated to be collected beyond 12
months from the balance sheet date.
6. NOTES PAYABLE AND LINE OF CREDIT
Notes payable and the line of credit at May 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Line of credit with a bank, $1,800,000 payable on demand, bearing interest at
10.5%, secured by accounts receivable and the personal guarantee of the
corporation's majority stockholder. $ 350,000 $ 1,490,000
=================== =================
Note payable with a bank, $100,000 term loan, monthly principal payments of
$8,333 plus interest at 10.5%, secured by equipment and personal guarantee of
majority stockholder. $ - $ 59,568
=================== =================
Note payable with the lessor of the Atlanta office, $24,800 term loan, monthly
principal payments of $331 plus interest at 10%, for buildout of lease space $ 23,172 $ -
=================== =================
</TABLE>
F-14
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
6. NOTES PAYABLE AND LINE OF CREDIT (Continued)
Maturities of long-term debt and the line of credit for the five years
succeeding May 31, 1999 are as follows:
May 31, 2000 $ 353,829
2001 4,230
2002 4,673
2003 5,162
2004 3,568
7. NOTES PAYABLE - EQUIPMENT
Notes payable for equipment at May 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Equipment notes bearing interest ranging from 8.4% to 10.75%. Interest is
payable monthly with aggregate monthly principal payments of $8,903 with
maturities through February 2004. The notes are collateralized by equipment. $ 250,076 $ 263,430
Less: current maturities (205,930) (61,873)
------------------- -----------------
$ 44,146 $ 201,557
=================== =================
</TABLE>
Maturities of notes payable - equipment for each of the five years succeeding
May 31, 1999 are as follows:
May 31, 2000 $ 205,930
2001 10,259
2002 11,155
2003 12,129
2004 10,603
-------------------
$ 250,076
===================
F-15
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases computers and other equipment under capital leases with
maturities through April 2003. The following is a schedule by years of future
minimum lease payments under capital leases, together with the present value
of net minimum lease payments at May 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
May 31, 2000 $ 185,260
2001 182,878
2002 88,442
2003 40,992
2004 -
-----------------
Total mimimum lease payments 497,572
Less amount representing interest (81,025)
-----------------
Present value of net minimum lease payments 416,547
Less current maturities (142,127)
-----------------
Total non-current obligations under capital leases $ 274,420
=================
</TABLE>
Included in fixed assets are the following assets under capital leases:
<TABLE>
<CAPTION>
May 31, 1999 May 31, 1998
----------------- -----------------
<S> <C> <C>
Computers/office equipment $ 75,179 $ 39,821
Automobiles 131,917 100,889
Other equipment 705,707 508,657
----------------- -----------------
912,803 649,367
Less accumulated depreciation (409,930) (288,477)
----------------- -----------------
$ 502,873 $ 360,890
================= =================
</TABLE>
F-16
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
9. COMMITMENTS AND CONTINGENCIES
Office and Facilities Leases
----------------------------
The Company conducts its operations in leased facilities under operating
leases expiring at various dates through 2007. Approximate minimum rental
commitments for five years as of May 31, 1999 are as follows:
May 31, 2000 $ 319,359
2001 323,322
2002 327,367
2003 331,496
2004 287,214
Other facilities are leased under short-term agreements. Rent expense for all
leases for the years ended May 31, 1999 and 1998, was $390,634 and $420,103,
respectively.
Equipment Leases
----------------
The Company has entered into various equipment operating leases expiring
between August 1999 and May 2003. Lease expense for the years ended May 31,
1999 and 1998, was $247,519 and $167,713, respectively. A schedule of the
future minimum lease commitments for five years as of May 31, 1999 are as
follows:
May 31, 2000 $ 244,978
2001 165,934
2002 121,039
2003 57,267
2004 -
Government Contracts
--------------------
Certain contracts with the federal government and state and local governments
are subject to audit and adjustment, and the ultimate realization of revenues
recognized is contingent upon the outcome of such audits. Revenue has been
recorded in amounts expected to be realized in full upon final settlements
with the respective contracting agency. As of May 31, 1998, an outstanding
claim exists under a contract performed for the State of New York. An audit
was conducted by a state-appointed firm and the audit findings noted
questioned costs in the amount of $370,000. The Company has disputed the
claim and there has been no indication that this matter will be pursued by the
State of New York.
