ENVIRONMENTAL TECHNOLOGIES CORP.
550 James Street
Lakewood, New Jersey 08701
June , 1996
To the Stockholders of Environmental Technologies Corp.:
Enclosed are a Notice of an Annual and Special Meeting of
Stockholders, a Proxy Statement and a Proxy for an Annual and
Special Meeting of Stockholders (the "Meeting") of Environmental
Technologies Corp. (the "Company") to be held at 10:00 a.m.,
Eastern Standard Time, on July __, 1996 at the offices of
Greenbaum, Rowe, Smith, Ravin & Davis, 99 Wood Avenue South,
Woodbridge, New Jersey. At the Meeting, you will be asked to
consider and approve an agreement (the "Agreement") pursuant to
which the Company acquired all the issued and outstanding capital
stock of FulCircle Recyclers, Inc. ("FulCircle"). The terms of
the Agreement provide that the Company would issue up to
1,150,000 shares of common stock to the shareholders of FulCircle
in exchange for their FulCircle shares, which were acquired by
the Company effective December 31, 1995. Details of the proposed
transaction are set forth in the accompanying Proxy Statement
which you should read carefully.
The affirmative vote of a majority of the outstanding shares
of the common stock of the Company entitled to vote is necessary
to approve the issuance of the 1,150,000 shares of common stock
to the former FulCircle stockholders. However, stockholders of
the Company holding approximately 50.4% of the Company's
outstanding common stock have agreed to vote in favor of the
Agreement and the issuance of 1,150,000 shares of the Company's
common stock, thereby assuring that such shares will be issued to
the former stockholders of FulCircle.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY
APPROVED THE AGREEMENT AND RECOMMENDS THAT ALL STOCKHOLDERS VOTE
TO APPROVE THE AGREEMENT.
The stockholders of the Company will have no dissenters
rights with respect to the Agreement or the transactions pursuant
to the Agreement.
The Proxy Statement contains a description of the Company's
business operations and management for the fiscal year ended
September 30, 1995 and financial statements for such fiscal year
and the preceding two fiscal years and the quarter ended December
31, 1995, as well as a description of the business, operations
and management of FulCircle and financial statements for
FulCircle.
In addition, at the Meeting you will be asked to elect seven
nominees to serve as the directors of the Company until the next
Annual Meeting of Stockholders or until their successors are duly
elected and qualified and to ratify and approve the adoption of
the Company's 1996 Incentive and Non-Qualified Stock Option Plan
(the "Plan"). The affirmative vote of the majority of the shares
represented at the Meeting is required for the election of
directors and for the approval of the Plan.
In order that your shares may be represented at the Meeting,
you are urged promptly to sign and return the accompanying Proxy
to the Company, whether or not you plan to attend the Meeting.
If you attend the Meeting in person, you may, if you wish, vote
personally on all matters brought before the Meeting.
Sincerely,
GEORGE CANNAN
Chairman
<PAGE>
PRELIMINARY COPY
ENVIRONMENTAL TECHNOLOGIES CORP.
550 James Street
Lakewood, New Jersey 08701
NOTICE OF ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
to be held on June __, 1996
Notice is hereby given that an Annual and Special
Meeting of Stockholders (the "Meeting") of Environmental
Technologies Corp. (the "Company") will be held at the offices of
Greenbaum, Rowe, Smith, Ravin & Davis, 99 Wood Avenue South,
Woodbridge, New Jersey on June __, 1996 at 10:00 a.m., Eastern
Standard Time, for the following purposes:
1. To consider and act upon the issuance of 1,150,000
shares of the Company's common stock pursuant to an Agreement
dated December 30, 1995 between the Company and the stockholders
of FulCircle Recyclers, Inc. ("FulCircle") in exchange for all of
the issued and outstanding capital stock of FulCircle from its
stockholders, all as described in the accompanying Proxy
Statement (to which a copy of the Agreement is attached as
Exhibit A).
2. To elect a Board of seven directors to serve until
the next Annual Meeting of Stockholders of the Company.
3. To ratify and approve the adoption of the
Company's 1996 Incentive and Non-Qualified Stock Option Plan.
4. To transact such other business as may properly
come before the Meeting or any adjournment thereof.
Only stockholders of record at the close of business on
June __, 1996 will be entitled to notice of and to vote at the
Meeting.
Whether or not you intend to attend the Meeting, please
complete, date and sign the enclosed Proxy and return it to the
Company. Your Proxy will be revocable, either in writing or by
voting in person at the Meeting, at any time prior to its
exercise.
By Order of the Board of Directors
GEORGE CANNAN
Chairman
Dated: Lakewood, New Jersey
June ___, 1996
<PAGE>
PRELIMINARY COPY
ENVIRONMENTAL TECHNOLOGIES CORP.
550 James Street
Lakewood, New Jersey 08701
Telephone: (908) 370-3400
__________________________
PROXY STATEMENT FOR ANNUAL AND SPECIAL MEETING
OF STOCKHOLDERS OF ENVIRONMENTAL TECHNOLOGIES CORP.
to be held on June __, 1996
__________________________
TABLE OF CONTENTS
Page
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
THE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MARKET PRICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
RIGHTS OF DISSENTING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . .10
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . .11
BUSINESS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . . . . .26
PRIMARY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .33
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . .38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . .39
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . .39
DESCRIPTION OF FULCIRCLE . . . . . . . . . . . . . . . . . . . . . . . . . . .40
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN . . . . . . . . . . . . . .68
GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING. . . . . . . . . . . . . . .71
FORM 10-K ANNUAL REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . .71
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
EXHIBIT A - AGREEMENT
EXHIBIT B - PRIMARY CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED SEPTEMBER 30, 1995
EXHIBIT C - FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996.
EXHIBIT D - SUPPLEMENTAL FINANCIAL STATEMENTS PRIOR TO
CONSUMMATION OF THE BUSINESS COMBINATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
ENVIRONMENTAL TECHNOLOGIES CORP. AS PREVIOUSLY
INCLUDED IN FORM 10-K FOR YEAR ENDED
SEPTEMBER 30, 1995
EXHIBIT E - SUPPLEMENTAL FINANCIAL STATEMENTS OF FULCIRCLE
RECYCLERS, INC.
EXHIBIT F - 1996 STOCK OPTION PLAN
<PAGE>
SUMMARY
Meeting Date and Purposes of Meeting
This Proxy Statement is furnished to the stockholders
of Environmental Technologies Corp., a Delaware corporation (the
"Company") in connection with the solicitation of proxies by the
management of the Company for its Annual and Special Meeting of
Stockholders to be held on June __, 1996 and at any adjournments
thereof (the "Meeting"). The Meeting will be held at the offices
of Greenbaum, Rowe, Smith, Ravin & Davis, 99 Wood Avenue South,
Woodbridge, New Jersey at 10:00 a.m. Eastern Standard Time.
The Meeting has been called for the purpose, among
other things, of voting upon the approval of an Agreement dated
December 30, 1995 (the "Agreement"), a copy of which is attached
hereto as Exhibit A, pursuant to which the Company acquired all
of the issued and outstanding capital stock of FulCircle
Recyclers, Inc., a New York corporation ("FulCircle"). See "The
Agreement." Approval of the payment of the purchase price under
the Agreement, the issuance of 1,150,000 shares of the Company's
common stock, requires the affirmative vote of a majority of the
outstanding shares of the Company's common stock. Stockholders
holding approximately 50.4% of such outstanding common stock have
agreed to vote in favor of the Agreement. The Company's
stockholders will also vote upon the election of seven directors
to serve until the next Annual Meeting of Stockholders and upon
the adoption of the Company's 1996 Incentive and Non-Qualified
Stock Option Plan (the "1996 Plan"). The approval of a majority
of the shares represented at the Meeting will be required for the
election of directors and the approval of the 1996 Plan. See
"Election of Directors" and "1996 Inventive and Non-Qualified
Stock Option Plan."
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT
ITS STOCKHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT, FOR THE
ELECTION OF THE SEVEN NOMINEES FOR DIRECTORS AND FOR THE APPROVAL
OF THE 1996 PLAN.
The record date for the Meeting is June __, 1996. For
information with respect to voting and Proxy solicitation, see
"The Meeting."
The complete mailing address of the Company's principal
executive office is 550 James Street, Lakewood, New Jersey 08701
(Telephone: (908) 370-3400). The approximate date on which this
Proxy Statement and form of Proxy were first sent or given the
stockholders of the Company was June __, 1996.
Terms of Agreement
Pursuant to the Agreement, the Company acquired all of
the issued and outstanding shares of common stock of FulCircle
Recyclers, Inc. in exchange for 1,150,000 newly issued shares of
the Company's common stock, which will be issued upon the
approval by the stockholders at the Meeting.
In addition, pursuant to the Agreement, the Company's
Board of Directors has been expanded to consist of seven (7)
members, of whom three were appointed by the selling stockholders
of FulCircle: Carlos Aguero, Mitchell L. Dong and B. Brinkerhoff
McCagg. Mr. Dong was appointed President of the Company, Mr.
McCagg was appointed Chief Executive Officer and Ken Shapiro was
appointed Vice President, Marketing and Sales. The Company
entered into employment agreements with these three officers.
The Company also agreed to nominate Messrs. Aguero, Dong and
McCagg as directors at the 1996 annual meeting of stockholders,
which is the Meeting. George Cannan remains the Company's
Chairman of the Board.
Finally, the Company entered into a registration rights
agreement with the selling stockholders of FulCircle. See "The
Agreement" and "Directors and Officers."
Reasons for Transaction and Stockholder Approval
The Company acquired FulCircle to gain access to the
business line in which FulCircle operates, the recycling of
lighting ballasts contaminated with polychlorinated biphenyls
("PCBs"). See "Business of FulCircle."
Because the transaction requires the Company to issue a
number of shares of common stock which is greater than 20% of the
number of shares currently outstanding, the Company is required
to seek stockholder approval at a meeting under the rules
governing Nasdaq National Market companies. However,
stockholders owning in excess of 50% of the Company's outstanding
common stock have granted irrevocable proxies to the selling
stockholders of FulCircle to vote in favor of the Agreement and
the issuance of such shares, thereby assuring that the Agreement
and issuance will be approved. See "Nasdaq National Market
Rules."
Dissenters' Rights
The stockholders of the Company will have no
dissenters' rights under the General Corporation Law of Delaware
as a result of the Agreement or the Company's issuance of
1,150,000 shares of common stock to the selling stockholders of
FulCircle.
Federal Income Tax Consequences
The transaction has been structured so that for federal
income tax purposes no gain or loss will be recognized by and no
amount will be included in the gross income of the Company or the
selling stockholders of FulCircle as a result of the transactions
contemplated by the Agreement. However, the Company has not
sought an opinion of counsel to that effect. See "Federal Income
Tax Consequences."
Market Prices
The following table sets forth, for the period since
October 1, 1993, the high and low price for the common stock as
reported by NASDAQ. The NASDAQ quotations represent quotations
between dealers without adjustments for retail markups, markdowns
or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock
High Low
Six Months Ended March 31, 1996
<S> <C> <C>
First Quarter............................ $12-3/8 $ 8-1/2
Second Quarter........................... 10 7-1/2
Year Ended September 30, 1995
First Quarter............................ $ 8-5/8 $ 7-5/8
Second Quarter........................... 9-7/8 7-1/2
Third Quarter............................ 13-1/2 9-1/2
Fourth Quarter........................... 14-7/8 9-3/4
Year Ended September 30, 1994
First Quarter............................ $ 5-5/8 $ 5
Second Quarter........................... 7-3/4 5-1/8
Third Quarter............................ 8-1/8 7
Fourth Quarter........................... 8 7-1/8
</TABLE>
<PAGE>
Comparative Per Share Data
Comparative primary income and net tangible book value
per share for the Company on a historical and combined basis are
as follows:
<TABLE>
<CAPTION>
Earnings Per Share Net Tangible
Book Value
Year Ended September 30, Three Months Ended Per Share as
1993 1994 1995 December 31, 1995 of 12/31/95
<S> <C> <C> <C> <C> <C>
Environmental
Technologies
Corp., historical $.33 $.42 $.50 $(.08) $4.03
Combined Company .27 .37 .43 (.02) $3.24
</TABLE>
Dilution
As a result of the transactions contemplated by the
Agreement, the stockholders of the Company experienced
substantial dilution in net tangible book value per share in
their shares of the Company's common stock as compared to their
net tangible book value prior to the transaction. See
"Dilution."
<PAGE>
THE AGREEMENT
The Company and the stockholders of FulCircle (the
"Selling Stockholders") executed and delivered the Agreement on
December 30, 1995 and consummated the transactions contemplated
by the Agreement, except for the Company's payment of the
purchase price, on that date, effective December 31, 1995 (the
"Closing Date"). A copy of the Agreement is attached to this
Proxy Statement as Exhibit A. The following summary of the terms
of the Agreement is qualified in its entirety by reference to the
text of the Agreement.
Terms of Agreement
Pursuant to the Agreement, the Selling Stockholders
sold all of the issued and outstanding common stock of FulCircle
to the Company, and FulCircle thereby became a wholly-owned
subsidiary of the Company. FulCircle had no other class of
capital stock outstanding.
The purchase price payable by the Company to the
Selling Stockholders is the issuance by the Company of 1,150,000
shares of common stock. Because of an NASD rule applicable to
Nasdaq National Market companies, the Company cannot issue that
many shares without the prior approval of the Company's
stockholders at a meeting. See "Nasdaq National Market Rules."
However, seven stockholders of the Company, who own in the
aggregate of 50.4% of the Company's out-standing common stock,
executed and delivered irrevocable proxies to the Selling
Stockholders on the Closing Date to vote in favor of the
Agreement and the issuance of the 1,150,000 shares to the Selling
Stockholders. As a result, the Selling Stockholders are assured
that the Agreement and the issuance of 1,150,000 shares will be
approved. The Agreement therefore contains no provisions to deal
with the possibility that the stockholders of the Company will
not vote in favor of the Agreement and the issuance of 1,150,000
shares. The Company's acquisition of FulCircle was a completed
transaction as of December 31, 1995.
The Agreement contains customary representations by the
Company concerning itself and by the Selling Shareholders
concerning FulCircle. The representations survive for a period
of one (1) year from the Closing Date except to the extent a
breach of a representation results in a claim against a party to
the Agreement by a person or entity not a party to the Agreement,
in which event the representation survives for the statute of
limitations period applicable to such a claim.
The Selling Stockholders have indemnified the Company,
and the Company has indemnified the Selling Stockholders, against
any loss or liability arising from a misrepresentation in the
Agreement by such indemnifying party. In addition, the Selling
Stockholders have indemnified the Company against any loss or
liability in excess of $62,000 in the aggregate, excluding
defense costs, resulting from three pending claims which the
Selling Stockholders disclosed to the Company. Two of such
claims have since been resolved for less than $62,000.
Any indemnification payment under the Agreement is
payable only in shares of the Company's common stock, valued for
this purpose at $9.25 per share, the closing price of such stock
on the Nasdaq National Market on the last day prior to the
Closing Date. Further, the indemnification obligation of either
the Selling Stockholders or the Company may not exceed 115,000
shares.
The Agreement was structured to provide that no gain or
loss was recognized by the Selling Stockholders or the Company as
a result of the transactions contemplated by the Agreement.
However, no opinion of counsel or ruling from the Internal
Revenue Service was sought with respect to such tax consequences.
See "Federal Income Tax Consequences."
The Agreement was also structured to provide that, for
financial reporting purposes, the transaction would be accounted
for as a pooling of interests rather than a purchase. While
management of the Company believes that the transaction is
subject to accounting as a pooling of interests, it did not seek
a formal opinion regarding such issue from an independent
accounting firm or the Securities and Exchange Commission. See
"Pooling of Interests."
No broker or finder was involved in the transactions
contemplated by the Agreement, and no fees other than legal and
accounting expenses were incurred in connection with such
transactions. FulCircle is responsible for the payment of the
legal and accounting expenses for the transactions.
Board Representation
Pursuant to the Agreement, the Company expanded the
size of its Board of Directors from four to seven members, and
the Board appointed Carlos E. Aguero, Mitchell L. Dong and B.
Brinkerhoff McCagg, three of the Selling Stockholders, to serve
as directors until the 1996 annual meeting of the Company's
stockholders. In addition, the Board of Directors agreed to
include those three individuals as nominees for directors at the
1996 annual meeting of stockholders, and has done so in
connection with the Meeting. See "Election of Directors" for
further information concerning Messrs. Aguero, Dong and McCagg.
Officers; Employment Agreements
As of the Closing Date, the Board of Directors
appointed Mr. Dong as President of the Company, Mr. McCagg as
Chief Executive Officer of the Company and Ken Shapiro, an
officer of FulCircle, as Vice President, Marketing and Sales, of
the Company. George Cannan resigned his positions as President
and Chief Executive Officer, but remains the Company's Chairman
of the Board.
The Company entered into employment agreements with
each of Messrs. Dong, McCagg and Shapiro as of the Closing Date,
at base salaries of $75,000, $125,000 and $65,000, respectively
for terms of one year, two years and one year, respectively. Mr.
Shapiro will also receive a commission equal to 2% of FulCircle's
gross sales in New England, New York and Northern New Jersey. In
addition, the Company granted options to purchase 30,000, 65,000
and 25,000 shares of the Company's common stock to Messrs. Dong,
McCagg and Shapiro, respectively, which options vest over three
years provided each individual remains an employee of the
Company. The Company reserved the right to terminate such
employees for cause, as defined in the employment agreements.
Registration Rights
At the Closing, the Company entered into a registration
rights agreement with the Selling Stockholders which granted to
them the right to two "demand" registrations at any time prior to
December 31, 1998 and unlimited "piggyback" registration rights.
The Company has agreed to bear the expenses of such a
registration with the exception of any underwriter's or broker's
discount or commission and filing fees with the Securities and
Exchange Commission, the NASD and any state securities agencies,
all of which will be paid by the Selling Stockholders. The
Selling Stockholders have exercised their right to one demand
registration, which is expected to occur shortly after the
Meeting.
THE MEETING
The Meeting will be held on June __, 1996 for the
purposes set forth in the attached Notice of Annual and Special
Meeting of Stockholders. This Proxy Statement and the
accompanying proxy cards are furnished to the stockholders of the
Company in connection with the solicitation of proxies for the
Meeting by the management of the Company.
Record Date and Voting
The close of business on June __, 1996 has been fixed
as the record date for the determination of stockholders of the
Company entitled to notice of and to vote at the Meeting. On
such date, there were outstanding 4,000,411 shares of the
Company's common stock, which constitutes the only class of
voting securities of the Company. Holders of the Company's
common stock are each entitled to one vote per share, exercisable
in person or by proxy at the Meeting. The presence in person or
by proxy of the holders of a majority of the outstanding shares
of the Company is required to constitute a quorum at the Meeting
for the transaction of business. Approval of the Agreement
requires the affirmative vote of the holders of record of a
majority of the outstanding common stock of the Company. At the
Meeting, approval of all other matters requires the affirmative
vote of a majority of the shares present. Stockholders of the
Company owning approximately 50.4% of the Company's outstanding
common stock have delivered irrevocable proxies to the Selling
Stockholders to vote in favor of the Agreement, thereby assuring
its approval.
Forms of proxy are being furnished by the Company to
its stockholders and are solicited by the Company's management
for use at the Meeting and at any adjournments thereof. If such
proxies are properly signed and returned prior to the Meeting,
all shares represented thereby will be voted in accordance with
the instructions specified therein. Any stockholder giving a
proxy has the right to revoke the proxy at any time before it is
voted.
If a proxy is properly signed and returned prior to the
Meeting but no instructions are specified therein, such proxy
will be voted for approval of the Agreement, for the election of
seven (7) nominees as directors of the Company to serve until the
next Annual Meeting of Stockholders, and for the approval of the
Plan. Proxies may be solicited by mail, personal interview,
telephone and telecopy.
Federal Income Tax Consequences
The Company believes that for the Selling Stockholders
(i) no gain or loss will be recognized upon the distribution to
them of shares of the Company's Common Stock in exchange for
their FulCircle stock, as contemplated by the Agreement, (ii) the
basis of shares of the Company's Common Stock to be received by
the Selling Stockholders will be the same as the basis of the
FulCircle common stock surrendered in exchange therefor, and
(iii) provided the FulCircle Common Stock was a capital asset of
the Selling Stockholder, the holding period for shares of the
Company will include the holding period of the FulCircle Common
Stock exchanged. Furthermore, there are no tax consequences to
the stockholders of the Company as a result of the transactions
pursuant to the Agreement.
The Company has not requested an opinion of counsel or
a ruling from the Internal Revenue Service as to the tax
consequences of the transactions pursuant to the Agreement.
Nasdaq National Market Rules
The Company's common stock trades on the Nasdaq
National Market, which is regulated by the NASD. Section
6(i)(1)(c)(ii) of Schedule D to the NASD By-Laws requires that a
Nasdaq National Market company obtain stockholder approval in
connection with the acquisition of the stock or assets of
another company if the Nasdaq company's common stock (or other
securities convertible to common stock) to be issued as part of
such acquisition has or will have upon issuance voting power
equal to, or in excess of, 20% of the voting power outstanding
before the issuance of the common stock or other securities, or
the number of shares of common stock to be issued is or will be
equal to, or in excess of, 20% of the number of shares of common
stock outstanding before the issuance of the common stock or
other securities.
The common stock to be issued to the Selling
Shareholders represents approximately 29% of the Company's
outstanding stock, and the voting power associated therewith,
prior to issuance. Although seven stockholders owning in excess
of 50% of the Company's outstanding common stock (including three
members of the Board of Directors owning 1,817,804 shares, or
45.4% of the outstanding common stock) consented to the Agreement
and issuance, and the corporate law of the State of Delaware
(where the Company is incorporated) permits stockholder action by
majority consent without a meeting, the NASD requires that a
meeting of stockholders be held for this purpose. Hence, the
Board of Directors called the Meeting and unanimously recommends
that its stockholders approve the Agreement and issuance of
1,150,000 shares of common stock to the Selling Stockholders.
<PAGE>
MARKET PRICES
The following table sets forth, for the period since
October 1, 1993, the high and low price for the common stock as
reported by NASDAQ. The NASDAQ quotations represent quotations
between dealers without adjustments for retail markups, markdowns
or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock
High Low
Six Months Ended March 31, 1996
<S> <C> <C>
First Quarter........................... $12-3/8 $ 8-1/2
Second Quarter.......................... 10 7-1/2
Year Ended September 30, 1995
First Quarter............................ $ 8-5/8 $ 7-5/8
Second Quarter........................... 9-7/8 7-1/2
Third Quarter............................ 13-1/2 9-1/2
Fourth Quarter........................... 14-7/8 9-3/4
Year Ended September 30, 1994
First Quarter............................ $ 5-5/8 $ 5
Second Quarter........................... 7-3/4 5-1/8
Third Quarter............................ 8-1/8 7
Fourth Quarter........................... 8 7-1/8
</TABLE>
As of May ___, 1996, there were 31 record holders of
the Company's common stock. The Company believes that there are
in excess of 1,000 beneficial owners of the Company's common
stock.
DIVIDENDS
The Company has not paid any cash dividends on its common
stock and does not currently intend to declare or pay cash
dividends in the foreseeable future. The Company intends to
retain any earnings that may be generated to provide funds for
the operation and expansion of its business.
RIGHTS OF DISSENTING STOCKHOLDERS
The stockholders of the Company have no dissenters
rights under the Delaware corporate law in connection with the
Agreement or the Company's acquisition of FulCircle.
DILUTION
As of December 31, 1995, without giving effect to the
acquisition of FulCircle, the net tangible book value per share
of the Company's Common Stock would have been $4.03 per share.
"Net tangible book value per share" represents the amount of the
Company's total assets reduced by its total liabilities and
intangible assets, divided by the total number of shares of
Common Stock outstanding.
Giving effect to the acquisition of FulCircle, the net
tangible book value of the Company as of December 31, 1995 was
$3.24. Therefore, the Company's stockholders experienced a
decrease in the net tangible book value of $.79 per share, or
20%. See "Comparative Per Share Data."
COMPARATIVE PER SHARE DATA
The following table is based upon the historical
financial statements of the Company and FulCircle and the Pro
Forma Combined Balance Sheet and Pro Forma Combined Income
Statements included elsewhere in this Proxy Statement. This
table should be read in conjunction with the historical and pro
forma financial statements and the notes thereto appearing
elsewhere in this Proxy Statement.
It should be noted that FulCircle's fiscal year ends
December 31, while the Company's fiscal year ends September 30.
Therefore, the respective companies' financial data are not
directly comparable on a fiscal year-to-fiscal year basis.
However, audited financial statements of FulCircle as of
September 30, 1995 have been prepared and are included in this
Proxy Statement. Furthermore, prior to the Closing Date,
FulCircle and the Selling Stockholders had elected to be treated
as an "S" corporation under the Internal Revenue Code for federal
income tax purposes. For purposes of this Proxy Statement,
FulCircle's financial statements have been restated to give
effect on a pro forma basis to provisions for income taxes as if
FulCircle had been taxed as a "C" corporation for federal income
tax purposes for all
periods presented. See the Financial Statements of the Company
and the Supplemental Financial Statements included elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
Net Tangible
Earnings Per Share Book Value
Year Ended September 30, Three Months Ended Per Share as
1993 1994 1995 December 31, 1995 of 12/31/95
<S> <C> <C> <C> <C> <C>
Environmental
Technologies Corp.
historical $.33 $.42 $.50 $(.08) $4.03
Combined Company .27 .37 .43 (.02) $3.24
</TABLE>
BUSINESS OF THE COMPANY
General
The Company (exclusive of FulCircle) is engaged in the
marketing and sale of refrigerants, refrigerant recovery and
reclaiming services and the manufacture and distribution of
refrigerant recycling and recovery equipment.
The following table sets forth information relating to the
approximate dollar amounts (in thousands) and percentages of
revenues derived from the Company's sales of refrigerants and
equipment:
Years Ended September 30,
1995 1994 1993
Refrigerants....$26,020 91% $18,613 94% $14,939 85%
Equipment....... 2,645 9 1,203 6 2,570 15
$28,665 100% $19,816 100% $17,509 100%
[/TABLE]
Industry Background
In recent years, increasing concern about damage to the
earth's stratospheric ozone layer has resulted in significant
legislation governing production and use of products containing
Chlorofluorocarbons ("CFCs"). In 1987, the United States became
a signatory to the Montreal Protocol on Substances that Deplete
the Ozone Layer (the "Montreal Protocol"), as amended in 1992,
which requires its signatories to reduce and ultimately eliminate
production and consumption of certain ozone depleting substances,
including R-12. The Montreal Protocol has been implemented in
the United States through the Clean Air Act and the regulations
promulgated thereunder by the EPA. Pursuant to the Clean Air
Act, which was amended in 1990 in response to evidence linking
the use of CFCs to damage to the earth's ozone layer, production
of CFCs will be totally prohibited by the end of 1995. In
addition, since January 1, 1994, the Clean Air Act prohibits
"non-essential" uses of R-22. The EPA has deemed the use of R-22
for dusting to be non-essential, which effectively prevents the
Company from marketing this product in its dusting business. The
Clean Air Act also requires the recycling of refrigerants used in
automobile air conditioning systems and recovery of refrigerants
used in residential and commercial air conditioning and
refrigeration systems.
The Company believes that continuing initiatives of
government authorities relating to ozone depleting substances has
resulted in significant opportunities for companies engaged in
the development and commercialization of equipment designed to
recycle and recover refrigerants and the recovery, reclaiming and
resale of refrigerants which are still in demand, but production
of which has been curtailed or eliminated, such as R-12. CFCs
have an indefinite useful life if the chemicals are stored in
well-sealed containers or systems.
The Company is not aware of any industry-wide stockpiling of
refrigerants containing CFCs, such as R-12. The Company is also
not aware of any governmental agenda to curtail or eliminate the
use of and/or reuse of such refrigerants.
In general, working capital levels for the Company and
industry-wide reflect the highly seasonal nature of sales for
refrigerants which are related to weather. Sales of the
Company's products generally precede warm weather and continue
through much of the warm weather months.
The Company, and other companies in the industry, have ready
access to sources of newly manufactured refrigerants. As of
January 1, 1996, however, CFC based refrigerants are no longer
being manufactured. The CFC replacement products, however, are
now readily available to the Company, and other companies in the
industry. In anticipation of the cessation of a predictable
manufactured supply of R-12, the primary source of the Company's
historical sales and profitability, the Company has arranged
access to a significant supply of R-12 for sale in 1996. Beyond
1996 the Company's access to R-12 is much less certain. See
"Production and Sources of Supply" below.
Products and Services
Refrigerants
Refrigerants are liquid compounds characterized by their
ability to absorb heat and vaporize at low temperatures that can
be used in air conditioning and refrigeration systems. Compounds
such as R-12 and R-134a serve as refrigerants through the
principle of heat transfer by absorbing heat while in a liquid
state and releasing heat while in a gaseous state.
Chlorofluorocarbon ("CFC") substances contained in most commonly
used refrigerants, including R-12 and R-22, have been linked to
upper-atmospheric ozone depletion due to the ability of these
substances to chemically combine with and separate ozone
molecules. Manufacturers of refrigerants, however, have
developed new refrigerants such as R-134a, which do not contain
CFCs, as replacements for R-12 and R-22.
The most widely used commercial refrigerants are R-11, R-12,
R-22 and R-502. Other than R-134a, which has recently been
introduced, R-12 is the only significant refrigerant used in
automobile air conditioning systems. R-12 can also be used as a
refrigerant in residential air conditioning and refrigeration
systems. R-22 is a refrigerant capable of providing extensive
cooling of large areas, making it suitable for use in residential
and commercial air conditioning. R-502 is used extensively as a
refrigerant in commercial refrigeration systems.
The Company's line of refrigerants includes R-12, R-22 and
R-134a marketed under the Company's "Arctic Air" label to
wholesalers and distributors of automobile supplies for use by
mechanics and technicians in servicing automobile air
conditioning systems.
The Company markets R-134a in spray cans under its
customers' private labels for use in moisture-sensitive
equipment, including personal computer screens, cabinets,
peripherals and photographic equipment.
As a result of the Clean Air Act mandates, automobile
manufacturers have developed and are installing new air
conditioning systems in vehicles using R-134a, a refrigerant
which does not contain ozone depleting CFCs, rather than R-12.
In September 1992, the Company commenced marketing R-134a as a
replacement for R-12 for new air conditioning systems. The
Company has also begun marketing R-134a for use in dusting
moisture-sensitive equipment.
The Company acquired Refrigerant Reclaim Services, Inc.
("RRSI") in February 1994 and Global Refrigerant Management, Inc.
in February 1995 (collectively, "Full Cycle-Global"). Full
Cycle-Global provides services for the recovery and reclamation
of all refrigerants in response to the requirements of the Clean
Air Act, which strictly regulates the use and disposal of
refrigerants containing certain chemicals. The Company's
recovery services consist of removing used refrigerants from air
conditioning and refrigeration systems and transferring them into
pressurized cylinders for collection. Its reclamation services
consist of "cleaning" refrigerants to remove impurities and
contaminants and returning them to their original purity
standards. Reclaimed refrigerants, unlike recycled refrigerants,
meet the same specifications as newly manufactured products.
RRSI markets its services to large users of refrigerants such as
wholesalers of air conditioning and refrigeration equipment, air
conditioning and refrigeration contractors and owners of air
conditioned buildings and refrigeration and cold storage
facilities, and it also purchases used refrigerants for
reclamation and resale from any entity using large amounts of
refrigerant. Typically refrigerant is purchased from users
opting to retrofit or replace their CFC bearing equipment for
equipment using a non CFC type.
Recycling and Recovery Equipment
The Clean Air Act requires the recycling of certain
refrigerants used in automobile air conditioning systems and
recovery of refrigerants used in residential and commercial air
conditioning and refrigeration systems. The purpose of recycling
and recovery of refrigerants is to extend the useful life of such
refrigerants. Recycled products can be reused by its original
owner or sold to a certified reclaimer who, after purifying the
refrigerant to specified standards, can resell the refrigerant to
any third party. To address this newly created market, the
Company developed and, since March 1991, has marketed a line of
equipment designed to recycle and recover refrigerants.
The Company's line of refrigerant recycling equipment is
marketed under its "Envirotech" label and includes: System 1,
Alpha I, Gold Line Series and Omega. These are integrated
refrigerant recycling systems which are designed to purify R-12
and R-134a, contained in automobile air conditioning systems.
Although R-134a does not contain CFCs the Clean Air Act requires
that as of November 15, 1995 it too must be recycled. When being
serviced all automotive air conditioning systems must be purified
to filter out air, moisture, oil and other contaminants for its
reuse. More importantly, the alternative, which is to vent the
refrigerant is illegal. In addition, the Company markets The PRO
and PRO PLUS portable refrigerant recovery systems designed to
extract various refrigerants from residential and commercial air
conditioning and refrigeration systems. Since the Clean Air Act
requires only recovery (extraction), rather than recycling of
refrigerants, The PRO and PRO PLUS are intended for use by air
conditioning and refrigeration technicians who do not need the
full recycling capabilities of System 1, Alpha I, the Gold Line
Series or Omega. The PRO and PRO PLUS also have the capability
to purify recovered refrigerant to an extent sufficient to permit
its reuse. To date, the Company believes that sales of
refrigerant recovery equipment has been less than anticipated
because of a lack of government enforcement of the Clean Air Act
provisions. The Company believes that future recovery system
sales will increase for the following reasons: CFC refrigerants
will be harder to replace following the cessation of their
production; use of recovery equipment is more frequently being
required by the inquiring public and the practice of charging
customers for the use of the machine is becoming more accepted
and profitable as even the cost of non CFC refrigerants is
increasing.
The Company markets a number of accessories for its line of
equipment, including vacuum pumps, and replacement parts for its
equipment, such as hoses, filters and refrigerant storage
cylinders. To date, sales of such accessories and replacement
parts have not been material.
The Company provides a one-year unlimited warranty on its
equipment which it believes equals or exceeds the warranties
offered by most of its competitors for comparable products. To
date, warranty expense has been insignificant. The Company's
line of equipment does not require installation. Each product is
sold with a detailed instruction manual and the Company provides
a toll-free (800) telephone number service during normal business
hours to assist its customers and answer questions relating to
the operation of its equipment. Servicing of the Company's
recycling and recovery equipment, as required, is performed at
the Company's Keller, Texas facility or by an authorized
independent repair facility. The Keller facility, which
currently runs on one daytime shift, is the Company's main site
for component fabrication and product integration and assembly,
as well as warranty servicing. See "Facilities."
The Company continues to devote time and effort to expand
its line of equipment by developing new versions of its equipment
which are designed to anticipate product demand and satisfy
evolving industry standards. The expenses associated with such
efforts have been immaterial to date. There can be no assurance
that the Company will be able to successfully develop or
commercialize any new products or that such products will prove
to be reliable and durable in widespread commercial use. All the
Company's equipment has been endorsed and approved for use by the
relevant sanctioning authorities. See "Government Regulation."
Marketing and Sales
The Company markets R-12 to wholesale distributors of
automobile suppliers, principally in the Eastern United States,
who purchase R-12 from the Company for resale to automobile
repair shops, service stations and retail automotive supply
stores.
The Company also markets R-134a as a replacement refrigerant
for R-12 for new automobile air conditioning systems. Because
automobile air conditioning systems capable of utilizing R-134a
have only been recently introduced, the Company believes that it
could take several years for a meaningful market for R-134a to
develop as a replacement for R-12. The Company is also marketing
R-134a as a duster for moisture sensitive equipment.
The Company markets System 1, Alpha I, Gold Line series and
Omega to wholesalers and distributors of automobile parts and
service equipment. The PRO and PRO PLUS models are marketed to
wholesalers of air conditioning and refrigeration equipment
("Heating, Ventilation, Air Conditioning/Refrigeration" or
"HVAC/R") distributors who supply contractors engaged in
servicing commercial and residential air conditioning and
refrigeration systems.
The Company believes that its wholesale distributors market
other products that compete with the Company's products.
The Company markets its automotive and HVAC/R equipment
through a network of independent manufacturers' representatives.
The manufacturers' representatives are paid on a commission basis
and are responsible for their geographical markets for
identifying customers and soliciting customer orders. Other
marketing efforts include advertising in trade journals and
attendance at trade shows.
The Company also directly markets its various reclaimed
refrigerants and reclaiming services to HVAC wholesalers,
mechanical contractors and large corporate, institutional and
governmental users of refrigerants.
No single customer accounted for 10% of the Company's
revenues during the years ended September 30, 1995 and 1994.
Production and Sources of Supply
The Company's refrigerants are packaged and/or distributed
at its Lakewood, New Jersey, Fort Worth and Houston, Texas,
Chicago, Illinois and San Leandro, California facilities.
Refrigerant is delivered to the Company's Lakewood facility by
tank truck and is held in storage tanks until packaged.
Refrigerant is delivered to the Company's reclaiming facilities
in various size containers where it is stored until reclaimed and
packaged. All packaged refrigerant is shipped to customers by
common carrier.
The Company is not dependent on any one source of
refrigerant for its supply of refrigerants.
The Company purchases used refrigerant from major HVAC
mechanical contractors, salvage operations, large industrial and
institutional users of refrigerant as well as brokers. The
Company also purchases used refrigerant from a network of
wholesale HVAC supply stores serving as collection stations.
The availability and price of virgin R-12 are influenced by
several factors, principally among which are the limitations on
commercial production and use imposed by the Clean Air Act. To
the extent that suppliers of refrigerant are required to curtail
production of R-12, they must correspondingly reduce allocations
to their customers. Consequently, the Company anticipates that
its access to R-12 will continue to be reduced in the future.
The price of R-12 has increased dramatically since the 1990
amendments to the Clean Air Act and the Company anticipates that
the price of R-12 will continue to increase as the supply of R-12
continues to decrease. The Omnibus Act imposes an excise tax on
CFC chemicals, including virgin R-12. The purchase of virgin R-
12 is subject to taxation as a result of the Omnibus Act,
including a tax on CFC chemicals held in the Company's inventory.
Under the Omnibus Act, the tax increased from $1.67 per pound to
$3.35 per pound as of January 1, 1993, increased by an additional
$1.00 per pound on January 1, 1994 and January 1, 1995 and
increased by another $.45 per pound on January 1, 1996. The
Company believes, based upon the strong demand for R-12 created
by the Clean Air Act's limitations on production, that the
increased cost of R-12 has not adversely affected sales of R-12
to date. There can be no assurance that increases in the
Company's cost of R-12 and the corresponding increased price at
which the Company must sell R-12 will not adversely affect the
Company's ability to market this product in the foreseeable
future. There can be no assurance, however, that sufficient
quantities of R-12 will be available to the Company on
commercially reasonable terms, or at all, or that sales of R-12
at increased price levels will offset anticipated declining
revenues as a result of reduced supply.
The Company produces its refrigerant recycling and recovery
equipment by integrating and assembling components which it
fabricates, certain components and sub-assemblies fabricated to
the Company's specifications, and off-the-shelf components
available from a variety of sources. In order to maintain
quality control, Company employees test its products at several
stages of production in order to ensure adherence to product
specifications. The Company undertakes component fabrication and
product integration and assembly in its Keller, Texas facility.
See "The Company - Properties."
The Company purchases all of its refrigerant containers and
its supply of raw materials used in the production of refrigerant
recycling and recovery equipment, principally copper tubing and
steel, and component parts and subassemblies incorporated into
these products, from third-party suppliers and manufacturers.
The Company believes that there are numerous available sources of
supply for the Company's refrigerant containers and raw
materials. While the Company attempts to maintain alternative
sources for the Company's refrigerant containers and raw
materials, the Company's business is subject to the risk of price
fluctuations and periodic delays in delivery of refrigerant
containers and raw materials. The Company has subcontracted
production of substantially all component parts and subassemblies
incorporated into its products to third-party manufacturers.
Accordingly, the Company is substantially dependent on the
ability of such manufacturers, among other things, to meet
performance and quality specifications and to conform to delivery
schedules. Failure by the Company's manufacturers to comply with
these and other requirements would have a material adverse effect
on the Company. Further, there can be no assurance that such
manufacturers will dedicate sufficient production capacity to
satisfy the Company's requirements for component parts within
scheduled delivery times. The Company generally purchases
refrigerant containers, raw materials and component parts from
sole suppliers and manufacturers. The Company does not maintain
supply agreements with its suppliers or manufacturers and
purchases containers, raw materials and component parts pursuant
to purchase orders in the ordinary course of business. Failure
or delay by suppliers and manufacturers in supplying necessary
containers, raw materials and component parts to the Company
could adversely affect the Company's profit margin and the
Company's ability to obtain and deliver products on a timely and
competitive basis which could have a material adverse effect on
the Company.
The Company typically seeks to fill customer orders for both
refrigerants and refrigerant recycling and recovery equipment
within ten days of receipt. Accordingly, at December 31, 1995,
the Company had no material backlog for either product line. In
order to fill orders within the foregoing time frame, the Company
seeks to maintain a significant inventory of refrigerants, raw
materials, components and subassemblies for production of
refrigerant recycling and recovery equipment and finished goods.
At December 31, 1995, the Company had a significant inventory of
completed refrigerant recycling and recovery equipment which had
not been sold in earlier periods. The Company had manufactured
such inventory in anticipation of sales which did not occur in
earlier periods, due in management's opinion, to lack of
enforcement of Clean Air Act provisions. During late winter and
spring 1996 the Company intends to convert a significant portion
of its HVAC recovery equipment inventory into automotive
recycling equipment due to Management's anticipation of a
stronger market for automotive equipment in fiscal 1996. The
Company anticipates that a significant portion of such inventory
will be sold during fiscal 1996.
Competition
The markets for the Company's products are highly
competitive.
The Company competes with numerous well-established
companies which market refrigerants, many of which possess
substantially greater financial, marketing, personnel and other
resources than the Company, which may position such companies to
more effectively compete for reduced allocations of supplies of
refrigerants and the marketing of refrigerants intended to
replace refrigerants containing ozone depleting CFCs.
The Company also competes with other manufacturers of
refrigerant recycling and recovery equipment. These products are
marketed by companies with, in some cases, significantly greater
financial, manufacturing, distribution and other resources than
the Company, including large advertising budgets, enabling them
to implement extensive advertising campaigns, both generally and
in response to efforts by additional competitors to enter into
new markets. The Company is aware of other companies which have
developed or are developing products or alternative technologies
which are competitive with the Company's products. Other
products or alternative technologies which are functionally
similar to those of the Company are currently available from
numerous competitors.
The Company believes that it competes on the basis of
product availability and customer service in the marketing and
sale of refrigerants and on the basis of price, reliability and
ease of operation with respect to its refrigerant recycling and
recovery equipment.
The Company believes that Full Cycle-Global, its refrigerant
recovery and reclamation operation, is one of the largest
companies in its industry. However, the business in which the
Company is engaged is relatively new and competition will, in all
probability, increase from existing competitors as well as from
new entrants. The Company seeks to compete on the basis of
offering full services, including on-site, high volume and
emergency services, and employing the latest equipment at
reasonable prices. Such capabilities are not possessed by all of
its competitors.