F-17
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
9. COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings
-----------------
The Company is involved in two separate legal proceedings with former
employees relating to discharge and discrimination. The former employees are
requesting lost wages, damages and expenses of approximately $1,660,000. The
outcomes in these cases are unknown; however, management believes it will
prevail in its defense, and resolution of the matters will not have a material
adverse effect on the financial statements.
10. EMPLOYEE BENEFIT PLAN
The Company participates in a 401(k) plan, the InterAmerica/Kemron 401(k) Plan
and Trust. The plan is available to all employees who are at least 21 years
old, with certain exceptions, primarily for leased employees and those covered
by collective bargaining agreements. The Company will make compensation
deferral contributions for the benefit of all eligible employees in the amount
directed by each employee up to the limits set by the Internal Revenue
Service.
The Company will make annual matching contributions of three percent of the
employee's Matched Compensation Deferral. The plan provides for a vesting of
Company contributions to the employee over a period of six years. During the
years ended May 31, 1999 and 1998, the Company's matching contributions
totaled $63,618 and $51,922, respectively.
11. RELATED PARTY TRANSACTIONS
Due to Related Parties
----------------------
An affiliated company provides computer and other services to the Company at
cost. Certain expenses at headquarters facilities of the affiliated company
such as administrative support, LAN and telecommunications support, and human
resources are shared among the companies. During the years ended May 31, 1999
and 1998, annual expenditures totaled $289,992 and $285,142 at headquarters
of the affiliated company, respectively, of which $89,790 and $80,880,
respectively, were charged to the Company.
As a result of the merger, (see note 3), a liability to two stockholders has
been recorded. The amounts payable are noninterest bearing and payable upon
demand.
F-18
<PAGE>
11. RELATED PARTY TRANSACTIONS (Continued)
Due to Related Parties (Continued)
-----------------------
Amounts due to affiliate and stockholders are as follows:
May 31, 1999 May 31, 1998
----------------- -----------------
Due to affiliate $ - $ 37,729
Due to stockholders 105,745 109,445
----------------- -----------------
$ 105,745 $ 147,174
================= =================
Notes Payable - Related Party
-----------------------------
The Company issued two promissory notes payable to the Company's majority
stockholder in the original amounts of $600,000. The notes bear interest at
the rate of 10% per annum with monthly installments of principal and interest
of $8,350. The amount of interest expense for the years ended May 31, 1999
and 1998, was $1,293 and $9,582, respectively.
Rent Expense - Related Party
----------------------------
The Company leases its Vienna, Virginia headquarters office from a related
party under a sublease agreement. The amount of rent expense paid to the
related party for the years ended May 31, 1999 and 1998 was $181,560 and
$148,820, respectively.
The Company leases its Marietta, Ohio office from a related party. The amount
of rent expense paid to the related party for the years ended May 31, 1999 and
1998, was $125,304 and $125,304, respectively.
12. INCOME TAXES
As of May 31, 1999 and 1998, the Company has a net operating loss carryforward
of approximately $261 thousand and $1.3 million, respectively, for income tax
purposes, that expires in fiscal years ending 2009 through 2012, which may be
used to reduce future taxable income and tax liabilities.
F-19
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
12. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes.