Government Regulation
In recent years, increasing concern about damage to the
earth's ozone layer caused by ozone depleting substances has
resulted in significant legislation governing production and use
of products containing CFCs. In 1987, the United States became a
signatory to the Montreal Protocol, as amended in 1992, which
requires its signatories to reduce and ultimately eliminate
production and consumption of certain ozone depleting substances,
including R-12, by the end of 1995. The Montreal Protocol has
been implemented in the United States through the Clean Air Act
and the regulations promulgated thereunder by the EPA. The
production and use of refrigerants containing CFCs, including R-
12 and R-22, are subject to extensive and changing federal and
state laws and substantial regulation under these laws by
government agencies, including the EPA, and various state
agencies and county and local authorities acting in conjunction
with federal and state authorities. Pursuant to the Clean Air
Act, which was amended in 1990 in response to evidence linking
the use of CFCs to damage of the earth's ozone layer, production
of R-12 was limited to 25% of the 1986 production level through
the end of 1995, at which time its production ceased.
The Clean Air Act also requires the recycling of R-12 and
its various replacements used in automobile air conditioning
systems and recovery of all refrigerants used in residential and
commercial air conditioning and refrigeration systems. Equipment
used to recycle R-12 and other refrigerants is required to meet
stringent performance standards imposed by the EPA and
administered by UL. The Company's System 1, Alpha I, Gold Line
series and Omega have received UL approval to recycle R-12 and R-
134a. UL approval, however, does not constitute an endorsement
of these products. The EPA has promulgated performance standards
for refrigerant recovery equipment, and the Company has obtained
UL approval for the PRO and PRO PLUS to recover refrigerants.
The Company believes that it has obtained all licenses, permits
and approvals required in connection with the production and sale
of its refrigerant recycling and recovery equipment. Amendments
to existing statutes and regulations, adoption of new statutes
and regulations which affect the marketing and sale of
refrigerants and recycling and recovery equipment, including the
marketing of replacement refrigerants such as R-134a, could
require the Company to continually adapt its methods of
operations and/or discontinue the sale of certain products at
costs that could be substantial. There can be no assurance that
the Company will be able, for financial reasons or otherwise, to
adapt its operations to comply with applicable laws or
regulations or obtain and maintain applicable licenses, permits
and approvals in the future. Failure to do so could have a
material adverse effect in the Company.
Notwithstanding the restrictions on the production and use
of refrigerants imposed by the Clean Air Act, the Company
believes that its business prospects are significantly enhanced
by the stringent enforcement of the comprehensive regulatory
framework by the EPA. The Company believes that government
mandates requiring the recycling and recovery of refrigerants
have created demand for the Company's equipment products.
However, the delay in enforcement of regulatory requirements
governing the recycling and recovery of refrigerants has
negatively affected the Company and all other participants in the
recycling and recovery equipment market as purchasing decisions
by contractors and technicians have been postponed as a result of
the lack of enforcement.
The Company's refrigerant operations require the handling,
storage and transportation of refrigerants, which are classified
as hazardous substances under applicable laws. See
"Environmental Matters."
Research and Development
While the Company places significant emphasis on ongoing
refinement and enhancement of its equipment and believes that
such efforts are important to take advantage of market trends and
to maintain its competitive position, the costs to do so to date
have not been material.
During the fiscal year ended September 30, 1995 the Company
entered into a 50% joint venture with two unaffiliated
individuals. The venture's name is Transformation Technologies,
Ltd. ("TTL"). TTL is researching the applicability of using high
temperatures with chemical catalysts to transform mixed or
contaminated refrigerants (defined as a hazardous substance) into
a useful by-product. Evidence suggests that millions of pounds
of contaminated or mixed refrigerants are being held for
destruction by their owners. Through September 30, 1995 the
Company had invested approximately $40,000. Through the filing
date of this Report the Company has invested approximately
$96,439. TTL will require additional funding to complete its
initial research phase. The Company has no commitment to
continue funding the project beyond its current levels. There
are no assurances that even if the additional funds are
sufficient to allow completion of the research that the
technology will be commercially viable.
Subsequent to September 30, 1995, the Company entered into a
second 50% joint venture with an unaffiliated company. The
ventures's name is Liberty Technology, Inc. ("LTI"). LTI plans
to utilize existing technology developed in Eastern Europe to
construct a refrigeration separation plant. The purpose of the
plant is to provide an alternative to total destruction of mixed
refrigerants. Through the date of this report the Company has
invested $50,000. LTI will require additional funding. The
Company anticipates an additional investment in LTI of at least
$150,000.
Proprietary Protection
The Company principally relies on a combination of trade
secret laws and employee and third-party non-disclosure
agreements to protect its products and technology. However, such
methods may not afford complete protection and there can be no
assurance that others will not independently develop such
technologies or, despite the precautions taken by the Company,
obtain access to the Company's know-how, concepts, ideas and
documentation. Since the Company believes that proprietary
information is important to its business, failure to protect its
trade secrets could have a material adverse effect on the
Company.
Trademarks
The Company has no registered trademarks.
Insurance
The Company may be exposed to potentially significant
product liability claims by its customers and users of its
products. The Company maintains product liability coverage at
$2,000,000 per occurrence, which it believes is adequate coverage
for the types of recycling and recovery equipment presently
marketed. There can be no assurance, however, that such
insurance will be sufficient to cover potential claims or that
the present level of coverage will be available in the future at
reasonable costs. The Company is self-insured for product
liability in connection with the marketing and sale of its
refrigerants. No material losses have occurred. A partially
insured or a completely uninsured successful claim against the
Company could have a material adverse effect on the Company. The
Company generally warrants its products to be free from defects
in materials and workmanship and for a specified period,
generally limited to one year from the date of shipment. There
can be no assurance that future warranty expenses will not have
an adverse effect on the Company's results of operations.
Environmental Matters
The Company's refrigerant operations require the handling,
storage and transportation of refrigerants, which are classified
as hazardous substances under applicable laws. The Company does
not maintain environmental impairment insurance. There can be no
assurance that the Company will not incur environmental liability
arising out of the use of hazardous substances. The use of
hazardous substances is subject to extensive federal, state and
local law and substantial regulation under these laws by
governmental agencies, including the United States Environmental
Protection Agency, the Occupational Safety and Health Adminis-
tration, various state agencies and county and local authorities
acting in conjunction with federal and state authorities. Among
other things, these regulatory bodies impose requirements to
control air, soil and water pollution, to protect against occu-
pational exposure to such chemicals, including health and safety
risks, and to require notification or reporting of the storage,
use and release of certain hazardous chemicals and substances.
The Company believes that it is in substantial compliance with
all material federal, state and local laws and regulations
governing its operations and has obtained all material licenses
and permits required for the operation of its business.
Amendments to statutes and regulations and/or the Company's
expanded level of operations in the future could require the
Company to continually modify or alter methods of operations at
costs which could be substantial and could subject the Company to
increased regulation. There can be no assurance that the Company
will be able, for financial or other reasons, to comply with
applicable laws and regulations. Failure by the Company to
comply with applicable laws and regulations could subject the
Company to civil remedies, including fines and injunctions, as
well as potential criminal sanctions, which could have a material
adverse effect on the Company.
Employees
At December 31, 1995, the Company employed approximately 84
persons, including its executive officers. Approximately 26 of
such persons are employed in the production and marketing of
refrigerant recycling and recovery equipment, including nine in
administration, one in sales, and 16 in production. The Company,
from time to time, adds temporary production help as needed.
Approximately 48 persons are employed in the production and
marketing of refrigerant reclaiming services, including nine in
administration, eleven in sales and marketing and 31 in
production. The remaining ten employees are employed in the
refrigerant packaging and distribution operations conducted by
EMC, including two in administration, one in sales and seven in
operations. None of the Company's employees is subject to a
collective bargaining agreement and the Company believes its
employee relations are good.
Properties
The Company's executive offices and refrigerant packaging
and distribution operations are located in a 21,000 square foot
building situated at 550 James Street, Lakewood, New Jersey
08701. The building is leased at a rental of $10,000 per month
from George Cannan, Sr., the Company's founder, Chairman, and
principal stockholder, pursuant to a month-to-month lease. The
Company believes that the terms of such lease are at least as
favorable as those which it could obtain from a non-affiliated
third party.
The Company's refrigerant recycling and recovery equipment
production operations are located in a 52,000 square foot
building located at 900 Price Street, Keller, Texas 76248. The
Company also performs servicing of the Company's recycling and
recovery equipment at the Keller, Texas facility. The building
is leased from a non-affiliated party at a monthly rental of
$10,183 pursuant to a lease expiring in January 2001.
At January 31, 1996 the Company maintained four refrigerant
reclaiming operations. The main reclaiming operation is located
in a 26,000 square foot building located at 121 South Norwood
Drive, Fort Worth, Texas 76053. The building is leased at a
rental of $5,000 per month from a non-affiliated party pursuant
to a lease expiring in November 1998. The second branch
operation is located in a 14,170 square foot building located at
2055 Silber Street, Houston, Texas 77055. The building is leased
at a rental of $5,011 per month from a non-affiliated party
pursuant to a lease expiring in June 1998. The third branch
operation is located in a 9,020 square foot building located at
2966-70 West Wireton Road, Blue Island, Illinois 60406. The
building is leased at a rental of $4,400 per month from a non-
affiliated party pursuant to a lease expiring in April 1997. The
fourth branch operation is located in a 22,800 square foot
building located at 2955 Merced, San Leandro, California. The
building is leased at a rental rate of $8,664 per month from a
non-affiliated party pursuant to a lease expiring in October
1998.
The Company believes that its facilities are adequate for
its current and proximate future needs.
<PAGE>
SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for
each of the five fiscal years ended September 30, 1995. This
data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and the audited consolidated financial statements and related
notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Years Ended September 30,
1995 1994 1993 1992 1991
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $34,678 $24,727 $21,895 $19,306 $12,821
Cost of Sales 24,914 17,400 15,088 14,486 11,226
Selling, General
and Administrative
Expenses 6,199 4,645 4,818 2,374 1,917
Operating Income 3,565 2,682 1,988 2,446 (321)
Interest Expense 297 208 157 39 14
Income before Income Tax
Expense 3,321 2,536 1,765 2,426 (415)
Income Tax Expense 1,338 1,033 709 976 116
Net Income $ 1,983 $1,504 $ 1,056 $1,706 (531)
Net Income Per Common
and Common Equivalent
Shares("Primary") $ 0.43 $ 0.37 $ 0.27 $ 0.43<FN1>$(0.16)
Weighted Average
Number of Common
Shares Outstanding 4,863 4,014 3,971 3,971 3,364
<FN1> Includes an extraordinary item resulting from the tax effect of
utilization of net operating loss carryovers of $255,900 or $.12 per share.
<\FN1>
September 30,
BALANCE SHEET DATA: 1995 1994 1993 1992 1991
(In thousands)
Working Capital $15,489 $ 4,484 $ 6,146 $ 1,430 $ (601)
Total Assets 22,164 13,427 11,318 8,621 4,531
Total Debt 1,267 1,920 2,329 1,507 418
Total Shareholders'
Equity $17,600 $ 8,187 $ 6,594 $ 1,685 $ (220)
/TABLE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
The Company is primarily engaged in the marketing and sale of
refrigerants, refrigerant reclaiming services, the manufacture of
refrigerant recovery and recycling equipment and the recycling of
hazardous waste materials from fluorescent light ballasts. The
Company's line of refrigerants include dichlorofluoromethane ("R-
12") and tetrafluoroethane ("R-134a"), marketed under the Company's
"Arctic Air" label to distributors of automotive supplies for use
by mechanics and technicians in servicing automotive air
conditioning systems. The Company markets R-134a in aerosol spray
cans under its customers' private labels for use in dusting
moisture-sensitive equipment, including personal computer screens,
cabinets, peripherals and photographic equipment. Through its
wholly-owned subsidiary Refrigerant Reclaim Services, Inc. (d/b/a
Full Cycle-Global), the Company markets refrigerant reclaiming
services as well as R-12, R-134a and a variety of other
refrigerants primarily to large users of air conditioning and
refrigeration chemicals. Through its wholly-owned subsidiary
Envirotech Systems, Inc. the Company has developed and
commercialized a line of equipment designed to recycle and recover
refrigerants contained in air conditioning and refrigeration
systems. Through its wholly-owned subsidiary FulCircle Recyclers,
Inc. ("FulCircle") (d/b/a Fulcircle Ballast Recyclers) the Company
is in the business of extracting hazardous waste materials from
fluorescent light ballasts and arranging environmentally accepted
means of treatment and disposal. The Company contracts for these
disposals with regulated PCB Disposal outlets. The Company
provides services to public utilities, governmental agencies and
commercial industrial organizations throughout the United States.
FulCircle is subject to the rules and standards of several
governmental regulatory agencies.
The Company's fiscal year-end is September 30.
The following discussion of results of operations for the
fiscal years ended September 30, 1995 and 1994 should be read in
conjunction with the consolidated financial statements, including
the notes thereto, included elsewhere in this Report. All of the
Company's historical financial statements presented herein include
the effects of acquiring FulCircle Recycling, Inc. on December 31,
1995 accounted for as a pooling of interests, the purchase of the
assets of Global Refrigerant Management, Inc. in February 1995 and
the acquisition of Refrigerant Reclaim Services, Inc. ("RRSI") in
February 1994. The acquisition of RRSI was accounted for as a
pooling-of-interests. In February 1995, the Company acquired the
assets of Global Refrigerant Management, Inc. ("Global"). As a
result, operations for 1995 include seven complete months with the
assets of Global. See Notes to Consolidated Financial Statements
for details of the acquisitions.
Year ended September 30, 1995 as compared to year ended
September 30, 1994
Net sales for the year ended September 30, 1995 were
$34,677,971, as compared to net sales of $24,727,126 for the year
ended September 30, 1994, an increase of $9,950,845, or
approximately 40.2%. The increase in net sales was primarily
attributable to a $5.5 million increase in reclaiming revenues, a
$1.9 million increase in virgin packaged refrigerant sales, a $1.4
million increase in sales of recycling and recovery equipment and
a $1.1 million increase in ballast recycling revenues. Reclaiming
revenues were higher as a result of RRSI's expansion of operations
from two to four locations during the period and the inclusion of
seven full months of operations with the assets acquired in the
Global acquisition. Packaged refrigerant sales were higher
primarily as a result of general price increases. Equipment
revenues were increased primarily as a result of the inclusion of
the purchase of the equipment assets from Wynn's International,
Inc. ("Wynn's") and ballast recycling revenues were increased
primarily as a result of the continued successful expansion of the
sales force into national markets. It is Management's opinion that
equipment revenues remain lower than expected due in large part to
the continued lack of governmental enforcement of laws prohibiting
the venting of CFC refrigerants into the atmosphere. The lack of
enforcement has resulted in postponed purchasing decisions by the
contractors and technicians required by law to own equipment of the
type manufactured and sold by the Company.
As a result of the prohibition of the manufacture of new CFC
refrigerants, which includes R-12, the Company will no longer have
ready access to newly manufactured R-12. As a result, the
Company's ability to maintain its current level of R-12 sales for
the foreseeable future will be dependent, to a large extent, upon
the availability of adequate sources of stockpiled and alternative
supplies. While Management believes that in 1996 it has access to
significant sources and amounts of R-12 and plans to continue to
seek to increase its sources of alternative supply, beyond 1996 the
Company's access to R-12 is much less certain. The Company
discontinued the sale of R-22 used in dusting applications on
January 1, 1994 while replacing it with R-134a. As a result, the
Company has become increasingly dependent on sales of R-134a, as a
replacement for both R-12 and R-22, and believes that R-134a will
become an increasing portion of the Company's revenues in the
future. The Company also expects that sales of recycling and
recovery equipment will increase as more contractors comply with
the Federal Clean Air Act (the "Clean Air Act") and as the price
for R-12 and other refrigerants continue to increase, thus
heightening the economic usefulness of the equipment. In addition,
the Company believes that the November 15, 1995 imposition of
additional requirements for the automotive sector to recycle and
recover R-134a will also have a favorable impact on the Company's
sales of equipment.
Cost of sales for the year ended September 30, 1995 were
$24,914,443, as compared to $17,400,125 for the year ended
September 30, 1994, an increase of $7,514,318. Of this increase,
approximately $4.4 million and $700,000 was attributable to the
increase in reclaiming and recycling activity at RRSI and
FulCircle, respectively and $1.4 million was associated with
increased cost of raw material prices of virgin refrigerants.
Higher sales of recycling and recovery equipment and their
attendant costs resulted in the balance of the increase in costs.
Selling, general and administrative expenses increased to
$6,198,552 for the year ended September 30, 1995 from $4,645,235
for the prior year, an increase of $1,553,317. This increase is
primarily attributable to the increase in operations of RRSI from
two locations to four during the year and an increase in sales and
marketing expenses at FulCircle. The excise tax, paid by the
Company for virgin CFC floor stocks carried over from calendar 1994
to 1995 was $1.00 per pound in each fiscal year. The Company
believes that expenses associated with the Federal Excise Tax will
continue. Such tax for fiscal year 1996 will be $.45 per pound.
In addition, the Company is continually seeking to enhance its
current products and develop new versions of its products.
However, the Company believes that costs to enhance or develop new
products for its recycling and recovery equipment will not
materially change the relationship between the Company's revenues
and costs.
The Company generated net income during the year ended
September 30, 1995 of $1,982,654, as compared to net income of
$1,503,552 during the year ended September 30, 1994, a 31.9%
increase.
Year ended September 30, 1994 as compared to year ended
September 30, 1993
Net sales for the year ended September 30, 1994 were
$24,727,126, as compared to net sales of $21,894,610 for the year
ended September 30, 1993, an increase of $2,832,516, or
approximately 12.9%. The increase in net sales was primarily
attributable to a $1.9 million increase in reclaiming revenues, a
$1.8 million increase in packaged refrigerant sales, a $500,000
increase in ballast recycling revenues and a partially offsetting
decrease in sales of recycling and recovery equipment. Reclaiming
revenues were higher as a result of RRSI having greater access to
working capital which allowed it to purchase and process
significantly more refrigerant over the prior period. Packaged
refrigerant sales were higher primarily as a result of general
price increases and ballast recycling revenues were higher
primarily as a result of an expansion of the sales force to include
national coverage. It is Management's opinion that the reduction
in equipment revenues was largely attributable to the lack of
governmental enforcement of laws prohibiting the venting of CFC
refrigerants into the atmosphere. The lack of enforcement resulted
in postponed purchasing decisions by the contractors and
technicians required by law to own equipment of the type
manufactured and sold by the Company. The Company's ability to
maintain its current level of R-12 sales for the foreseeable future
will be dependent, to a large extent, upon the availability of
adequate sources of supply. Management believes that it has
increased its number of sources and access to greater volumes of R-
12 over the prior period and the Company plans to continue to take
advantage of alternative sources of supply for R-12, including
recovered R-12. The Company discontinued the sale of R-22 used in
its dusting applications on January 1, 1994 while replacing it with
R-134a. As a result, the Company became increasingly dependent on
sales of R-134a, as a replacement for both R-12 and R-22. The
Company also expects that sales of recycling and recovery equipment
will increase as more contractors comply with the Federal Clean Air
Act (the "Clean Air Act") and as the price for R-12 and other
refrigerants continue to increase, thus heightening the economic
usefulness of the equipment. In addition, the Company believes
that imposition of additional requirements to recycle and recover
R-134a will also have a favorable impact on the Company's sales of
equipment.
Cost of sales for the year ended September 30, 1994 were
$17,400,125, as compared to $15,088,028 for the year ended
September 30, 1993, an increase of $2,312,097. Of this increase,
approximately $1.6 million and a $1.4 million increase associated
with rising costs of raw material prices of certain virgin
refrigerants. Offsetting a portion of these cost increases was an
$800,000 decrease associated with reduced sales of refrigerant
recycling and recovery equipment. Further offsetting these costs
was a decrease of a portion of the Company's R-12 LIFO inventory.
Selling, general and administrative expenses decreased to
$4,645,235 for the year ended September 30, 1994 from $4,818,286
for the prior year, a decrease of $173,051. This decrease resulted
primarily from a decrease in the Federal Excise Tax rate imposed on
certain floor stocks of the Company as the tax rate decreased from
$1.68 per pound at January 1, 1993 to $1.00 per pound on January 1,
1994. The Company believes that expenses associated with the
Federal Excise Tax will continue. Such tax for fiscal year 1995
and 1996 were $1.00 and $0.45 per pound, respectively.
The Company generated net income during the year ended
September 30, 1994 of $1,503,552, as compared to net income of
$1,055,690 during the year ended September 30, 1993, a 42.4%
increase.
Liquidity and Capital Resources
The Company had working capital of $15,489,132 at September
30, 1995, as compared to a working capital position of $4,483,844
at September 30, 1994. The increase in working capital is
attributable primarily to year-end increases in inventory
$4,726,275, cash $3,441,920 and accounts receivable $1,561,956.
Based upon the Company's anticipated equipment sales during the
1996 fiscal year, the Company reclassified $3.0 million of its
equipment inventory from long-term assets to current assets in its
balance sheet as of September 30, 1995. The Company had earlier
classified such inventory as long-term when in Management's opinion
the lack of enforcement of the Clean Air Act resulted in a lack of
demand for the equipment sold by the Company. Management believes
that most of its automotive recycling equipment and a significant
portion of its commercial recovery equipment inventory at September
30, 1995 will be sold in fiscal 1996. These anticipated sales
increases primarily reflect new Clean Air Act provisions, effective
November 15, 1995, which requires the use of new refrigerant
recycling equipment during service on vehicles using R-134a.
During late the spring of 1996 the Company intends to convert a
significant portion of its commercial recovery equipment inventory
into automotive recycling equipment due to Management's
anticipation of a stronger market for automotive equipment sales in
1996. Based on historic net sales prices of equipment, the
estimated conversion costs will be fully recoverable and are not
expected to have a material effect on future operating results.
The balance of its inventory increase is made up of increased
refrigerant levels. Increased cash levels reflect the invested
proceeds of the Company's exercise of warrants and accounts
receivable primarily reflect the increase in sales associated with
the Company's expanded reclaiming business. The Company has
financed its working capital requirements through operating cash
flow, a $1.0 million term loan and $3.0 million working capital
revolving line of credit obtained from a bank (together the "Credit
Facility") and through borrowings from its stockholders and
officers.
Net cash provided by operating activities for the years ended
September 30, 1995 and 1994 was $782,043 and $1,035,520,
respectively. The net cash provided from operating activities in
the 1995 period is primarily attributable to the Company's earnings
and non cash expenses offset primarily by increases in accounts
receivable and other prepaid expenses and other current assets.
Net cash used in investing activities of $2,807,743 primarily
reflects the acquisition of the assets of Global and capital
expenditures. The net cash provided by financing activities of
$5,467,620 primarily reflects the proceeds from the exercise of
common stock warrants during the period.
The Company had cash and cash equivalents of $4,027,349 and
$585,429 at September 30, 1995 and September 30, 1994,
respectively.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that cash flow from
operations, proceeds from the recent exercise of common stock
warrants, and its Credit Facility that sources of cash are
sufficient to satisfy its contemplated cash requirements for at
least 12 months. These assumptions give full effect to the
Company's current and desired levels of refrigerant inventory,
including R-12 and R134a; recycling and recovery equipment; joint
venture arrangements and planned capital expenditures. As of
September 30, 1995 the Company had purchase commitments to take
$1,751,000 from vendors, including approximately $1.3 million to
Wynn's Climate Systems, Inc. ("Wynn's"). Of these purchase
commitments as of December 31, 1995 the Company took delivery of
approximately $845,000 from Wynn's. The Wynn's assets will be paid
for over the following twelve month period with such payments
amortized in even monthly installments. In the event that the
Company's plans change, its assumptions change or prove to be
inaccurate to fund operations (due to unanticipated expenses,
technical problems or difficulties otherwise), the Company could be
required to seek additional financing sooner than anticipated.
The Credit Facility provides for advances bearing interest per
annum at the Bank's prime rate (currently 8-1/4%) plus 1.0% for
working capital advances and 1.5% for term loans and is secured by
a pledge of substantially all the Company's assets and the personal
guarantee of George Cannan, Sr., the Company's President, Chief
Executive Officer and principal stockholder. The Credit Facility
expires on May 15, 1996. The Company expects to renew the Credit
Facility with the Bank during May 1996.
As of the date of this Report, other than as set forth in this
Report, the Company has no material commitments for capital
expenditures, including in connection with research and
development, acquisition of plant and equipment and additional
employees.
Seasonality
Sale of R-12 are highly seasonal, with Company shipments of
such products heavily concentrated in the winter and spring (second
and third fiscal quarters), reflecting sales in advance of the
seasonal use of automobile air conditioning systems in most regions
of the United States. The Company expects that sales of R-134a for
use in servicing automobile air conditioning systems will also be
seasonal in nature. Accordingly, the first and fourth fiscal
quarters of the Company's operations have been characterized by
inventory build-up and seasonal operating losses resulting in
periodic cash flow difficulties, which in the past necessitated
loans from the Company's stockholders and which currently is
adequately handled by the Company's credit facility. In addition,
based on experience to date, the Company anticipates that a
substantial portion of its customers for refrigerant recycling and
recovery equipment, particularly System 1, will place their orders
for equipment during the second and third fiscal quarters.
Recently Issued Accounting Standards
The Company has not adopted the Statement of Financial
Accounting Standards No. 121 (SFAS 121) "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS 121 was issued in March 1995 and is effective
for fiscal years beginning after December 15, 1995. The Company
believes that the adoption of this accounting standard will not
have a material effect on the Company's consolidated financial
position or results of operations. The Company has not adopted
Statement of Financial Accounting Standards No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation." SFAS 123 was issued
October 1995 and is effective for financial statements for fiscal
years beginning after December 15, 1995. When adopted, certain
disclosures are required for fiscal years that begin after December
15, 1994. SFAS 123 allows for alternative methods of accounting
for stock-based compensation arrangements with employees. The
Company currently is undecided as to what method of adoption it
will utilize.
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Company as of the
date of this Proxy Statement are:
Name Age Position
George Cannan, Sr. 52 Chairman
and Director
Mitchell L. Dong 43 President and
Director
B. Brinkerhoff McCagg 33 Chief Executive
Officer, Director
Richard G. Schmeling 43 Vice President, Finance
and Chief Financial
Officer
George Cannan, Jr. 26 Director
Caroline Costante 34 Secretary and
Director
Carlos E. Aguero 42 Director
John Stefiuk 45 Director
George Cannan, Sr. founded Environmental Materials Corp.
("EMC") a wholly-owned subsidiary of the Company in 1975 and has
been President, Chief Executive Officer and a director of EMC since
that time. Mr. Cannan founded the Company in 1989 and was
President and Chief Executive Officer until December 31, 1995 and
has been Chairman of the Board and a director of the Company since
1989. In July 1992, EMC became a wholly-owned subsidiary of the
Company. Mr. Cannan has been responsible for all phases of the
Company's operations since its inception. Prior to founding EMC,
Mr. Cannan was a manufacturer's representative in the automotive
industry.
Carlos E. Aguero is President and Chief Executive Officer of
Continental Waste Industries, Inc., a publicly traded waste
management company since its founding in 1988. From 1985 to 1988
Mr. Aguero was employed with the certified public accounting firm
of Gralnick, Strauss, D'Angerio, where he worked exclusively in
their waste industry services practice. From 1985 to 1990,
concurrent with other responsibilities, he served as comptroller
for the Pennsauken (New Jersey) Solid Waste Management Authority.
From 1977 to 1981, and or a short period in 1983, he worked for
Coopers & Lybrand, leaving the company as Audit Supervisor. Mr.
Aguero received a bachelors' degree in Accounting and International
Business from Upsala College and is a certified public accountant.
Mitchell L. Dong became a director and President of the
Company on December 31, 1995. He has been president and a director
of FulCircle since 1991. Mr. Dong has been president and a
director of Chronos Asset Management, an investment management
firm, since October 1995. Mr. Dong was president of Tellus, Inc.
from January 1986 until September 1991, and President of Mitex,
Inc. from May 1980 to December 1995. Mr. Dong holds a B.A. from
Harvard University.
B. Brinkerhoff McCagg became a director and Chief Executive
Officer of the Company on December 31, 1995. Mr. McCagg has been
a vice-president and director of FulCircle since co-founding it in
September 1991. For the past five years Mr. McCagg has managed all
aspects of FulCircle's operations as its Chief Executive Officer.
Prior to September 1991, Mr. McCagg worked for three years in the
investment banking departments at Drexel Burnham Lambert and Paine
Webber. Mr. McCagg holds an MBA from the Wharton Business School.
Richard G. Schmeling has been Vice President and Chief
Financial Officer since February 1, 1993. From February 1991 to
January of 1993, Mr. Schmeling served as Senior Vice President of
Investment Banking and Corporate Finance at Laidlaw Holdings, Inc.
Prior thereto, Mr. Schmeling served as a principal at Investcorp
International, Inc., an internationally prominent investment bank
specializing in buyouts where he focused on corporate acquisition,
due diligence and post-acquisition corporate development. From
1987 to 1989, he was a Vice President at Bear, Stearns & Co., Inc.,
specializing in private placement underwriting. Previous to that,
Mr. Schmeling held various commercial banking positions for various
East Coast and international financial institutions. Mr. Schmeling
received an AB in Economics and an MBA in Finance and Accounting at
Columbia University.
George Cannan, Jr. has been a director since July 1992. Mr.
Cannan formerly served as a Vice President primarily involved with
the marketing efforts for the Company's refrigerant recycling and
recovery equipment. Mr. Cannan is a 1991 graduate from the
University of Miami with a B.S. degree in marketing and finance.
Since 1995 Mr. Cannan has been employed as a financial consultant
with Merrill Lynch. George Cannan, Sr. and George Cannan, Jr. are
father and son.
Caroline Costante has been Secretary of the Company since its
inception and a director of the Company since July 1992. Ms.
Costante has been employed by EMC since 1979 and is responsible for
the overall administration of the operations of EMC.
John Stefiuk is the President of Federal Bronze Products, Inc.
a metal servicing center and representative agency based in Newark,
New Jersey. Mr. Stefiuk joined Federal Bronze in 1972 and became
President in 1978. During his tenure at Federal Bronze, he has
held various managerial and operating positions.
Information Concerning Board
The Board of Directors did not meet during the 1995 fiscal
year, and acted by unanimous consent 24 times.
The Board of Directors has an Audit Committee and a Compen-
sation Committee, both consisting of George Cannan, Sr., George
Cannan, Jr., B. Brinkerhoff McCagg and John Stefiuk. The Audit
Committee is responsible for reviewing the Company's audited
financial statements, meeting with the Company's independent
accountants to review the Company's internal controls and financial
management practices and examining all agreements or other
transactions between the Company and its directors and officers
(other than those compensation functions assigned to the
Compensation Committee) to determine whether such agreements or
transactions are fair to the Company's shareholders.
The Compensation Committee is responsible for reviewing the
compensation and benefits of the Company's executive officers,
making recommendations to the Board of Directors concerning com-
pensation and benefits for such executive officers and adminis-
tering the Company's stock option plans.
Directors of the Company receive no cash compensation for
serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings.
Officers of the Company are elected annually by the Board of
Directors and hold office at the discretion of the Board.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended
September 30, 1995, 1994 and 1993, cash and certain other
compensation paid or accrued by the Company for the Chief Executive
Officer ("CEO"). No other executive officer had a salary and bonus
in excess of $100,000 during such year:
<TABLE>
<CAPTION>
Annual Compensation
Other Annual Long-Term
Compensation Compensation
Name and Principal
Position Year Salary($) Bonus($) $ Awards
<S> <C> <C> <C> <C> <C>
George Cannan, Sr. 1995 $200,000 0 (1) -
President and CEO 1994 $200,000 0 (1) -
1993 $200,000 0 (1) -
(1) Represents less than 10% of the Executive's compensation.
</TABLE>
Option Grants in Last Fiscal Year
The Company made no grants of stock options during the fiscal year
ended September 30, 1995 to the CEO.
Stock Options Held at End of Fiscal 1995
The following table indicates the total number and value of
exercisable stock options held by the CEO as of September 30, 1995. No
options were exercised by the CEO in the fiscal year ended September
30, 1995:
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
George Cannan, Sr. 90,000 0 $497,250 $0
(1) Based on the last sale price for the Company's Common Stock on September
29, 1995 (the last day the Common Stock traded in the 1995 fiscal year) of
$12.125 per share, as reported by NASDAQ.
Profit Sharing Plan
The Company terminated a profit-sharing plan covering
substantially all of its full-time employees in December 1992,
immediately prior to its initial public offering. Such plan called for
contributions varying from 0% to 15% of eligible salaries as determined
by the Board of Directors. The Company made no contributions to the
profit sharing plan for the fiscal years ended September 30, 1994, 1993
and 1992. The Company made distributions from this plan in the first
half of calendar year 1994, in compliance with tax and other
requirements under applicable law.
1992 Stock Option Plan
The Company maintains a stock option plan (the "Option Plan")
pursuant to which 500,000 shares of Common Stock have been reserved for
issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Internal Revenue Code of
1986, amended (the "Code") or (ii) non-qualified options. ISOs may be
granted to consultants, directors (whether or not they are employees),
employees or officers of the Company. In certain circumstances, the
exercise of stock options may have an adverse effect on the market
price of the Company's Common Stock.
The purpose of the Option Plan is to encourage stock
ownership by certain directors, officers and employees of the Company
and certain other persons instrumental to the success of the Company
and give them a greater personal interest in the success of the
Company. The Option Plan is administered by the Board of Directors.
The Board, within the limitations of the Option Plan, determines the
persons to whom options will be granted, the number of shares to be
covered by each option, whether the options granted are intended to be
ISOs, the duration and rate of exercise of each option, the option
purchase price per share and the manner of exercise, the time, manner
and form of payment upon exercise of an option, and whether restric-
tions such as repurchase rights in the Company are to be imposed on
shares subject to options. ISOs granted under the Option Plan may not
be granted at a price less than the fair market value of the Common
Stock on the date of grant (or 110% of fair market value in the case of
persons holding 10% or more of the voting stock of the Company). The
aggregate fair market value of shares for which ISOs granted to any
employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Non-qualified options
granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant.
Options granted under the Option Plan will expire not more than ten
years from the date of grant (five years in the case of ISOs granted to
persons holding 10% or more of the voting stock of the Company). All
options granted under the Option Plan are not transferable during the
optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution.
As of the date of this Proxy Statement, options to purchase
an aggregate of 500,000 shares of Common Stock are outstanding under
the Option Plan.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of February 23, 1996, the
name and number of shares of Common Stock held by each person known to
the Company to own beneficially more than five percent (5%) of the
Company's Common Stock and the number of shares owned by each director
of the Company, the Company's Chief Executive Officer and its other
four most highly compensated executive officers, and all directors and
executive officers as a group. Each of the following has an address
c/o Environmental Technologies Corp., 550 James Street, Lakewood, New
Jersey 08701. All shares are owned directly by the named person.
Number of
Name Shares Owned Percent of Class(1)
George Cannan, Sr. 1,800,793(2) 45.0%
George Cannan, Jr. 33,750 0.8%
Caroline Costante 93,261(3) 2.2%
John Stefiuk 5,000(4) --
B. Brinkerhoff McCagg 65,000(5) 1.6%
Mitchell L. Dong 30,000(6) 0.7%
Carlos E. Aguero -- --
All Directors and Officers as
a Group (7 persons) 2,022,804(7) 48.0%
_________________________
(1) A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days from the date of
this Proxy Statement upon the exercise of warrants or options.
Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person
(but not those held by any other person) and which are exercisable
within 60 days from the date of this Proxy Statement have been
exercised.
(2) Includes 90,000 shares of Common Stock issuable upon the exercise
of stock options which are presently exercisable.
(3) Includes 20,000 shares of Common Stock issuable upon the exercise
of stock options which are presently exercisable.
(4) Consists of 5,000 shares of Common Stock issuable upon the
exercise of stock options which are presently exercisable.
(5) Consists of 65,000 shares of Common Stock issuable upon the
exercise of stock options, none of which are presently
exercisable.
(6) Consists of 30,000 shares of Common Stock issuable upon the
exercise of stock options, none of which are presently
exercisable.
(7) Includes 90,000, 20,000, and 5,000 shares of Common Stock issuable
to George Cannan, Sr., Caroline Costante, and John Stefiuk,
respectively, upon the exercise of stock options which are
presently exercisable, and 65,000 and 30,000 shares of Common
Stock issuable to B. Brinkerhoff McCagg and Mitchell L. Dong,
respectively, none of which are presently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In order to meet working capital needs during off-peak seasons,
George Cannan, Sr., the Company's President and Chief Executive Officer
has periodically advanced funds to the Company. Such advances, which
are interest free in the case of Mr. Cannan, are repayable on demand.
All such advances from Mr. Cannan were repaid in full in 1995.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 10,000,000 shares of Common
Stock, $.01 par value per share, and 1,000,000 shares of Preferred
Stock, $.01 par value per share. As of the date of this Proxy
Statement, there are 4,000,411 shares of Common Stock outstanding which
are held of record by 31 persons. No shares of preferred stock are
currently outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the
shares voting for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock
are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision
has been made for each class of stock, if any, having preference over
the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby, when issued against the consideration set forth in this
Prospectus, will be, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue preferred stock with such
designation, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights of the
holders of the Company's Common Stock and, in certain instances, could
adversely affect the market price of such stock. In the event of
issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. The Company has no present intention
to issue any shares of its preferred stock.
DESCRIPTION OF FULCIRCLE
General
FulCircle recycles and disposes fluorescent lighting fixtures of
the type commonly found in office, industrial and institutional
buildings. In particular, the Company manages the recycling and
disposal of ballasts, a principal component of such fixtures. Prior to
1985, ballasts were manufactured using hazardous compounds, which
created a need for special handling and disposal procedures when
replacing ballasts or removing them at the end of their useful lives.
Polychlorinated biphenyls (commonly known as PCBs) were widely
used before 1979 as insulators in electrical equipment such as
capacitors, switches and voltage regulators. Virtually all fluorescent
light ballasts manufactured before 1979 contain PCBs. PCBs have been
shown to cause cancer as well as reproductive and developmental defects
in laboratory animals. PCBs do not readily decompose when released into
the environment. Instead, they accumulate in plants and animals,
working their way up the food chain. Between 1979 and 1985, certain
ballasts were manufactured with di (2-ethylhexy) phthalate (DEHP) in
place of PCBs. DEHP has since been identified as a probable human
carcinogen and is listed as a hazardous substance under the Superfund
laws; however, it is not a hazardous waste under the Resource
Conservation and Recovery Act (RCRA) when discarded inside a ballast.
Its use in ballast manufacturing has been discontinued.
Demand for FulCircle's services is triggered when facility owners
replace fluorescent light fixtures with more energy efficient fixtures.
In recent years, lighting manufacturers have made dramatic improvements
in the energy efficiency of fluorescent lighting fixtures. Using
electronic ballasts and new types of fluorescent lamps, the new
fixtures are able to achieve comparable illumination with approximately
25% to 50% less electrical energy than required by older fixtures.
Thus, some light fixture replacements are motivated by cost savings.
More often, however, replacements have been motivated by utility-
sponsored "demand side management" (DSM) programs, where facility
owners are given economic incentives to install replacements.
Management believes FulCircle is well positioned to take advantage of
these DSM programs, although these DSM programs have been declining
recently.
In anticipation of the retirement of older ballasts, driven by
these factors, FulCircle pioneered a disposal solution for ballasts.
The process developed by FulCircle, which its management believes is
among the first companies established exclusively to recycle PCB
ballasts, is to "demanufacture" the ballast. FulCircle separates the
original components, recycles those elements that can be reused, and
repackages the hazardous components for environmentally safe disposal,
typically by high temperature incineration. Over 75% of the weight of
a ballast is copper, steel and aluminum, all of which is recovered,
cleaned and sold to scrap metal dealers to be used in lieu of virgin
metal material. The PCB capacitor and contaminated asphalt potting
material are sent offsite to a licensed hazardous waste disposal
facility.
FulCircle's processing facility is located in Bronx, New York.
The Company serves a nationwide customer base and reaches customers
through nine full-time sales people located near metropolitan areas,
and a marketing program of trade shows, advertising, and mailings.
Industry
Overview
Polychlorinated biphenyls (commonly known as PCBs) were widely
used before 1979 as insulators in electrical equipment such as
capacitors, switches and voltage regulators. A capacitor is a metal
capsule, located inside a ballast, that contains about an ounce of
dielectric fluid. Virtually all fluorescent light ballasts manufactured
before 1979 contain PCBs. PCBs have been shown to cause cancer as well
as reproductive and developmental defects in laboratory animals. PCBs
do not readily decompose when released into the environment. Instead,
they accumulate in plants and animals, working their way up the food
chain.
In 1988, Congress passed the National Ballast Energy Law, which
required that only energy efficient ballasts be installed after April
1, 1990. The Law defined "energy efficient" in terms of an efficiency
index called the Ballast Efficiency Factor, an expression of relative
light output divided by power (watts) input. The most common four- and
eight-foot rapid start fluorescent light fixtures are covered by the
new law, and they must contain ballasts that meet minimum efficiency
standards. Additionally, the Energy Policy Act of 1992 has focused
attention on the lighting industry by providing minimum standards for
energy efficient lamps.
The EPA encourages commercial and industrial firms to send their
used ballasts to high temperature incinerators or hazardous waste
landfills. If a ballast has been punctured or is leaking PCBs, it must
be disposed of according to federal regulations under the Toxic
Substances Control Act (TSCA). See "Industry-Regulatory Factors."
In addition, 30 states currently have regulations or policies that
are more strict than the federal laws on ballast disposal, including 21
states that prohibit disposal in non-hazardous landfills. In the
remaining states, discarded ballasts are regulated as a hazardous,
industrial or special waste that require special handling or disposal.
The increase in the number of states regulating ballast disposal
resulted, in part, from FulCircle's marketing and educational
activities.
Additionally, about half of all non-PCB fluorescent light ballasts
(or one-fourth of the total installed ballast population) contain a
toxic chemical called di (2-ethylhexyl) phthalate (DEHP). DEHP was
used to replace PCBs as a dielectric fluid in ballast capacitors
beginning in 1979. DEHP is listed as a hazardous substance under EPA's
Superfund regulations. Under the Resource Conservation and Recovery
Act ("RCRA"), DEHP is listed as a hazardous waste when it is discarded
in its pure form, but not after it is "used". DEHP is a clear,
odorless, synthetic compound that is used extensively as a plasticizer.
The EPA has classified DEHP as a probable human carcinogen.
Certain ballast manufacturers continued until 1985 to use DEHP in
ballasts for four-foot fixtures and until 1991 in some ballasts for
certain eight-foot fixtures and for certain high intensity discharge
(HID) fixtures. In most cases the replacement for DEHP was a dry
metallic capacitor.