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
May 31, 1999 May 31, 1998
----------------- -----------------
<S> <C> <C>
Current:
Federal $ 324,895 $ (42,153)
State 63,482 (11,368)
----------------- -----------------
388,377 (53,521)
----------------- -----------------
Deferred:
Federal (324,895) 42,153
State (63,482) 11,368
----------------- -----------------
(388,377) 53,521
----------------- -----------------
$ - $ -
================= =================
The tax effects of temporary differences that give rise to deferred tax assets
are as follows:
<CAPTION>
May 31, 1999 May 31, 1998
----------------- -----------------
<S> <C> <C>
Net tax operating loss carryforwards $ 260,927 $ 1,279,982
================= =================
Deferred tax assets $ 91,351 $ 461,306
Less valuation allowance (91,351) (461,306)
----------------- -----------------
Net deferred tax asset $ - $ -
================= =================
</TABLE>
13. MAJOR CUSTOMERS
Earned revenue and the related accounts receivable from major customers are as
follows:
<TABLE>
<CAPTION>
Accounts
Earned Revenue Receivable
----------------- -----------------
<S> <C> <C>
As of May 31, 1999
Private sector (seven customers) $ 4,027,336 $ 1,026,011
================= =================
Public sector (four customers) $ 5,529,959 $ 901,738
================= =================
</TABLE>
F-20
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
13. MAJOR CUSTOMERS (Continued)
<TABLE>
<CAPTION>
Accounts
Earned Revenue Receivable
----------------- -------------------
<S> <C> <C>
As of May 31, 1998
Private sector (six customers) $ 3,409,941 $ 727,723
================= =================
Public sector (three customers) $ 3,795,510 $ 1,159,322
================= =================
</TABLE>
14. DISCONTINUED OPERATIONS
During fiscal year 1997, the Company discontinued its wholly-owned subsidiary,
Kemron Construction Corporation. This construction company was established at
the beginning of the fiscal year, but as a result of significant startup costs
for the new business as well as the low profit margins experienced, the
operation was terminated. In addition, the Cincinnati consulting office,
which has historically demonstrated erratic profit with little contract
backlog, was shutdown. The Cincinnati office performed in areas of NEPA
services and cultural resource investigations, which were not an important
component of the consulting group's strategy.
15. IMPAIRMENT OF NOTE RECEIVABLE
In June 1997, the Company made a loan totaling $170,000 to a target company in
a potential acquisition. The original note bore interest at 12% per annum and
was due in 1997. Management subsequently broke-off acquisition discussion and
has written-off the loan due to the target company's inability to repay the
loan.
16. STOCK COMPENSATION PLANS
The Company adopted stock option plans in 1997 under which pools of 2,000,000
and 1,500,000 shares of the Company's common stock have been reserved. The
plans are administered and terms of option grants are established by a
committee appointed by the Board of Directors. Under terms of the plans,
options may be granted to the Company's employees to purchase shares of common
stock. Options become exercisable immediately upon grant and expire ten years
from the date of the grant, six months after termination of employment without
cause, or one year after death or permanent disability of the employee. The
committee appointed by the Board of Directors determines the option price (not
less than 85% fair market value) at the date of the grant. The Company has
applied APB Opinion No. 25 and related Interpretations in accounting for the
plans.
F-21
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
16. STOCK COMPENSATION PLANS (Continued)
Had compensation cost been determined in accordance with FASB Statement No.
123, the Company's net income per share would have been the proforma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Net income
As reported $ 999,644 $ 112,401
Proforma $ 999,644 $ 32,910
Net income per common share - Basic:
As reported $ 0.24 $ 0.03
Proforma $ 0.24 $ 0.01
Net income per common share - Diluted:
As reported $ 0.21 $ 0.03
Proforma $ 0.21 $ 0.01
</TABLE>
All options granted during the years ended May 31, 1999 and 1998 were issued
pursuant to the stock options plans. The fair value of each option granted
under the plan is estimated on the date of grant using each option granted
under the Black-Scholes option-pricing model. The following weighted average
assumptions for 1999 were used: expected dividend yield of 0%, expected
volatility rate of 200%, risk-free rate of 5.5% and expected lives of four
years.
During the fiscal year ending May 31, 1998, the Company granted options for
635,532 shares of common stock at the exercise price of $.25 per share. The
Company granted no options prior to the fiscal year ending May 31, 1998. The
options expire in 2008.