Demand Factors and Market Size
Certain electric utilities grant financial incentives for the
replacement of end users' light fixtures, which most likely contain
PCBs, with systems that are 25% to 50% more energy efficient. The cost
incurred by electric utilities in the construction of new power
generating capacity is extremely high. As such, most utilities in the
U.S. have planned or implemented energy conservation programs designed
to reduce customer demand for electricity, which in turn reduces the
need for additional electrical generating capacity and the concomitant
need for new construction. These programs, collectively referred to as
"demand side management" or "DSM," typically include rebates or
financing to customers for a variety of energy conservation
improvements, particularly for the replacement of existing lighting
systems with new energy-efficient fluorescent lamps and ballasts.
In its 1992 Electric Power Annual, the Energy Information
Administration ("EIA") reports that the aggregated U.S. utility
expenditures for DSM programs had grown from $873 million in 1989 to
$2.2 billion in 1992, a compound annual growth rate of 37%. EIA also
reported that the largest segment of DSM programs is energy efficiency,
which includes lighting retrofitting. Of the end user changes
generated by DSM programs, lighting retrofitting is the most common for
both the commercial and industrial sectors. A 1993 Electric Power
Research Institute survey reports that 90% of the 1992 DSM lighting
retrofitting programs were ongoing, 8% were in the planning stages, and
only 2% had been completed.
In its May 1994 Utility Rebate Guide, the Energy Users News, a
trade publication, found that there were 68 utilities with DSM programs
in 1991 compared to 133 in 1993 and 145 in 1994; however, the number of
utilities with DSM programs is now declining.
The decrease in power demand created through successful DSM poses
a problem for the same utilities that inspired the programs. In order
to keep DSM viable, most states have adopted incentives to reward
utilities for actively pursuing DSM. The Clean Air Act Amendments of
1990 authorized the awarding of "bonus" emissions allowances, available
from 1992 to 1999, but only to utilities that both (i) pursue DSM and
(ii) operate under regulatory regimes that do not create financial
penalties for DSM. Currently 34 out of 50 states have existing or
proposed DSM incentives for utilities.
The character and form of DSM programs has evolved over time.
Because regulators are encouraging more competition, there is a trend
toward "retail wheeling." Retail wheeling allows medium and large
sized power consumers to purchase power from numerous independent power
suppliers, not just their local utility. Under this new regulatory
regime, DSM will be provided by all power suppliers, not just today's
existing electric utilities. This has slowed the growth and cause the
decline of DSM programs.
The nature of DSM rebates to customers is also changing.
Initially, utilities offered large rebates to relatively few customers.
Based on more favorable responses than initially anticipated, however,
utilities have reduced rebate levels on a per customer basis and
decreasing its DSM budgets.
Even without utility-sponsored DSM programs, simple cost
considerations often provide sufficient incentive for facility owners
to replace their old fluorescent fixtures with new energy efficient
fixtures. In recent years, lighting manufacturers have made dramatic
improvements in the energy efficiency of fluorescent lighting fixtures.
Using electronic ballasts and new fluorescent lamps, the new fixtures
are able to achieve comparable illumination with approximately 25% to
50% less the electrical energy than required by older fixtures. In
areas with high electric rates, such as the Northeast, Middle Atlantic,
parts of the Midwest and Southwest, and California, the payback on an
investment in energy-efficient lighting can be as short as six months
to three years. Where electric rates are low ($0.02 to $0.05 per
kilowatt hour), the payback will be longer, typically three to seven
years or longer.
The U.S. EPA created a program called the Green Lights Program in
early 1991. By encouraging the installation of energy efficient
lights, both electrical usage and power plant emissions would be
reduced. In its Fourth Annual Green Lights Report, published in March
1995, the EPA has estimated that if all lighting in the U.S. could be
retrofitted with energy efficient models, the country's demand for
electricity would be cut by 10% and the reduction in carbon dioxide
emissions would be the equivalent of eliminating one-third of the U.S.
automobile fleet. Full implementation of Green Lights upgrades by
current participants would save five million kilowatts of electricity,
preventing $7.5 billion in power plant construction or the equivalent
of 15 coal-fired plants.
The EPA Green Lights Program has succeeded in enlisting more than
1,600 large institutional and corporate participants who have committed
to replacing their older fluorescent lighting fixtures. This program
continues to grow. The most recent EPA figures estimate that these
participants have 780 million square feet committed to the Green Lights
Program. Given the EPA's estimate of 80 billion eligible square feet,
less than 1% of those eligible have joined the Green Lights Program to
date. Of the amount committed to Green Lights, 10% has been surveyed
for retrofitting and only 1% has actually been retrofitted as of 1994;
thus, ballast replacement is not yet a mature industry.
While both utility-sponsored DSM programs and independent
commercial and industrial lighting retrofitting offer substantial
energy and dollar savings, these efforts have created an environmental
problem by accelerating the retirement and disposal of ballasts
containing PCBs and DEHP.
Based on various industry estimates, there are approximately one
billion ballasts in the installed ballast base.
When FulCircle was founded in 1991, it estimated that, of those
one billion ballasts, 50% contain PCBs, 25% contain DEHP and 25% are
not hazardous. This estimate relies, in part, on the fact that older,
magnetic ballasts have a long useful life, typically 20-30 years.
According to a U.S. Department of Energy study, 80% of the buildings in
the U.S. were constructed prior to 1980, and PCB ballasts were the norm
until 1979. Furthermore, estimates of the number of DEHP ballasts is
based on census statistics on the number of magnetic ballasts
manufactured between 1979 and 1985, and the number of eight-foot and
ballasts manufactured between 1985 and 1991.
Replacement of the magnetic ballasts with the new electronic
ballasts drives the disposal market. The penetration of electronic
ballasts into the installed ballast base did not occur until the late
1980's and early 1990's when DSM and Green Lights raised awareness.
Census statistics show an exponential increase in the penetration of
total electronic ballasts manufactured:
Millions Of Units
1988 1
1989 1
1990 2
1991 5
1992 12
1993 24
1994 30
Total 75
With an installed base of one billion ballasts, only 7.5% have been
replaced as of 1994; thus, electronic ballast replacements and the
corresponding disposal market are still in their early stages. Based
on an average recycling price of $2.00 per ballast and an aggregate
market of one billion ballasts, of which 50% contain PCBs and 25% DEHP,
management believes that the remaining potential market for recycling
services for PCB ballasts is $900 million and for DEHP is $450 million
(net of the 7.5% of the PCB and DEHP ballast population believed to
have already been replaced).
Services - Disposal and Recycling
FulCircle recycles and disposes of the hazardous wastes contained
in used ballasts. FulCircle has developed a unique "demanufacturing"
process that efficiently separates the ballast into recyclable products
and hazardous waste. Both PCBs and DEHP are interchangeably demanu-
factured using the same plant and processes.
FulCircle has invested over a half million dollars in technology
and automation, and its management believes that this has made
FulCircle the most efficient and lowest cost producer in the ballast
recycling industry.
As parts of its service, FulCircle subcontracts with haulers to
pick-up ballasts from customers. At the point of receipt, ballasts
have already been packaged in sealed drums and are ready for demanu-
facturing. The ballasts are shipped by truck to the FulCircle facility
in New York. At the plant, drums of ballasts are weighed, labeled for
verification purposes, stored and are demanufactured on its processing
lines.
The disposal process pioneered by FulCircle separates the original
components, recycles all materials that can be economically recovered
and repackages the now volume reduced hazardous elements for safe
destruction. Over 75% of the weight of a ballast is copper, steel and
aluminum which is recovered, cleaned and sold to scrap metals dealers.
Only the PCB capacitor and contaminated asphalt potting material are
sent off-site to an incinerator of PCB waste or to a chemical waste
landfill, depending on the customer's preference.
FulCircle has PCB disposal contracts with two major operators
which collectively control four PCB incinerators: Rollins Environ-
mental Services and Chemical Waste Management. The Company has a PCB
disposal contract with two major PCB landfill operators, Chemical Waste
Management and U.S. Ecology.
In addition to FulCircle's New York headquarters, it has offices
in nine regional sales offices located across the country. Many of the
sales persons have significant prior experience in selling hazardous
waste disposal services or selling lighting products. Sales persons
are responsible for sales, marketing and customer service in their
respective territories.
FulCircle has extensive educational and promotional materials
(including the "Practical Guide to Ballast Disposal" with over 100,000
copies in print), which are distributed through trade journals,
targeted mailing campaigns and conferences. FulCircle's sales
personnel market at some 20 conferences and conventions each year.
FulCircle also advertises in many magazines targeted at the lighting,
DSM, electric utility, waste disposal and environmental remediation
industries.
Competition
The market for FulCircle's services is highly competitive.
FulCircle competes with numerous well-established companies which
market ballast recycling services some of which possess substantially
greater financial and other resources than FulCircle.
FulCircle believes that it competes on the basis of price,
reliability and reputation.
FulCircle believes that it is one of the largest companies in its
industry segment.
Competing Ballast Management Processes
1. Leaving disconnected ballasts in the installed fixture. Such
practice is not recommended by fire inspectors or fire insurers
because when exposed to fire PCBs can oxidize into dioxins or
furans, which are deadly carcinogens and greatly increase the
potential for toxicity in a fire and add to postfire cleanup
costs.
2. Municipal solid waste landfills. While prohibited or heavily
regulated in the majority of the states this option is less
expensive but may result in future Superfund liabilities.
3. Hazardous waste landfills. While legal and relatively inexpensive
to use most hazardous landfills are not designed to accept PCB
liquids or materials with over 500 parts per million (ppm) PCBs.
Ballasts have 500,000 to 1 million ppm of PCBs in liquid form.
This option may also lead to Superfund liabilities.
4. Whole ballast incineration. This option ensures permanent
destruction of the PCBs. PCB incineration is expensive because
the entire ballast, including the recyclable materials, is
destroyed. It is also environmentally less desirable because it
wastes recyclable resources.
5. Recycling/PCB incineration process. Such services as those
offered by FulCircle provide the most cost effective and
environmentally prudent option. The FulCircle demanufacturing
process is less costly than whole ballast incineration and
environmentally safer than other competing ballast management
processes.
Regulatory Factors
The Toxic Substances Control Act ("TSCA") does not regulate the
disposal of non-leaking, intact "small capacitors" (such as those
contained in lighting ballasts) in municipal solid waste landfills.
However, under the Superfund laws (Comprehensive Environmental
Response, Compensation and Liability Act or "CERCLA", and the Superfund
Amendments and Reauthorization Act or "SARA"), PCBs are specifically
listed as a "hazardous substance". This means that if there is a
release or threat of release of over one pound of PCBs (equivalent to
the amount of PCBs in approximately 16 ballasts), the party disposing
of the ballasts is required to notify the National Response Center and
is responsible for corrective action for cleanup costs and damages to
the environment. A conservative interpretation of CERCLA is that the
disposal of more than 16 ballasts in a municipal solid waste landfill
constitutes a CERCLA PCB release, which is unlawful, and triggers an
immediate Superfund cleanup requirement with potential contamination
liabilities.
CERCLA also requires that the Department of Transportation list
and regulate the transportation of all hazardous materials, including
PCBs.
While it is legal to dispose of ballasts under the appropriate
circumstances in a sanitary landfill, the EPA encourages disposers of
large quantities of PCB ballasts to treat them as if they were a
regulated waste. The preamble to the May 31, 1979 PCB Final Rule in
the Code of Federal Regulations (40 CFR Part 761) makes it clear that
the intent of the Small Capacitor TSCA disposal rule is to allow
"random disposal" in landfills only by "household and other infrequent
disposers". In the case of large quantities of small PCB capacitors by
commercial and industrial activities, which "pose a somewhat larger
environmental risk", the EPA strongly encourages the voluntary disposal
of small PCB capacitors in chemical waste landfills or high-temperature
incinerators.
In December 1994, the EPA has also disclosed plans to regulate PCB
ballast disposal; management expects that the release and
implementation of such regulations will further expand the
attractiveness of the ballast recycling option offered by the Company.
There are two categories of new regulations which affect PCB ballast
disposal: (i) elimination of the "Small Capacitor Exemption", and (ii)
regulation of the entire ballast as a PCB waste because the asphalt
potting material used in ballasts usually contains in excess of 50 ppm
of PCBs. Currently, TSCA does not regulate small capacitors (less than
3 pounds of dielectric fluid) because they are too small and too dis-
persed; ballasts are not regulated because they contain a small capa-
citor. FulCircle, Rollins Environmental Services and the Hazardous
Waste Treatment Council ("HWTC") have petitioned the U.S. EPA to
eliminate the Small Capacitor Exemption. The EPA solicited comments
from the public on eliminating the Small Capacitor Exemption as part of
its proposed modifications to its PCB regulations. These are only
draft regulations, however, and final regulations could take several
years to complete.
The regulation of the asphalt potting material requires ballast
recyclers, including FulCircle, to obtain two additional permits to
continue their operations. First, ballast recyclers would need a
Commercial Storer approval by the EPA for the total weight of all
ballasts processed and PCB compounds stored in their facility. Second,
ballast recyclers would need an Alternative Disposal Technology
Approval by the EPA, which sets limits (100m/100 cm2) with respect to
the "cleanliness" of the recycled metals shipped for recycling, smelt-
ing or reclamation, and other conditions. FulCircle received those
permits on October 31, 1994. Only two other ballast recyclers have
such permits. Because of the costs of obtaining these permits as well
as the typical approval time of two years.
Receipt of these EPA permits has given FulCircle a competitive
advantage. FulCircle's permits may effectively raise the standard by
which all other recyclers are judged by customers. It cost FulCircle
about approximately a half million dollars to apply for and meet the
conditions of these EPA permits, and many of the smaller recyclers are
not believed to have the resources to achieve the same regulatory
status. Management expects that, as a result of these new regulatory
measures, FulCircle's market share may increase.
Another area of growing regulatory attention is the disposal of
fluorescent lamps. Fluorescent light bulbs have historically been
manufactured with mercury and, therefore, thee disposal requires
special handling. Under their Green Lights program, the EPA also
encourages environmentally responsible disposal or recycling of all
lighting upgrade wastes, including mercury lamps. The EPA and lamp
manufacturers have conducted detailed studies, which have concluded
that these mercury lamps are hazardous waste because they fail the
Toxicity Characteristic Leaching Procedure (TCLP).
The EPA has proposed new regulations to exempt mercury lamps, in
part or in whole, from hazardous waste regulations, which are too
cumbersome for this type of waste stream. Applying the hazardous waste
regulations to lamps would be impractical because the quantities are
very small and there are many users. The EPA has proposed special
regulations that address lamp disposal and these are currently
receiving comments from the public. This proposal is very contro-
versial, drawing much attention to the industry in general and ballast
disposal in particular. This attention highlights the need for proper
disposal of all lighting waste, including ballasts. Thus, the atten-
tion on lamp disposal is favorable for ballast disposal because of the
increased exposure and publicity. Large conservative companies and
institutions concerned about liability are becoming increasingly
concerned about proper lamp and ballast disposal.
Facilities
FulCircle's processing facility is located in the Hunt's Point
section of Bronx, New York, where it leases a 13,500 square foot
building, which has been customized to the needs of FulCircle's
business. The lease expires June 30, 1999 with one option to renew.
The building was customized for FulCircle's business and FulCircle has
an EPA-approved closure plan for the facility when FulCircle vacates
it.
Management
The Board of Directors and executive officers of FulCircle
consisted of Carlos E. Aguero, Mitchell L. Dong and B. Brinkerhoff
McCagg, who are also directors of the Company as of December 31, 1995.
See "Directors and Officers."
Employees
FulCircle has 57 full-time employees, two of whom are in
management or finance and administration, 15 of whom are in sales,
marketing and customer support, and 40 of whom work in production.
None of the employees of FulCircle is subject to a collective
bargaining agreement, and management believes that relationships with
FulCircle's employees are satisfactory.
Insurance
In addition to general liability and worker's compensation
insurance, FulCircle carries pollution liability insurance in the
amount of $5 million. FulCircle encourages its vendors to carry the
following: PCB's incinerator's insurance in the amount of $10 million
and hazardous waste transporter's insurance in the amount of $5
million. While management of FulCircle believes such coverage to be
adequate, there can be no assurance that such insurance will be
adequate to cover potential claims or that the present level of
coverage will be available in the future at reasonable costs.
Patents and Trademarks
The Company has no patents or registered trademarks.
1996 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
Summary Description of Options and Tax Status
The full text of the 1996 Incentive and Non-Qualified Stock Option
Plan (the "1996 Plan") set forth as Exhibit B to this Proxy Statement
and reference is made thereto for a complete statement of the terms of
that document.
Shares Reserved for Issuance. Pursuant to the terms of the 1996
Plan, five hundred thousand (500,000) shares of the company's Common
Stock are reserved for issuance thereunder. In the event there is any
change in the number of issued shares of the Common Stock of the
company without new consideration to the company (such as by stock
dividends or stock splits), the number of shares reserved for issuance
under the Stock Option Plan, the number of shares subject to any
outstanding option and the option price per share of each outstanding
stock option shall be appropriately adjusted. Similarly, if the
Company shall be party to a merger, consolidation, reorganization, sale
or similar occurrence, equitable adjustment in the options may be made.
Administration of Plan; Award of Options. The 1996 Plan is
administered by the Board of Directors. Pursuant to its authority, the
Board may grant options to purchase shares of Common Stock reserved
under the Plan to all employees of the Company.
Amendments. The Board of Directors may amend the Plan as it deems
advisable. No amendment may, without further approval of the
stockholders of the Company within twelve months before or after the
date on which such amendment was adopted, (a) increase the total number
of shares which may be made the subject of options granted under the
1996 Plan, either in the aggregate or to any individual employee, (b)
change the manner of determining the option price, (c) change the
criteria of determining which employees are eligible to receive
options, (d) extend the period during which options may be granted or
exercised, or (e) withdraw the administration of the 1996 Plan from the
Board of Directors.
Vesting. Non-Qualified options granted to employees under the
1996 Plan are to vest and become exercisable at rates determined by the
Board of Directors at the time of grant. For a description of these
conditions, see the subsection below entitled "Termination of
Employment". The incentive options granted to employees under the 1996
Plan vest upon date of grant.
Exercise Period. The options granted to employees under the 1996
Plan may not be exercised more than ten (10) years after the 1996 Plan
is approved by the Company's stockholders.
Termination of Employment. Outstanding options must be exercised
during employment with the Company or within three months after
termination of employment with the company (other than by reason of
death or permanent disability, in which case they must be exercised
within twelve months after termination). In addition, options are
exercisable only to the extent that they are vested as of the date of
termination of employment.
Nontransferability. Each option granted under the 1996 Plan is
not transferable by the holder except by will or the laws of descent
and distribution of the State wherein the holder is domiciled at the
time of his death.
Sale or Public Offering of the Company. In the case of (i) a sale
of all or substantially all of the company's assets outside the
ordinary course of business; (ii) an offer to purchase at least a
majority of the Company's issued and outstanding common stock or an
offer to the Company's stockholders to tender for sale at least a
majority of the Company's issued and outstanding common stock, which
offer is accepted or tender made with respect to at least a majority of
the Company's issued and outstanding shares of Common Stock; (iii) the
merger or consolidation of the company with another corporation or
entity; (iv) a public or private offering of the company's Common
Stock, whether of newly or previously issued shares; or (v) a dissolu-
tion or liquidation of the Company, options granted but unexercised
shall, in the discretion of the Board of Directors, become fully vested
and exercisable for a period of thirty days from the date notice of
such sale or public offering is given to the optionees. Upon the
expiration of the thirty day period, the Board of Directors in its
discretion may suspend or cancel the right of any optionee to exercise
such options.
Federal Income Tax Treatment of Options. The options to be
granted under the 1996 Plan may be deemed to be qualified or non-
qualified within the meaning of the Code, in the discretion of the
committee. Generally, an optionee will recognize ordinary income upon
the exercise of a non-qualified stock option (or, if the stock subject
to the option is restricted within the meaning of Code Section 83 and
the optionee does not otherwise elect to recognize income upon the
exercise of the stock option, at such time as the shares become trans-
ferable or are no longer subject to a substantial risk of forfeiture)
in an amount equal to the excess (if any) of the fair market value of
the shares purchased at the time of exercise over the exercise price.
The Company will be entitled to an income tax deduction in the same
amount and at the same time as the optionee recognizes such income.
Upon the sale of shares which were purchased upon the exercise of an
option, the optionee will recognize capital gain or loss measured by
the difference between the amount realized on the sale and the fair
market value of the shares at the time income was previously recognized
in connection with the exercise (or possibly the grant) of the stock
option. Such capital gain or loss will be short-term or long-term,
depending upon the length of time the shares were held by the optionee.
The Board of Directors recommends that the stockholders vote FOR
the approval and ratification of the Company's 1996 Incentive and Non-
Qualified Stock Option Plan.
<PAGE>
GENERAL
The expense of this solicitation is to be borne by the Company.
The Company may also reimburse persons holding shares in their names or
in the names of their nominees for their expenses in sending proxies
and proxy material to their principals.
Unless otherwise directed, the persons named in the accompanying
form of proxy intend to vote all proxies received by them in favor of
the election of nominees to the Board herein and the ratification of
selected independent auditors. All proxies will be voted as specified.
Management does not intend to present any business at the meeting
other than that set forth in the accompanying Notice of Annual Meeting,
and it has no information that others will do so. If other matters
requiring the vote of the shareholders properly come before the meeting
and any adjournments thereof, it is the intention of the persons named
in the accompanying form of proxy to vote the proxies held by them in
accordance with their judgment on such matters.
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
Shareholder proposals for inclusion in the proxy materials related
to the 1997 Annual Meeting of Shareholders must be received by the
Company no later than November 1, 1996. A shareholder must have been
a record or beneficial owner of the Company's common stock for at least
one year prior to November 1, 1996, and the shareholder must continue
to own such shares, worth at least $1,000, through the date on which
the Meeting is held.
The Company's by-laws outline procedures, including minimum notice
provisions, for shareholder nominations of directors and other
shareholder business to be brought before shareholders at the Annual
Meeting. A copy of the pertinent by-law provisions is available upon
request to Richard G. Schmeling, Vice President, Finance, Environmental
Technologies Corp., 550 James Street, Lakewood, New Jersey 08701.
FORM 10-K ANNUAL REPORT
Upon written request by any shareholder entitled to vote at the
Meeting, the Company will furnish that person without charge a copy of
the Form 10-K Annual Report which it filed with the Securities and
Exchange Commission for 1995, including consolidated financial
statements and schedules. The consolidated financial statements
included in such Form 10-K are no longer the Company's primary
financial statements as a result of the acquisition consummated on
December 31, 1995 and accounted for as a pooling of interests. If the
person requesting the report was not a shareholder of record on
February 23, 1996, the request must contain a good faith representation
that the person making the request was a beneficial owner of the
Company's common stock at the close of business on that date. Requests
should be addressed to Richard G. Schmeling, Vice President, Finance,
550 James Street, Lakewood, New Jersey 08701.
Lakewood, New Jersey
June ___, 1996
<PAGE>
EXHIBIT INDEX
Page
XHIBIT A - AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)
EXHIBIT B - PRIMARY CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDED SEPTEMBER 30, 1995 . . . . . . . . . . .57
EXHIBIT C - FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996.. . . . . . . . .(b)
EXHIBIT D - SUPPLEMENTAL FINANCIAL STATEMENTS PRIOR TO
CONSUMMATION OF THE BUSINESS COMBINATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
ENVIRONMENTAL TECHNOLOGIES CORP. AS PREVIOUSLY
INCLUDED IN FORM 10-K FOR YEAR ENDED
SEPTEMBER 30, 1995 . . . . . . . . . . . . . . . . . . . .(c)
EXHIBIT E - SUPPLEMENTAL FINANCIAL STATEMENTS OF FULCIRCLE
RECYCLERS, INC.. . . . . . . . . . . . . . . . . . . . . .(d)
EXHIBIT F - 1996 STOCK OPTION PLAN . . . . . . . . . . . . . . . . . . . . . 80
________________
(a) Previously filed with the Company's Form 8-K filed on May 8, 1995.
(b) Previously filed on May 15, 1996.
(c) Previously filed with the Company's Form 10-K filed on January 11,
1996.
(d) Previously filed with the Company's Form 8-K filed on March 15,
1996.
<PAGE>
Independent Auditors' Report
The Board of Directors
Environmental Technologies Corp.
We have audited the accompanying consolidated balance sheet of
Environmental Technologies Corp. and subsidiaries as of September 30,
1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying
consolidated financial statements of Environmental Technologies Corp.
and subsidiaries as of September 30, 1994 and for the years ended
September 30, 1994 and 1993 were audited by other auditors whose report
thereon dated December 7, 1994 expressed an unqualified opinion on
those consolidated financial statements. We did not audit the
financial statements of FulCircle Recyclers, Inc., acquired pursuant to
a business combination as of December 31, 1995, accounted for as a
pooling-of-interests, which statements reflect total assets and net
sales constituting 7% and 17%, respectively, of the related
consolidated totals in 1995. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for FulCircle Recyclers,
Inc., is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the 1995 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
Environmental Technologies Corp. and subsidiaries as of September 30,
1995, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
December 15, 1995, except as to
note 1(b), which is as of
December 31, 1995
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1995 and 1994
Assets 1995 1994
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,027,349 585,429
Accounts receivable, less allowance
for doubtful accounts of $106,400 in
1995 and $61,500 in 1994 4,939,418 3,377,462
Inventories 9,946,713 5,220,438
Prepaid expenses and other current
assets 773,086 536,760
Total current assets 19,686,566 9,720,089
Property and equipment, net 1,629,553 608,980
Goodwill, net 714,905 -
Other assets 133,357 3,097,881
22,164,381 13,426,950
Liabilities and Stockholders' Equity
Current liabilities:
Note payable - related party - 252,144
Notes payable 500,000 1,661,749
Current portion of long-term debt 399,996 2,437
Accounts payable 2,516,416 2,690,691
Accrued liabilities 781,022 629,224
Total current liabilities 4,197,434 5,236,245
Long-term debt, excluding current
portion 366,673 3,396
Stockholders' equity:
Preferred stock, $.01 par value.
Authorized 1,000,000 shares; none
issued or outstanding - -
Common stock, $.01 par value.
Authorized 10,000,000 shares; issued
(including 1,150,000 shares to be
issued) (note 1(b)) 5,150,411 shares
in 1995 and 4,013,942 shares in 1994 51,504 40,139
Additional paid-in capital 12,823,634 4,725,134
Retained earnings 4,725,136 3,422,036
Total stockholders' equity 17,600,274 8,187,309
Commitments and contingencies $ 22,164,381 13,426,950
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
<S> <C> <C> <C>
Net sales 34,677,971 24,727,126 21,894,610
Cost of sales 24,914,443 17,400,125 15,088,028
Gross profit 9,763,528 7,327,001 6,806,582
Selling, general and
administrative expenses 6,198,552 4,645,235 4,818,286
Operating income 3,564,976 2,681,766 1,988,296
Interest expense 296,534 207,884 157,130
Other (income) expenses,
net (52,212) (62,459) 66,173
Income before
income tax expense 3,320,654 2,536,341 1,764,993
Income tax expense 1,338,000 1,032,789 709,303
Net income 1,982,654 1,503,552 1,055,690
Net income per common
and common equivalent shares:
Primary $ .43 .37 .27
Fully diluted $ .42 .37 .27
See accompanying notes to
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995, 1994 and 1993
Common Stock
Shares Amount
<S> <C> <C>
Balance at September 30, 1992 3,281,250 $ 32,813
Issuance of common stock in
connection with Refrigerant
Reclaim Services, Inc. pooling 82,692 826
Issuance of common stock
and warrants 800,000 8,000
Distribution to stockholders - -
Contributions to capital - -
Shares contributed to stockholder (150,000) (1,500)
Purchase and effective retirement
of pooled subsidiary stock - -
Proforma tax adjustment - -
Net income - -
Balance at September 30, 1993 4,013,942 40,139
Distributions to stockholders - -
Contribution of notes payable
to stockholders - -
Proforma tax adjustment - -
Net income - -
Balance at September 30, 1994 4,013,942 40,139
Issuance of common stock
for Global Refrigerant
Management, Inc. 58,089 581
Proceeds from exercise of warrants 1,078,380 10,784
Distributions to shareholders - -
Contributions to capital - -
Adjustment to conform fiscal year
of Fulcircle Recyclers, Inc. and
eliminate duplicative net income - -
Proforma tax adjustment - -
Net income - -
Balance at September 30, 1995 5,150,411 51,504
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995, 1994 and 1993
Add'l Paid- Retained
In Capital Earnings Total
<S> <C> <C> <C>
Balance at September 30, 1992 $376,158 1,257,554 1,666,525
Issuance of common stock in
connection with Refrigerant
Reclaim Services, Inc. pooling 181,330 (59,162) 122,994
Issuance of common stock
and warrants 3,611,042 - 3,619,042
Distribution to stockholders - (80,000) (80,000)
Contributions to capital 173,470 - -
Shares contributed to stockholder 1,500 - -
Purchase and effective retirement
of pooled subsidiary stock - (25,000) (25,000)
Proforma tax adjustment 61,762 - 61,762
Net income - 1,055,690 1,055,690
Balance at September 30, 1993 4,405,262 2,149,082 6,594,483
Distributions to stockholders - (230,598) (239,598)
Contribution of notes payable
to stockholders 120,650 - 120,650
Proforma tax adjustment 199,222 - 199,222
Net income - 1,503,552 1,503,552
Balance at September 30, 1994 4,725,134 3,422,036 8,187,309
Issuance of common stock
for Global Refrigerant
Management, Inc. 499,419 - 500,000
Proceeds from exercise
of warrants 7,200,382 - 7,211,166
Distributions to shareholders (70,566) (619,923) (690,489)
Contributions to capital 350,000 - 350,000
Adjustment to conform fiscal year
of Fulcircle Recyclers, Inc. and
eliminate duplicative net income - (59,631) (59,631)
Proforma tax adjustment 119,265 - 119,265
Net income - 1,982,654 1,982,654
Balance at September 30, 1995 12,823,634 4,725,136 17,600,274
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1995, 1994 and 1993
<S> <C> <C> <C>
Cash flows from
operating activities:
Net income $ 1,982,654 1,503,552 1,055,690
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Proforma tax
adjustment 119,265 199,222 61,762
Conform fiscal year
of FulCircle Recycler,
Inc. and eliminate
duplicate net income (59,631) - -
Depreciation and
amortization 400,569 200,045 114,471
Provision (benefit) for
bad debt, net 185,124 38,551 (25,687)
(Gain) loss on sale of
equipment - (24,474) 70,637
Unrealized (gain) loss
on marketable securities - (21,568) 5,108
(Increase) decrease in assets:
Accounts receivable (1,444,943) (783,798) (1,026,834)
Inventory (123,688) (533,072) (1,663,844)
Prepaid expenses and
other current assets (219,354) (402,192) (46,594)
Other assets (35,476) (64,917) 221,489
Increase (decrease in liabilities:
Accounts payable and
accrued liabilities (22,477) 924,162 (3,176,234)
Net cash provided by
(used in) operating
activities ( 782,043) (1,035,520) (4,410,036)
Cash flows from investing activities:
Proceeds from sale of
equipment - 38,587 -
Purchase of equipment (882,743) (372,738) (302,201)
Acquisition of business (1,925,000) - -
Net cash used in investing
activities (2,807,743) (334,151) (302,201)
Cash flows from financing
activities:
Principal payments on
note payable - related
party (252,144) - -
Principal payments on
notes payable (1,911,749) (235,251) (1,073,958)
Principal payments on
long-term debt (239,164) (45,332) -
Cost to acquire
treasury stock - - (25,000)
Distributions to
stockholders (690,489) (230,598) (80,000)
Principal payments on
capital lease obligations - (2,052) -
Repayment of bank loan - (12,500) -
Repayment of advances from
officers - (26,761) (170,746)
Proceeds from long-term debt 1,000,000 25,000 -
Net proceeds from officers'
loans - - 26,761
Proceeds from exercise of
warrants 7,211,166 - -
Proceeds from contributions
to capital 350,000 - 173,470
Proceeds from short-term
debt, net of payments - - 1,891,250
Proceeds from issuance of
common stock - - 3,619,042
Net cash provided by (used in)
financing activities 5,467,620 (527,494) 4,360,819
Net increase (decrease)
in cash and cash
equivalents 3,441,920 173,875 (351,418)
Cash and cash equivalents
at beginning of year 585,429 411,554 762,972
Cash and cash equivalents
at end of year $ 4,027,349 585,429 411,554
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995 and 1994
(1) Nature of Business, Basis of Presentation and Significant
Accounting Policies
(a) Nature of Business
Environmental Technologies Corp. and subsidiaries (the
Company) is primarily engaged in: the marketing and sale of
refrigerants (including dichlorofluoromethane (R-12) and
tetrafluoroethane (R-134a)), refrigerant recovery and reclaiming
services; the manufacture and distribution of refrigerant recycling and
recovery equipment for automotive and commercial use; and the
extraction of hazardous waste materials from fluorescent light fixture
ballasts and arranging for environmentally accepted means of treatment
or disposal.
(b) Basis of Presentation
On December 30, 1995, the Company executed and consummated as
of December 31, 1995, an agreement under which it agreed to issue
1,150,000 shares of common stock in exchange for all of the issued and
outstanding capital stock of FulCircle Recyclers, Inc. (FulCircle).
The acquisition has been accounted for using the pooling of interests
method and the accompanying consolidated financial statements have been
restated to include the accounts of FulCircle for all periods
presented.
Through December 31, 1994, FulCircle used a calendar year end
for financial reporting purposes. Accordingly, the accompanying
consolidated financial statements of the Company for the years ended
September 30, 1995, 1994 and 1993 include the financial statements of
FulCircle for the years ended September 30, 1995 and December 31, 1994
and 1993, respectively. As a result, operations for the three-month
period ended December 31, 1994 are included in the consolidated
statements of income for both the year ended September 30, 1995 and the
year ended December 31, 1994.
As FulCircle had elected to be taxed as an S corporation
under the provisions of the Internal Revenue Code, income tax expense
has been adjusted to reflect the effective C corporation income tax
rate of the Company for all periods presented. The proforma income tax
expense of FulCircle has been credited to additional paid-in capital.
Financial information attributable to the Company and
FulCircle is set forth below:
<TABLE>
<CAPTION>
Environmental FulCircle
Technologies Recyclers
Corp. Inc. Combined
<S> <C> <C> <C>
Year ended
September 30, 1995:
Net sales $28,665,227 6,012,744 34,677,971
Net income 1,776,187 206,467 1,982,654
Net income per
common and
equivalent shares:
Primary .50 - .43
Fully diluted .49 - .42
Year ended
September 30, 1994:
Net sales 19,815,597 4,911,529 24,727,126
Net income 1,200,698 302,854 1,503,552
Net income per
common and
equivalent shares:
Primary .42 - .37
Fully diluted .40 - .37
Year ended
September 30, 1993:
Net sales 17,509,301 4,385,309 21,894,610
Net income 919,442 136,248 1,055,690
Net income per
common and
equivalent shares
- primary and
fully diluted .33 .27
</TABLE>
(c) Risks and Uncertainties
Financial instruments which potentially subject the Company
to concentrations of credit risk consist of cash, cash equivalents and
trade receivables. The Company considers such risk in placing its cash
and cash equivalents in financial institutions and other instruments.
Concentration of credit risk with respect to trade receivables is
limited because of the large number of customers that make up the
Company's customer base and their dispersion in various industries and
across different geographies. The Company performs ongoing credit
evaluations of its customers' financial condition. No single customer
accounted for more than 10% of total net sales in 1995.
In conformity with generally accepted accounting principles,
management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the
Company's consolidated financial statements.
Actual results could differ from these estimates.
Some of the Company's products and services are regulated by the
Federal Clean Air Act (the Clean Air Act) and the regulations
promulgated thereunder by the Environmental Protection Agency (EPA), as
well as certain state environmental regulations. As such, the
Company's business is affected by the requirements of the Clean Air
Act, the EPA and other regulations and the degree of enforcement
thereof.
The Company's sales are highly seasonal in nature, as
industry-wide refrigerant and related equipment sales are related to
weather temperatures, primarily in the warmer months. The Company's
historical refrigerant sales have primarily come from the sale of R-12,
a refrigerant that is a chlorofluorocarbon (CFC). As of January 1,
1996, however, CFC-based refrigerants can no longer be manufactured
under current regulations. CFC replacement products, such as R-134a,
are now readily available to the Company. Notwithstanding the
cessation of a predictable manufactured supply of R-12, management
believes it will have access to an adequate supply of R-12 in fiscal
1996. However, beyond 1996 the Company's access to R-12 is much less
certain. Management believes R-134a sales will offset, to a great
extent, the decline of R-12 sales in future periods; however, it could
be several years for a meaningful market of R-134a to develop.
The Company has a significant supply of refrigerant recycling and
recovery equipment on hand at September 30, 1995. Management believes
the demand for this equipment will increase in 1996 as customers in
both the automotive and commercial sectors comply with the Clean Air
Act and as the demand for R-12 and other refrigerants is expected to
increase, thus heightening the economic usefulness of the equipment.
Additionally, management believes that the imposition of additional
Federal requirements, effective November 1995, for the automotive
sector to recycle and recover R-134a will also have a favorable impact
on the sales of this equipment. However, the achievement of such
anticipated sales cannot be assured.
The Company's ballast recycling subsidiary has obtained approval
from the EPA as a qualified recycler of waste materials. In connection
therewith, the Company entered into an agreement with the EPA to set
aside in a Closure Trust Fund, beginning in 1994 approximately $112,500
(annually adjusted for inflation), which is payable over a three-year
period in equal annual installments of $37,500. The purpose of this
fund is to accumulate resources required to clean up the Company's
recycling facility upon closure. As of September 30, 1995, the Company
has funded approximately $38,404 of this obligation. The Company does
not expect any significant cleanup costs in connection with the closure
of its facility.
(d) Principles of Consolidation
The consolidated financial statements include the financial
statements of Environmental Technologies Corp. and its wholly-owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
The Company accounts for its 50% ownership interest in a joint
venture using the equity method. The Company's investment and related
share of earnings or loss of the joint venture are not material to the
Company's consolidated financial position and results of operations.
(e) Revenue Recognition
Sales are generally recorded by the Company when products are
shipped to customers or services are performed. Ballast recycling
revenues are recognized upon the receipt and acceptance of waste
material at its recycling facility in the Bronx, New York. Revenue
from sales of recyclable scrap materials is recognized when shipped.
Equipment products shipped on consignment to customers and sales
representatives are not included in sales.
(f) Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
(g) Marketable Equity Securities
Included in prepaid expenses and other current assets at
September 30, 1995 and 1994 are marketable equity securities of $34,314
and $41,160, respectively. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS115), during
the year ended September 30, 1995. Under SFAS 115, the Company has
classified its marketable equity securities as trading securities.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Trading securities are recorded at fair
value. Unrealized holding gains and losses on trading securities are
included in earnings. The effect of adopting SFAS 115 in fiscal 1995
was immaterial.
(h) Inventories
Substantially all inventories are stated at the lower of cost or
market, determined using the first-in, first-out (FIFO) method.
Inventories of certain virgin R-12 refrigerants, which were
insignificant at September 30, 1995 and 1994, are stated at cost using
the last-in, first-out (LIFO) method.
(i) Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line and declining balance methods over the
estimated useful lives of the assets. Costs of maintenance and repairs
are charged to expense when incurred.
(j) Goodwill
Goodwill, which represents the excess of cost over net assets
acquired, is being amortized over 15 years using the straight-line
method.
(k) Excise Tax
The Federal government imposed a $1.00 per pound excise tax on
certain R-12 and other CFC-based refrigerants owned by entities holding
them for resale as of January 1, 1995 and 1994. The Company paid
excise tax on certain CFC refrigerant inventory on hand at January 1,
1995 and 1994 and accounted for this tax as an expense in the
respective fiscal year. A $.45 per pound excise tax will also be
imposed on January 1, 1996 for certain R-12 owned at January 1, 1996
and will be payable in June 1996.
(l) Income Taxes
Income taxes are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(m) Income Per Share
Net income per share in fiscal 1995 is computed on the basis of
the weighted average number of common shares and common equivalent
shares outstanding during the period (4,862,648 for primary and
4,878,633 for fully diluted after giving effect to 1,150,000 shares to
be issued in connection with the acquisition of FulCircle, accounted
for as a pooling of interests) in accordance with the modified treasury
stock method through the date that outstanding options and warrants
exceeded 20% of the Company's outstanding common stock, and in
accordance with the treasury stock method thereafter. Under such
approach, 496,396 and 512,381 incremental shares for the primary and
fully diluted calculations, respectively, have been added to the
weighted average number of shares outstanding (4,366,252), and interest
expense has been reduced and investment income has been increased by an
aggregate of approximately $92,000, net of tax ($83,000 for purposes of
the fully diluted calculation).
For 1994 and 1993, primary income per share is based on the
weighted average number of shares outstanding during each year and the
assumed exercise of dilutive warrants and employees' stock options less
the number of treasury shares assumed to be purchased from the proceeds
using the average market price of the Company's common stock. For
1993, the income per share, assuming full dilution, is considered to be
the same as primary income per share since the effect of the common
stock equivalents would be antidilutive. Weighted average outstanding
shares were 4,013,942 and 3,971,065 in fiscal 1994 and 1993,
respectively, and incremental share equivalents were 112,607 and 0 in
fiscal 1994 and 1993, respectively.
(n) Reclassifications
Certain amounts in the 1994 and 1993 consolidated financial
statements have been reclassified to conform to the 1995 consolidated
financial statement presentation.
(o) Recently Issued Accounting Standards
The Company has not adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 was
issued in March 1995 and is effective for fiscal years beginning after
December 15, 1995. The Company believes that the adoption of this
accounting standard will not have a material effect on the Company's
consolidated financial position or results of operations. The Company
has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 123). SFAS 123 was
issued in October 1995 and is effective for financial statements for
fiscal years beginning after December 15, 1995. When adopted, certain
disclosures are required for fiscal years that begin after December 15,
1994. SFAS 123 allows for alternative methods of accounting for
stock-based compensation arrangements with employees.
The Company currently is undecided as to what method of adoption
it will utilize.
(2) Acquisitions
In February 1995, the Company acquired the assets of Global
Refrigerant Management, Inc. for total consideration of $3,175,000.
The consideration included cash of $1,925,000, notes of $750,000 and
58,089 shares of common stock valued at $500,000. The acquisition was
accounted for using the purchase method of accounting. The excess of
cost over the net assets acquired at the date of acquisition amounted
to approximately $749,000. Accumulated amortization at September 30,
1995 was approximately $34,000.
In February 1994, 82,692 common shares were issued to the
shareholders of Refrigerant Reclaim Services, Inc. in exchange for all
its outstanding common shares. The acquisition was accounted for as a
pooling-of-interests.