The following depicts activity in the plans for years ended May 31, 1999 and
1998:
<TABLE>
<CAPTION>
Year Ended May 31, 1999
------------------------------------------
Options Per Share
Outstanding Exercise Price
------------------- --------------------
<S> <C> <C>
Outstanding May 31, 1998 478,000 $ 0.25
Options granted - -
Options exercised (30,000) 0.25
-------------------
Outstanding May 31, 1999 448,000
===================
</TABLE>
F-22
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
16. STOCK COMPENSATION PLANS (Continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1998
------------------------------------------
Options Per Share
Outstanding Exercise Price
------------------- -------------------
<S> <C> <C>
Outstanding May 31, 1997 - $ -
Options granted 635,532 0.25
Options exercised (157,532) 0.25
-------------------
Outstanding May 31, 1998 478,000
===================
</TABLE>
17. FAILED MERGERS
Concurrently with the Merger with and into Whitney (see note 3), the Company
entered into a merger agreement with three additional entities: Exeter Group,
Inc. ("Exeter"), Coastline International, Inc. ("Coastline"), and New
Horizons, Inc. ("New Horizons"). As a result of management differences and
the Company's lack of the management control over these entities, the Company
entered into separate rescission agreements on October 19, 1998, April 26,
1998 and May 12, 1999, respectively, which collectively address the Company
and Exeter, Coastline and New Horizons agreements that involved the return of
the respective shares originally issued by the Company in connection with the
failed mergers.
Under terms of the settlement agreements, the Company was successful in
recovering all but 190,973 shares of common stock and stock options for
135,532 shares of common stock, at the exercise price of $.25 per share,
issued in connection with the failed mergers. The 190,973 shares and 135,532
stock options are deemed unrecoverable due to the shares being transferred to
third parties and management's attempts to arrange for any form of
repossession of these shares have failed.
The failed merger costs, representing the fair value of the unrecoverable
shares and stock options, have been treated as a increase in paid-in capital.
Based on legal opinions received by management concerning the issuance of
stock in the failed mergers, and the subsequent rescission agreements,
management considers the failed mergers a nullity and void ab initio.
Accordingly, the accounts and operations of Exeter, Coastline and New Horizons
have been omitted from the Company's consolidated financial statements. All
common stock, stock options and per-share amounts from the date of the failed
mergers to May 31, 1999 have been retroactively adjusted to reflect the
nullification of the issuance of the original stock and stock options.
F-23
<PAGE>
Whitney American Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
May 31, 1999 and 1998
18. YEAR 2000 (Unaudited)
The Company is in the process of upgrading its computer applications to ensure
functionality with respect to the Year 2000. The Year 2000 issue affects most
corporations and concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date-sensitive
information relating to the Year 2000 and beyond. The Company believes it is
pursuing appropriate courses of action to identify and address Year 2000
readiness.
The principal operating functions that are dependent on information systems
have been identified, primarily the accounting system and operating systems
that support the laboratory instruments. Most of the related information
systems have already been converted and tested for Year 2000 compliance. Any
remaining Year 2000 initiatives are scheduled to be complete by mid-year 1999.
The Company is giving consideration to the status of compliance by third party
suppliers. Failure by third party suppliers to become Year 2000 compliant
could impact the Company's ability to obtain products or services as
scheduled, which could potentially result in delays in meeting client orders.
The Company has undertaken initiatives to review the Year 2000 readiness of
clients which are material to the Company's business. Failure by material
customers to become Year 2000 compliant could result in the Company's
inability to obtain or perform work on a timely basis for such customers,
leading to delays in receipt of revenue.
A formal contingency plan will not be formulated unless the Company identifies
specific areas where there is substantial risk of Year 2000 problems
occurring, and no such areas have been identified as of this date.
The costs incurred by the Company through the fiscal year ended May 31, 1999
are approximately $50,000. The Company does not anticipate any future costs
relating to Year 2000 compliance.
F-24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 3,975,760
<ALLOWANCES> 199,963
<INVENTORY> 0
<CURRENT-ASSETS> 3,871,786
<PP&E> 2,945,627
<DEPRECIATION> 1,944,316
<TOTAL-ASSETS> 4,949,250
<CURRENT-LIABILITIES> 2,792,191
<BONDS> 337,909
0
0
<COMMON> 42
<OTHER-SE> 1,819,108
<TOTAL-LIABILITY-AND-EQUITY> 4,949,250
<SALES> 13,514,743
<TOTAL-REVENUES> 13,514,743
<CGS> 9,565,061
<TOTAL-COSTS> 9,565,061
<OTHER-EXPENSES> 2,679,156
<LOSS-PROVISION> 100,629
<INTEREST-EXPENSE> 184,854
<INCOME-PRETAX> 999,644
<INCOME-TAX> 0
<INCOME-CONTINUING> 999,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 999,644
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.21
</TABLE>