The following unaudited pro forma financial information for 1995
and 1994 gives effect to the 1995 acquisition as noted above as though
such acquisition occurred on October 1, 1993, after giving effect to
certain adjustments including amortization of goodwill, depreciation
and adjusted interest expense. The following pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had the acquisition occurred on October 1, 1993:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales 35,783,193 27,321,142
Net income 1,961,916 1,513,427
Net income per share .42 .38
<TABLE/>
(3) Inventories
Inventories at September 30, 1995 and 1994 consist of the
following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Raw material at FIFO $4,100,067 $2,932,702
Raw material at LIFO 20,130 43,867
Finished goods at FIFO 5,826,516 5,243,869
Total inventories 9,946,713 8,220,438
Less amount classified
as long-term (included
in other assets) - 3,000,000
$9,946,713 $5,220,438
</TABLE>
The estimated replacement cost of inventories exceeded the LIFO
inventory cost by $190,000 and $380,000 at September 30, 1995 and 1994,
respectively. During 1995 and 1994, inventory layers were reduced.
This reduction resulted in charging lower inventory costs prevailing in
previous years to cost of sales, thus reducing cost of sales below the
amount that would have resulted from liquidating inventory recorded at
prices at September 30, 1995 and 1994. The effect of this was an
increase in net income of approximately $115,000 and $608,000 or $.02
and $.15 per share in 1995 and 1994, respectively.
Inventory of $3,000,000 at September 30, 1994, presented as a
noncurrent asset (included in other assets), represents the estimated
portion of the commercial recycling equipment inventory that was not
expected to be sold currently at September 30, 1994. The Company had
manufactured such inventory in anticipation of sales which did not
occur due, in management's opinion, to lack of enforcement of
provisions of the Clean Air Act. During late winter and spring 1996,
the Company intends to convert a significant portion of its commercial
recovery equipment inventory into automotive recycling equipment due to
management's anticipation of a stronger market for automotive equipment
in fiscal 1996. Based on historic net sales prices of equipment, the
estimated conversion costs will be fully recoverable and are not
expected to have a material effect on future operating results.
(4) Property and Equipment
Property and equipment at September 30, 1995 and 1994 is
summarized as follows:
<TABLE>
<CAPTION>
Depreciable
1995 1994 lives
<S> <C> <C> <C>
Machinery and equipment $ 2,373,202 1,278,548 2-7 years
Office equipment 301,246 150,458 2-5 years
Vehicles 134,104 45,940 5 years
Leasehold improvements 91,248 62,913 2-5 years
Total Cost 2,899,800 1,537,859
Accumulated depreciation (1,270,247) (928,879)
$ 1,629,553 608,980
</TABLE>
The estimated useful lives (years) for leasehold improvements
include the shorter of the useful lives of the assets or the lease
terms.
(5) Note Payable - Related Party
Note payable - related party consists of an uncollateralized
non-interest bearing note payable to the majority shareholder
aggregating $252,144 at September 30, 1994 which was fully paid during
fiscal 1995.
Total interest expense due to related parties was $0, $0 and
$50,739 in fiscal 1995, 1994 and 1993, respectively.
(6) Notes Payable
Notes payable consist of: (a) a $750,000 note due in August 1996
with an outstanding balance at September 30, 1995 of $500,000 ($0 at
September 30, 1994) payable to the previous owner of Global Refrigerant
Management, Inc. bearing interest at the prime rate plus 1% per annum
(9.75% at September 30, 1995); (b) a $3,000,000 line of credit with a
bank, subject to available collateral, with $0 and $1,649,249
outstanding at September 30, 1995 and 1994, respectively (the bank note
is collateralized by substantially all of the Company's assets,
guaranteed by the majority shareholder, and bears interest at 1% over
the bank's prime rate per annum), and (c) a $25,000 term note payable
to a bank with $0 and $12,500 outstanding at September 30, 1995 and
1994, respectively.
In January 1995, the Company's ballast recycling subsidiary was
granted a line of credit by a financial institution in the amount of
$400,000, which expired on June 30, 1995. This credit line was
collateralized by all assets of the subsidiary and had been personally
guaranteed by certain stockholders. In March 1995, the Company's
ballast recycling subsidiary borrowed and repaid $350,000 on this line.
(7) Long-term Debt
Long-term debt of $766,669 at September 30, 1995 consists of a
term note payable to a bank, due August 1997, collateralized by
substantially all assets, guaranteed by the majority shareholder, and
bearing interest at 1.5% over the bank's prime rate per annum (10.25%
at September 30, 1995). Principal payments of $399,996 and $366,673
are due in fiscal 1996 and 1997, respectively.
The Company's bank agreement includes a financial covenant
requirement which limits the maximum allowable capital expenditures.
At September 30, 1995, the Company was not in compliance with this
financial covenant. The Company has received from the bank a waiver of
such violation which waives the required compliance for the year ended
September 30, 1995.
(8) Cash Flows
Cash paid during 1995, 1994 and 1993 for interest and income
taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Interest $ 292,766 232,870 162,491
Income taxes 1,406,119 903,205 1,085,779
</TABLE>
Significant noncash financing is as follows: during 1994, the
Company's minority shareholders contributed $120,650 of notes payable
to paid-in capital; during 1995 the Company issued 58,089 shares of
common stock valued at $500,000 and a note payable for $750,000 for a
portion of the acquisition price for Global Refrigerant Management,
Inc.
(9) Income Taxes
The components of income tax expense for the years ended
September 30, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $1,033,000 $ 766,840 $519,102
State 326,500 281,349 190,201
__________ __________ ________
1,359,500 1,048,189 709,303
Deferred:
Federal (21,500) (15,400) - State
- - -
_________ _________ ________
(21,500) (15,400) -
1,338,000 1,032,789 709,303
</TABLE>
Income tax expense for the years ended September 30, 1995, 1994
and 1993 differed from the expected income tax expense (computed by
applying the U.S. Federal income tax rate to income before income tax
expense) as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Computed "expected" income
tax expense $1,129,022 862,356 600,098
State income taxes, net of
federal benefit 212,612 203,519 119,708
Other (3,634) (33,086) (10,503)
$1,338,000 1,032,789 709,303
</TABLE>
The temporary differences which give rise to a significant
portion of deferred tax assets and liabilities as of September 30, 1995
are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for bad debts $42,560
Accruals 27,642
Net operating loss
carryforwards 22,680
Other 4,048
Gross deferred tax assets 96,930
Valuation allowance -
Net deferred tax assets 96,930
Deferred tax liabilities:
Plant and equipment 1,535
Other 8,627
Deferred tax liabilities 10,162
Net deferred tax asset 86,768
</TABLE>
At September 30, 1994, the net deferred tax asset was $65,268.
A valuation allowance is provided when management believes that it is
more likely than not that some portion or all of the deferred tax
assets will not be realized.
At September 30, 1995, the Company has Federal net operating loss
carryforwards of $66,000 which expire in 2007.
(10) Profit Sharing Plan
The Company terminated its profit sharing plan in 1994. The
Company made no contributions to the plan in 1995, 1994 and 1993. The
costs to terminate the plan were not material.
(11) Commitments and Contingencies
The Company leases its New Jersey office and warehouse facilities
on a month-to-month basis from its principal shareholder at an annual
cost of $120,000 in 1995, 1994 and 1993.
The Company leased office space from a shareholder from January
1993 through April 1994. Total rental payments under this arrangement
amounted to approximately $7,000 in 1994 and $22,000 in 1993.
The Company leases other manufacturing and office facilities
pursuant to operating leases expiring in 1996 through 2000.
The following is a schedule of future minimum rental payments
under operating leases:
1996 $ 410,495
1997 471,825
1998 427,916
1999 210,999
2000 125,945
Thereafter -
________
Total 1,647,180
Total rental expense was $450,265, $352,027 and $327,401 for the
years ended September 30, 1995, 1994 and 1993, respectively.
In March 1995, the Company's ballast recycling subsidiary entered
into three-year consulting agreements with certain stockholders for the
purpose of expanding existing lines of business and exploring other
recycling opportunities. These agreements call for annual payments
totaling $50,000 which are payable monthly.
During 1995, consulting fees paid to the stockholders amounted to
$41,354.
The Company is self-insured for product liability in connection
with the marketing and sale of its refrigerants. No material losses
have occurred.
At September 30, 1995, the Company has commitments with vendors
to purchase inventory of approximately $1,751,000 in fiscal 1996.
(12) Stock Option Plan
In July 1992, the Company adopted a stock option plan (the Option
Plan) pursuant to which 500,000 shares of common stock have been
reserved for issuance upon the exercise of options designated as either
(a) incentive stock options (ISOs) under the Internal Revenue Code of
1986, as amended, or (b) non-qualified options.
ISOs may be granted under the Option Plan to employees and
officers of the Company. Nonqualified options may be granted to
consultants, directors (whether or not they are employees), employees
or officers of the Company.
As of September 30, 1995, the Company has granted certain
employees options to purchase a total of 256,000 shares of the
Company's common stock. The options are exercisable for a period that
ends five years from the date the options become exercisable.
Details of stock options are as follows:
<TABLE>
<CAPTION>
Number of Option
shares price
<S> <C> <C>
Shares under option at
September 30, 1992 - $ -
Granted 166,000 6.00 - 6.00
Exercised - -
Forfeited - -
Shares under option at
September 30, 1993 166,000 6.00 - 6.60
Granted 79,000 5.25 - 7.00
Exercised - -
Forfeited (8,000) 5.25 - 6.00
Shares under option at
September 30, 1994 237,000 5.25 - 7.00
Granted 86,000 7.67 - 10.50
Exercised - -
Forfeited (67,000) 6.00 - 7.00
Shares under option at
September 30, 1995 256,000 5.25 - 10.50
Shares exercisable at
September 30, 1995 161,250 5.25 - 10.50
</TABLE>
(13) Stockholders' Equity
In December 1992, a public sale was made of 800,000 shares of
common stock at $6.00 per share and 920,000 redeemable warrants at $.10
per share to purchase 920,000 shares of common stock at $6.90 per
share. The warrants expire on December 16, 1997. The net proceeds to
the Company after deducting offering expenses and the underwriting
discount in 1992 amounted to $3,619,042. In fiscal 1995, the Company
received $7,211,166 of net proceeds from the exercise of warrants. At
September 30, 1995, warrants to purchase approximately 242,000 shares
of common stock were outstanding at exercise prices ranging from $7.13
to $8.88.
In December 1992, George Cannan, Sr. contributed 150,000 shares
of common stock to the Company's capital. Such shares have been
cancelled.
During 1995 and 1993, stockholders made cash contributions to
capital of $350,000 and $173,470, respectively.
During 1995, 1994 and 1993, distributions to stockholders
amounted to $690,489, $230,598 and $80,000, respectively.
(14) Industry Segments
<TABLE>
<CAPTION>
Refrigerant Equipment
Products Products
Year ended September 30, 1995:
<S> <C> <C>
Net sales $26,020,530 2,644,697
Operating income $ 3,683,625 (464,251)
Net income $ 2,130,809 (354,622)
Identifiable assets at
September 30, 1995 $19,437,628 7,628,106
Year ended September 30, 1994:
Net sales $18,612,475 1,203,122
Operating
income $ 2,992,528 (820,877)
Net income $ 1,786,736 (586,038)
Identifiable assets at
September 30, 1994 $ 8,382,878 6,760,785
Year ended September 30, 1993:
Net sales $14,939,455 2,569,846
Operating income $ 1,725,131 (51,965)
Net income $ 952,552 (33,110)
Identifiable assets at
September 30, 1993 $ 4,445,488 6,908,814
<CAPTION>
Ballast
Recycling Eliminations Consolidated
Year ended September 30, 1995:
<S> <C> <C> <C>
Net sales $6,012,774 - 34,677,971
Operating income $ 345,592 - 2,564,976
Net income $ 206,467 - 1,982,654
Identifiable assets at
September 30, 1995 $1,602,847 (6,504,200) 22,164,381
Year ended September 30, 1994:
Net sales $4,911,529 - 24,727,126
Operating
income $ 510,115 - 2,681,766
Net income $ 302,854 - 1,503,552
Identifiable assets at
September 30, 1994 $1,590,636 (3,307,439) 13,426,950
Year ended September 30, 1993:
Net sales $ 4,385,309 - 21,894,610
Operating income $ 315,130 - 1,988,296
Net income $ 136,248 - 1,055,690
Identifiable assets at
September 30, 1993 $ 1,111,724 (1,147,603) 11,318,423
</TABLE>
The Company operates in the refrigerant and the fluorescent light
ballast recycling industries and reports segment information for its
product lines, which are the sale of refrigerants and refrigerant
reclaiming services, the sale of refrigerant recovery and recycling
equipment and the ballast recycling business. Operating income (loss)
is net sales less cost of sales and selling, general and administrative
expenses. In computing operating income, none of the following were
included: income taxes, interest expense and other nonoperating items.
Depreciation and amortization for the refrigerant, equipment and
ballast recycling segments was $278,893, $23,876 and $97,800,
respectively, in 1995, $87,265, $34,120 and $78,660, respectively, in
1994 and $48,001, $28,610 and $37,860, respectively, in 1993.
Capital outlay for the refrigerant, equipment and ballast
recycling segments was $727,446, $3,305 and $151,992, respectively, in
1995, $305,106, $4,820 and $62,812, respectively, in 1994 and $43,295,
$39,232 and $219,674, respectively, in 1993.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
1. Purposes of Plan. The purposes of the Environmental
Technologies Corp. 1996 Incentive and Non-Qualified Stock Option Plan
(hereinafter referred to as the "Plan") are to provide to employees of
Environmental Technologies Corp. (hereinafter referred to as the
"Corporation"), as well as employees of subsidiary or parent
corporations which may currently exist or be formed or acquired in the
future, an opportunity for investment in the Corporation's common stock
(hereinafter referred to as the "Shares"), as an inducement for such
individuals to remain with the Corporation, and to encourage them to
increase their efforts to make the Corporation's business more
successful.
2. Effective Date and Termination of Plan. The effective
date of the Plan is April , 1996, the date on which the Plan was
adopted by the Board of Directors of the Corporation. The Plan shall
terminate on, and no option shall be granted hereunder, after April
, 2006; provided, however, that the Board of Directors may at any time
prior to that date terminate the Plan; and provided further that any
option granted hereunder prior to the termination of the Plan shall
remain exercisable in accordance with its terms as then in effect.
3. Administration of Plan. The Plan shall be administered
by the Board of Directors of the Corporation. The Board of Directors
may, however, to the extent permissible under the Corporation's
Articles of Organization, By-laws and applicable law, delegate any of
its functions under this Plan to a committee of the Board of Directors
or any other committee. Wherever in this Plan the term "Board of
Directors" is used it shall be construed to mean such committee to the
extent that the Board of Directors may have delegated any of its
functions to said committee and only to the extent of any such
delegation. The acts of a majority of the members present at any
meeting of the Board of Directors at which a quorum is present, or acts
approved in writing by a majority of the entire Board, shall be the
acts of the Board of Directors for purposes of the Plan.
4. Eligibility and Grant of Options. Subject to the
provisions of the Plan, the Board of Directors shall (i) authorize the
granting of incentive stock options, non-qualified stock options or a
combination of incentive stock options and non-qualified stock options
(hereinafter collectively referred to as "options" unless otherwise
stated); (ii) determine and designate from time to time those employees
(from the group consisting of all employees of the Company) to whom
options are to be granted and the number of Shares to be optioned to
each employee; (iii) determine the number of Shares subject to each
option; and (iv) determine the time or times when and the manner in which each
option shall be exercisable and the duration of the exercise period. In
determining the eligibility of an individual to receive an option, as well as in
determining the number of Shares to be optioned to any individual, the
Board of Directors shall consider the position and responsibilities of
the employee, the nature and value to the Corporation, parent or
subsidiary of his services and accomplishments, his present and
potential contribution to the success of the Corporation, parent or
subsidiary, and such other factors as the Board may deem relevant. To
be eligible to receive an incentive stock option or non-qualified stock
option an individual must be an employee of the Corporation, parent or
subsidiary. A Director shall abstain from voting on the grant of any
options to himself, his spouse, his children, grandchildren and
parents. The grant of each option shall be confirmed by a Stock Option
Agreement (in the form prescribed by the Board of Directors) which
shall be executed by the Corporation and the optionee as promptly as
practicable after such grant. More than one option may be granted to
an individual.
Incentive stock options shall be those options which satisfy
the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended and which the Board of Directors has specifically identified
as incentive stock options in the Stock Option Agreement executed by
the Corporation and the optionee. In the case of incentive stock
options, the aggregate fair market value, determined at the time
incentive stock options are granted, of the stock with respect to which
the incentive stock options are exercisable for the first time by such
individual during any calendar year (under all such plans the
Corporation may adopt) shall not exceed one hundred thousand dollars
($100,000.00). In the event that an incentive stock option granted
pursuant to the terms of this Plan is granted to an employee who, prior
to the grant, holds more than ten percent (10%) of the total combined
voting power of all classes of stock of the Corporation, its parent or
a subsidiary ("10% Shareholder") the option price under such grant
shall be at least one hundred ten percent (110%) of the fair market
value, and such option, by its terms, shall not be exercisable more
than five (5) years from the date of grant.
Nothing in the Plan or in any option granted pursuant to the Plan
shall confer on any individual any right to continue in the employ of
the Corporation or any parent or subsidiary or interfere in any way
with the right of the Corporation to terminate his employment at any
time.
5. Number of Shares Subject to Options. The Board of
Directors, prior to the time options under the Plan become exercisable,
shall reserve for the purposes of the Plan a total of Five Hundred
Thousand (500,000) Shares, which Shares may be either authorized and
unissued Shares, or previously issued Shares held in the treasury of
the Corporation, or both. Shares as to which an option granted under
the Plan shall remain unexercised at the expiration or termination
thereof, and Shares subject to options which are cancelled, may be the
subject of the grant of further options. Shares reserved pursuant to
this paragraph may be adjusted to reflect changes in the Corporation's
capital structure as discussed in paragraph 19 hereof.
6. Option Price. The option price per Share shall be
determined in each case by the Board of Directors and shall not be less
than one hundred percent (100%) (one hundred ten percent (110%) in the
case of an incentive stock option granted to a 10% Shareholder) of the
fair market value thereof as determined by the Board by any reasonable
method using market quotations on the date the option is granted.
7. Period of Option and When Exercisable. No option may be
granted under this Plan whose exercise date is later than ten (10)
years after the date of the grant or five (5) years after the date of
grant in the case of an incentive stock option granted to a 10%
Shareholder. Generally, an option may be exercised only by the
optionee and subject to the rules set forth below only if, at all times
during the period beginning on the date of the granting of such option
and ending with the date of exercise of such option, the optionee is an
employee of the Corporation, its parent or a subsidiary.
(i) Except as otherwise provided herein, in the case of
an employee who terminates employment, options which are vested but
unexercised as of the date of termination of employment must be
exercised within three (3) months of termination. In the case of an
employee who is discharged for cause, as determined in the sole
discretion of the Board of Directors, all previously vested but
unexercised options shall be forfeited immediately.
(ii) In the case of an employee who dies during the
three (3) month period discussed in (i) above, options which are vested
but unexercised as of the date of termination of employment must be
exercised within twelve (12) months of death.
(iii) Options which are vested but unexercised as of
the date of termination of employment due to death, must be exercised within
twelve (12) months after the death of an optionee.
(iv) In the event that the employee becomes disabled
as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, options which are vested but unexercised as of the date of
termination of employment due to disability must be exercised within twelve
(12) months following the date of termination of the optionee's said
employment.
(v) In the event an optionee's employment is
terminated for any reason (including but not limited to, voluntary or
involuntary termination or termination resulting from the death or disability
of the optionee), all unvested options shall be immediately forfeited.
Notwithstanding the foregoing, options may not be exercised
after the original five (5) or ten (10) year term. Options may be
exercised on behalf of the estate of a former employee by the person or
persons entitled to do so under the optionee's will or, if the optionee
shall have failed to make testamentary disposition of such option or
shall have died intestate, by the optionee's legal representative or
representatives. Such person, persons, representative, or
representatives are hereinafter referred to as the "Successors of an
Optionee."
8. Vesting. Options granted to a participant shall be
exercisable in accordance with a schedule to be established by the
Board for each Option grant at the time of such grant. Non-vested
options shall be immediately forfeited upon the termination of
employment for any reason. Vested options shall be forfeited upon the
termination of employment as provided in paragraph 7 hereof.
9. Exercise of Options. Subject to Plan restrictions and
vesting, an option may be exercised, and payment in full of the option
price made, by an optionee only by written notice (in the form
prescribed by the Board of Directors) to the Corporation specifying the
number of Shares to be so purchased. Such notice shall state that the
option price will be paid in full in cash (which in the discretion of
the Board of Directors may be obtained through a loan from the
Corporation or from a third party and guaranteed by the Corporation) or
other property, in the discretion of the Corporation. If the
Corporation accepts a request to pay in stock of the Corporation in
satisfaction of the exercise price, the fair market value of said stock
shall at least equal the option price, and, in the case of incentive
stock options, prior to such acceptance the Corporation must be
furnished with evidence that the acquisition of said stock and its
transfer in payment of the option price satisfies the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended and other
applicable law. As soon as practicable after receipt by the
Corporation of such notice and of payment in full of the option price
of all the Shares with respect to which an option has been exercised,
a certificate or certificates representing such Shares shall be
registered (subject to the provisions of paragraph 16 hereof) in the
name of the optionee or the Successors of an Optionee as defined under
this Plan and delivered to the optionee or to the Successors of an
Optionee.
10. Sale of the Corporation. In the case of a Sale of the
Corporation as herein defined, in the discretion of the Board of
Directors options granted but unexercised shall become fully vested
(100%) and exercisable for a period of twenty (20) days from the date
notice of such Sale is given to the optionees. Upon the expiration of
the twenty (20) day period, all then unexercised options shall be
permanently cancelled. For purposes of this paragraph, a Sale or
Public Offering shall be deemed to occur upon the happening of any one
of the following:
(i) A sale of all or substantially all of the
Corporation's assets outside the ordinary course of business;
(ii) An offer to purchase at least a majority of the
Corporation's issued and outstanding common stock or an offer to the
Corporation's shareholders to tender for sale at least a majority of
the Corporation's issued and outstanding common stock, which offer is
accepted or tender made with respect to at least a majority of the
Corporation's issued and outstanding shares of common stock;
(iii) The merger or consolidation of the Corporation
with another corporation or entity; or
(iv) A dissolution or liquidation of the
Corporation.
11. Employer Withholding. In the case of non-qualified stock
options, the Corporation shall be required to withhold additional
income taxes attributable to that amount which is considered
compensation includible in the optionee's gross income by reason of the
exercise of such options. The Corporation in its discretion shall
determine the method and amount of withholding.
12. Exercise by Successors and Payment in Full. An option
may be exercised, and payment in full of the option price made, by the
Successors of an Optionee only by written notice (in the form
prescribed by the Board of Directors) to the Corporation specifying the
number of Shares to be purchased. Such notice shall state that the
option price will be paid in full in cash (which in the discretion of
the Board of Directors may be obtained through a loan from the
Corporation or from a third party and guaranteed by the Corporation),
property or stock of the Corporation in conformance with paragraph 9
hereof. As soon as practicable after receipt by the Corporation of
such notice and of payment in full of the option price of all the
Shares with respect to which an option has been exercised, a
certificate or certificates representing such Shares shall be
registered (subject to the provisions of paragraph 16 hereof) in the
name or names of such Successors of an Optionee and shall be delivered
to him.
13. Non-Transferability of Option. Each option granted under
the Plan shall by its terms be nontransferable by the optionee except
by will or the laws of descent and distribution of the state wherein
the optionee is domiciled at the time of his death.
14. Other Terms of Options. Options granted pursuant to the
Plan shall contain such terms, provisions, and conditions not
inconsistent herewith as shall be determined by the Board of Directors.
15. Registration of Certificates. Certificates representing
Shares may be registered either in the name of the Optionee or in the
name or names of the Successors of an Optionee. Designation of the
appropriate form of registration of certificates shall be made in the
written notice given to the Corporation upon exercise of an option.
16. Listing and Registration of Shares. If at any time the
Board of Directors of the Corporation shall determine, in its
discretion, that the listing, registration, or qualification of any of
the Shares subject to options under the Plan upon any securities
exchange or under any state or federal law, or the consent or approval
of any governmental regulatory body is necessary or desirable as a
condition of or in connection with the granting of options or the
purchase or issue of Shares thereunder, no further options may be
granted and outstanding options may not be exercised in whole or in
part unless and until such listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any
conditions not acceptable to the Board of Directors. The Board of
Directors shall have the authority to cause the Corporation at its
expense to take any action related to the Plan which may be required in
connection with such listing, registration, qualification, consent, or
approval. The Board of Directors may require that any person
exercising an option hereunder shall make such representations and
agreements and furnish such information as it deems appropriate to
assure compliance with the foregoing or any other applicable legal
requirement.
17. Interpretation and Amendments. The Board of Directors
may make such rules and regulations and establish such procedures for
the administration of the Plan as it deems appropriate. In the event
of any dispute or disagreements as to the interpretation of this Plan
or of any rule, regulation, or procedure, or as to any question, right
or obligation arising from or related to the Plan, the decision of the
Board of Directors shall be final and binding upon all persons. The
Board of Directors may amend this Plan as it shall deem advisable.
However, in no event shall any such amendment adversely affect the
rights of an optionee under any existing stock option agreement without
the consent of such optionee.
18. Indemnification and Exculpation.
(a) Each person who is or shall have been a member
of the Board of Directors shall be indemnified and held harmless by the
Corporation against and from any and all loss, cost, liability, or
expense that may be imposed upon or reasonably incurred by him in
connection with or resulting from any claim, action, suit, or
proceeding to which he may be or become a party or in which he may be
or become involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof (with the Corporation's written approval) or paid by
him in satisfaction of a judgment in any such action, suit, or
proceeding, except a judgment in favor of the Corporation based upon a
finding of his lack of good faith; subject, however, to the condition
that upon the institution of any claim, action, suit, or proceeding
against him, he shall in writing give the Corporation an opportunity,
at its own expense, to handle and defend the same before he undertakes
to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other right to which such
person may be entitled as a matter of law or otherwise, or any power
that the Corporation may have to indemnify him or hold him harmless.
(b) Each member of the Board of Directors, and each
officer and employee of the Corporation shall be fully justified in
relying or acting in good faith upon any information furnished in
connection with the administration of the Plan by any appropriate
person or persons other than himself. In no event shall any person who
is or shall have been a member of the Board of Directors, or an officer
or employee of the Corporation be held liable for any determination
made or other action taken or any omission to act in reliance upon any
such information, or for any action (including the furnishing of
information) taken or any failure to act, if in good faith.
19. Changes in Capital Structure. In the event that a
dividend shall be declared upon the Shares payable in Shares, the
number of Shares then subject to any option outstanding under the Plan
and the number of Shares reserved for the grant of options pursuant to
the Plan but not yet subject to option shall be adjusted by adding to
each such Share the number of Shares which would be distributable in
respect thereof if such Shares had been outstanding on the date fixed
for determining the shareholders of the Corporation entitled to receive
such Share dividend. In the event that the outstanding Shares shall be
changed into or exchanged for a different number of Shares or other
securities of the Corporation or of another corporation, whether
through reorganization, recapitalization, split-up, combination of
shares, merger, or consolidation, then there shall be substituted for
each Share subject to any such option and for each Share reserved for
the grant of options pursuant to the Plan but not yet subject to option
the number and kind of Shares or other securities into which each
outstanding Share shall have been so changed or for which each such
Share shall have been exchanged. In the event there shall be any
change, other than as specified above in this paragraph, in the number
or kind of outstanding Shares or of any shares or other securities into
which such Shares shall have been changed or for which they shall have
been exchanged, then if the Board of Directors shall in its sole
discretion determine that such change equitably requires an adjustment
in the number or kind of Shares theretofore reserved for the grant of
options pursuant to the Plan but not yet subject to option and of the
Shares then subject to an option or options, such adjustments shall be
made by the Board of Directors and shall be effective and binding for
all purposes of the Plan and of each option outstanding thereunder. In
the case of any such substitution or adjustment as provided for in this
paragraph, the aggregate option exercise price set forth for all
outstanding options for all Shares covered thereby prior to such
substitution or adjustment will be the option exercise price for all
shares or other securities which shall have been adjusted pursuant to
this paragraph. No adjustment or substitution provided for in this
paragraph shall require the Corporation to sell a fractional Share, and
the total substitution or adjustment with respect to each outstanding
option shall be limited accordingly. Upon any adjustment made pursuant
to this paragraph, the Corporation will, upon request, deliver to the
optionee or to his successors a certificate setting forth the option
price thereafter in effect and the number and kind of shares or other
securities thereafter purchasable on the exercise of the option.
20. Notices. All notices under the Plan shall be in writing,
and if to the Corporation, shall be delivered to the Treasurer of the
Corporation or mailed to its principal office, addressed to the
attention of the Treasurer; and if to the optionee, shall be delivered
personally or mailed to the optionee at the address appearing in the
payroll records of the Corporation. Such addresses may be changed at
any time by written notice to the other party.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
The Company is engaged in the marketing and sale of refrigerants,
refrigerant recovery and reclaiming services and the manufacture and
distribution of refrigerant recycling and recovery equipment. The
Company's line of refrigerants include dichlorofluoromethane ("R-12")
and tetrafluoroethane ("R-134a"), marketed under the Company's "Arctic
Air" label to distributors of automotive supplies for use by mechanics
and technicians in servicing automotive air conditioning systems. The
Company markets R-134a in spray cans under its customers' private
labels for use in dusting moisture-sensitive equipment, including
personal computer screens, cabinets, peripherals and photographic
equipment. Through its wholly-owned subsidiary, Refrigerant Reclaim
Services, Inc., the Company markets refrigerant reclaiming services as
well as R-12, R-134a and a variety of other refrigerants primarily to
large users of air conditioning and refrigeration chemicals. The
Company has also developed and commercialized a line of equipment
designed to recycle and recover refrigerants contained in air
conditioning and refrigeration systems.
The Company's fiscal year-end is September 30.
The following discussion of results of operations for the fiscal
years ended September 30, 1995 and 1994 should be read in conjunction
with the consolidated financial statements, including the notes
thereto, included elsewhere in this Report. In February 1994, 82,692
common shares were issued to the shareholders of Refrigerant Reclaim
Services, Inc. ("RRSI") in exchange for all its outstanding common
shares. The acquisition was accounted for as a pooling-of-interests.
In February 1995, the Company acquired the assets of Global Refrigerant
Management, Inc. ("Global"). As a result, operations for 1995 include
seven complete months with the assets of Global. See Notes to
Consolidated Financial Statements for details of the acquisitions.
Year ended September 30, 1995 as compared to year ended September
30, 1994
Net sales for the year ended September 30, 1995 were $28,665,227,
as compared to net sales of $19,815,597 for the year ended September
30, 1994, an increase of $8,849,630, or approximately 44.7%. The
increase in net sales was primarily attributable to a $5.5 million
increase in reclaiming revenues, a $1.9 million increase in virgin
packaged refrigerant sales and a $1.4 million increase in sales of
recycling and recovery equipment. Reclaiming revenues were higher as
a result of RRSI's expansion of operations from two to four locations
during the period and the inclusion of seven full months of operations
with the assets acquired in the Global acquisition. Packaged
refrigerant sales were higher primarily as a result of general price
increases. Equipment revenues were increased primarily as a result of
the inclusion of the purchase of the equipment assets from Wynn's
International, Inc. ("Wynn's"). It is Management's opinion that
equipment revenues remain lower than expected due in large part to the
continued lack of governmental enforcement of laws prohibiting the
venting of CFC refrigerants into the atmosphere. The lack of
enforcement has resulted in postponed purchasing decisions by the
contractors and technicians required by law to own equipment of the
type manufactured and sold by the Company.
As a result of the prohibition of the manufacture of new CFC
refrigerants, which includes R-12, the Company will no longer have
ready access to newly manufactured R-12. As a result, the Company's
ability to maintain its current level of R-12 sales for the foreseeable
future will be dependent, to a large extent, upon the availability of
adequate sources of stockpiled and alternative supplies. While
Management believes that in 1996 it has access to significant sources
and amounts of R-12 and plans to continue to seek to increase its
sources of alternative supply, beyond 1996 the Company's access to R-12
is much less certain. The Company discontinued the sale of R-22 used
in dusting applications on January 1, 1994 while replacing it with R-
134a. As a result, the Company has become increasingly dependent on
sales of R-134a, as a replacement for both R-12 and R-22, and believes
that R-134a will become an increasing portion of the Company's revenues
in the future. The Company also expects that sales of recycling and
recovery equipment will increase as more contractors comply with the
Federal Clean Air Act (the "Clean Air Act") and as the price for R-12
and other refrigerants continue to increase, thus heightening the
economic usefulness of the equipment. In addition, the Company
believes that the November 15, 1995 imposition of additional
requirements for the automotive sector to recycle and recover R-134a
will also have a favorable impact on the Company's sales of equipment.
Cost of sales for the year ended September 30, 1995 were
$22,031,483, as compared to $15,216,476 for the year ended September
30, 1994, an increase of $6,815,007. Of this increase, approximately
$4.4 million was attributable to the increase in reclaiming activity at
RRSI and $1.4 million was associated with increased cost of raw
material prices of virgin refrigerants. Higher sales of recycling and
recovery equipment and their attendant costs resulted in the balance of
the increase in costs.
Selling, general and administrative expenses increased to
$3,414,360 for the year ended September 30, 1995 from $2,427,470 for
the prior year, an increase of $986,890. This increase is primarily
attributable to the increased of RRSI operations from two locations to
four during the year. The excise tax, paid by the Company for virgin
CFC floor stocks carried over from calendar 1994 to 1995 was $1.00 per
pound in each year. The Company believes that expenses associated with
the Federal Excise Tax will continue. Such tax for fiscal year 1996
will be $.45 per pound. In addition, the Company is continually
seeking to enhance its current products and develop new versions of its
products. However, the Company believes that costs to enhance or
develop new products for its recycling and recovery equipment will not
materially change the relationship between the Company's revenues and
costs.
The Company generated net income during the year ended September
30, 1995 of $1,776,187, as compared to net income of $1,200,698 during
the year ended September 30, 1994, a 47.9% increase.
Year ended September 30, 1994 as compared to year ended September
30, 1993
Net sales for the year ended September 30, 1994 were $19,815,597,
as compared to net sales of $17,509,301 for the year ended September
30, 1993, an increase of $2,306,296, or approximately 13.2%. The
increase in net sales was primarily attributable to a $1.9 million
increase in reclaiming revenues, a $1.8 million increase in packaged
refrigerant sales and a partially offsetting decrease in sales of
recycling and recovery equipment. Reclaiming revenues were higher as
a result of RRSI having greater access to working capital which allowed
it to process significantly more refrigerant over the prior period's
activities. Packaged refrigerant sales were higher primarily as a
result of general price increases. It is Management's opinion that the
reduction in equipment revenues was largely attributable to the lack of
governmental enforcement of laws prohibiting the venting of CFC
refrigerants into the atmosphere. The lack of enforcement resulted in
postponed purchasing decisions by the contractors and technicians
required by law to own equipment of the type manufactured and sold by
the Company. The Company's ability to maintain its current level of R-
12 sales for the foreseeable future will be dependent, to a large
extent, upon the availability of adequate sources of supply.
Management believes that it has increased its number of sources and
access to greater volumes of R-12 over the prior period and the Company
plans to continue to take advantage of alternative sources of supply
for R-12, including recovered R-12. The Company discontinued the sale
of R-22 used in its dusting applications on January 1, 1994 while
replacing it with R-134a. As a result, the Company became increasingly
dependent on sales of R-134a, as a replacement for both R-12 and R-22.
The Company also expects that sales of recycling and recovery equipment
will increase as more contractors comply with the Federal Clean Air Act
(the "Clean Air Act") and as the price for R-12 and other refrigerants
continue to increase, thus heightening the economic usefulness of the
equipment. In addition, the Company believes that imposition of
additional requirements to recycle and recover R-134a will also have a
favorable impact on the Company's sales of equipment.
Cost of sales for the year ended September 30, 1994 were
$15,216,476, as compared to $12,982,599 for the year ended September
30, 1993, an increase of $2,233,877. Of this increase, approximately
$1.6 million was attributable to the increase reclaiming activity and
$1.4 million associated with increased cost of raw material prices of
refrigerants. Offsetting a portion of these cost increases was an
$800,000 decrease associated with reduced sales of refrigerant
recycling and recovery equipment. Further offsetting these costs was
a decrease of a portion of the Company's R-12 LIFO inventory.
Selling, general and administrative expenses decreased to
$2,427,470 for the year ended September 30, 1994 from $2,853,536 for
the prior year, a decrease of $426,066. This decrease resulted from a
decrease in the Federal Excise Tax imposed on CFC floor stocks as of
January 1, 1994 as compared to the prior period offset partially by
increased expenses associated with the increased activities at RRSI.
The excise tax for 1994 was $1.00 per pound versus $1.68 per pound on
floor stocks of CFC chemicals at January 1, 1993. The Company believes
that expenses associated with the Federal Excise Tax will continue.
Such tax for fiscal year 1995 and 1996 are $1.00 and $0.45 per pound,
respectively. In addition, the Company is continually seeking to
enhance its current products and develop new versions of its products.
However, the Company believes that costs to enhance or develop new
products for its recycling and recovery equipment will not materially
change the relationship between the Company's revenues and costs.
The Company generated net income during the year ended September
30, 1994 of $1,200,698, as compared to net income of $919,442 during
the year ended September 30, 1993, a 30.6% increase.
Liquidity and Capital Resources
The Company had working capital of $15,242,147 at September 30,
1995, as compared to a working capital position of $4,114,552 at
September 30, 1994. The increase in working capital is attributable
primarily to year-end increases in inventory ($4,726,275), cash
($3,547,643) and accounts receivable ($1,522,000). Based upon the
Company's anticipated equipment sales during the 1996 fiscal year, the
Company reclassified $3.0 million of its equipment inventory from long-
term assets to current assets in its balance sheet as of September 30,
1995. The Company had earlier classified such inventory as long-term
when in Management's opinion the lack of enforcement of the Clean Air
Act resulted in a lack of demand for the equipment sold by the Company.
Management believes that most of its automotive recycling equipment and
a significant portion of its commercial recovery equipment inventory at
September 30, 1995 will be sold in fiscal 1996. These anticipated
sales increases primarily reflect new Clean Air Act provisions,
effective November 15, 1995, which requires the use of new refrigerant
recycling equipment during service on vehicles using R-134a. During
late winter and spring of 1996 the Company intends to convert a
significant portion of its commercial recovery equipment inventory into
automotive recycling equipment due to Management's anticipation of a
stronger market for automotive equipment sales in 1996. Based on
historic net sales prices of equipment, the estimated conversion costs
will be fully recoverable and are not expected to have a material
effect on future operating results. The balance of its inventory
increase is made up of increased refrigerant levels. Increased cash
levels reflect the invested proceeds of the Company's exercise of
warrants and accounts receivable primarily reflect the increase in
sales associated with the Company's expanded reclaiming business. The
Company has financed its working capital requirements through operating
cash flow, a $1.0 million term loan and $3.0 million working capital
revolving line of credit obtained from a bank (together the "Credit
Facility") and through borrowings from its stockholders and officers.
Net cash provided (used) by operating activities for the years
ended September 30, 1995 and 1994 was $376,952 and $675,751,
respectively. The net cash provided from operating activities in the
1995 period is primarily attributable to the Company's earnings and non
cash expenses offset primarily by increases in inventory and other
prepaid assets. Net cash used in investing activities of $2,655,751
primarily reflects the acquisition of the assets of Global and the
expansion of operations at RRSI. The net cash provided by financing
activities of $5,826,442 primarily reflects the proceeds from the
exercise of common stock warrants during the period.
The Company had cash and cash equivalents of $4,018,778 and
$471,135 at September 30, 1995 and September 30, 1994, respectively.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that cash flow from operations,
proceeds from the recent exercise of common stock warrants, and its
Credit Facility that sources of cash are sufficient to satisfy its
contemplated cash requirements for at least 12 months. These
assumptions give full effect to the Company's current and desired
levels of refrigerant inventory, including R-12 and R134a; recycling
and recovery equipment; joint venture arrangements and planned capital
expenditures. As of September 30, 1995 the Company has purchase
commitments to take $1,751,000 from vendors, including approximately
$1.3 million to Wynn's Climate Systems, Inc. ("Wynn's"). Of these
purchase commitments as of December 31, 1995 the Company will take
delivery of approximately $800,000 from Wynn's. The Wynn's assets will
be paid for over the following twelve month period with such payments
amortized in even monthly installments. In the event that the
Company's plans change, its assumptions change or prove to be
inaccurate to fund operations (due to unanticipated expenses, technical
problems or difficulties otherwise), the Company could be required to
seek additional financing sooner than anticipated.
The Credit Facility provides for advances bearing interest per
annum at the Bank's prime rate (currently 8-1/2%) plus 1.0% for working
capital advances and 1.5% for term loans and is secured by a pledge of
substantially all the Company's assets and the personal guarantee of
George Cannan, Sr., the Company's President, Chief Executive Officer
and principal stockholder. The Credit Facility expires on January 31,
1996. The Company expects to renew the Credit Facility with the Bank
during January 1996.
As of the date of this Report, other than as set forth in this
Report, the Company has no material commitments for capital
expenditures, including in connection with research and development,
acquisition of plant and equipment and additional employees.
Seasonality
Sale of R-12 are highly seasonal, with Company shipments of such
products heavily concentrated in the winter and spring (second and
third fiscal quarters), reflecting sales in advance of the seasonal use
of automobile air conditioning systems in most regions of the United
States. The Company expects that sales of R-134a for use in servicing
automobile air conditioning systems will also be seasonal in nature.
Accordingly, the first and fourth fiscal quarters of the Company's
operations have been characterized by inventory build-up and seasonal
operating losses resulting in periodic cash flow difficulties, which in
the past necessitated loans from the Company's stockholders and which
currently is adequately handled by the Company's credit facility. In
addition, based on experience to date, the Company anticipates that a
substantial portion of its customers for refrigerant recycling and
recovery equipment, particularly System 1, will place their orders for
equipment during the second and third fiscal quarters.
Recently Issued Accounting Standards
The Company has not adopted the Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121 was
issued in March 1995 and is effective for fiscal years beginning after
December 15, 1995. The Company believes that the adoption of this
accounting standard will not have a material effect on the Company's
consolidated financial position or results of operations. The Company
has not adopted Statement of Financial Accounting Standards No. 123
(SFAS 123) "Accounting for Stock-Based Compensation." SFAS 123 was
issued October 1995 and is effective for financial statements for
fiscal years beginning after December 15, 1995. When adopted, certain
disclosures are required for fiscal years that begin after December 15,
1994. SFAS 123 allows for alternative methods of accounting for stock-
based compensation arrangements with employees. The Company currently
is undecided as to what method of adoption it will utilize.
