SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the Quarterly Period Ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Transition
Period From ________ to ________.
Commission File Number 0-20986
ENVIRONMENTAL TECHNOLOGIES CORP.
(Exact name of issuer as specified in its charter)
Delaware 22-305943
- -------------------------------------------- -----------------------------
(State or other Jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
550 James Street
Lakewood, New Jersey 08701
- --------------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732)370-3400
---------------------------------------------------------
(Issuer's Telephone Number,
Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. XX Yes No
The number of shares outstanding of the registrant's common stock is
4,989,719(as of May 14, 1998). There are no exhibits.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
March 31, September 30,
1998 1997
----------- ------------
Current Assets:
Cash and cash equivalents .................. $ 1,918,584 $ 2,321,071
Accounts receivable, net ................... 7,311,150 5,665,329
Inventories ................................ 24,204,199 24,430,301
Other current assets ....................... 376,406 441,237
---------- -----------
-----------
Total current assets ................ 33,810,339 32,857,938
-----------
Property and equipment ....................... 2,053,655 2,243,797
Goodwill, net ................................ 585,533 610,101
Other Assets ................................. 1,232,185 1,222,520
--------- -----------
Total assets ........................ $37,681,712 $36,934,356
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable .............................. $14,692,280 $13,500,000
Accounts payable ........................... 4,679,659 3,690,787
Accrued liabilities ........................ 985,242 1,148,415
---------- -----------
Total current liabilities ........... 20,357,181 18,339,202
Stockholders' Equity
Common stock ............................... 49,867 49,897
Paid-in-capital ............................ 11,396,562 11,396,532
Retained earnings ............................ 5,878,102 7,148,725
---------- ----------
Total stockholders' equity .......... 17,324,531 18,595,154
---------- ----------
Total liabilities and
stockholders' equity .............. 37,681,712 $36,934,356
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
------------- ----------- ------------ ------------
Net sales ......................................... $ 8,716,827 $ 18,704,433 $ 15,043,245 $ 30,070,547
Cost of sales ..................................... _7,261,133 15,228,403 12,218,765 24,229,628
------------ ------------ ------------ ------------
Gross profit ...................................... 1,455,694 3,476,030 2,824,480 5,840,919
Selling, general and
administrative expenses .......................... 2,517,466 1,816,972 4,538,084 3,502,035
Operating income .................................. (1,061,772) 1,659,058 (1,713,604) 2,338,884
Interest expense .................................. 260,942 230,008 512,815 441,394
Investment income ................................. 89,059 5,489 97,553 5,489
Other income, net ................................. 1,395 20,742 _7,194 35,521
------------ ------------ ------------ ------------
Income before income tax
expense ......................................... (1,232,260) 1,455,281 (2,121,672) 1,938,500
Income tax expense ................................ (495,549) 579,281 (851,049) 772,000
------------ ------------ ------------ ------------
Net income ........................................ $ (736,711) $ 876,000 $ (1,270,623) $ 1,166,500
============ ============ ============ ============
Net income per common and common equivalent shares:
Basic ............................................. $ (.15) $ .17 $ (.25) $ .23
============ ============ ============ ============
Fully diluted ..................................... $ (.15) $ .17 $ (.25) $ .23
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED MARCH 31,
1998 1997
Cash Flows From Operating
Activities
Net (loss) income ........................................................ $(1,270,623) $ 1,166,500
Adjustments to reconcile net
(loss) income to net cash
(used in) provided by operating
activities:
Depreciation and amortization ....................................... 418,443 401,462
Provision for bad debt .............................................. (8,715)
Gain on sale equipment .............................................. (2,982)
(Increase) decrease in assets:
Accounts receivable ............................................... (1,535,748) (2,774,208)
Inventory ......................................................... 226,102 (7,932,408)
Other current assets .............................................. (36,527) (72,410)
Other assets ...................................................... (9,665) (134,902)
Increase (Decrease) in liabilities:
Accounts payable and accrued
liabilities ..................................................... 825,699 5,861,953
--------- -----------
Net cash used in
operating activities .......................................... (1,391,034) (3,486,995)
Cash Flows From Investing Activities
Capital expenditures .................................................... (203,733) (1,240,228)
Cash Flows From Financing Activities
Proceeds from short-term debt, net
of repayments ......................................................... 1,192,280 4,073,610
Proceeds from long-term debt ............................................ 252,121
---------
Net cash provided by
financing activities .......................................... 1,192,280 4,325,731
Net (decrease) in cash and
cash equivalents ........................................................ (402,487) (401,492)
Cash and cash equivalents - Beginning ..................................... 2,321,071 942,709
of period ---------- --------
Cash and cash equivalents - End of
period .................................................................. $ 1,918,584 $ 541,217
--------- -----------
--------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
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
reclaiming services; the separation of mixed refrigerants; the manufacture and
distribution of refrigerant recycling and recovery equipment for automotive and
commercial use; and the recycling of fluorescent light fixture ballasts and
lamps.
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 financial information furnished herein has not been audited by independent
accountants; however in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial position, results of operations, and cash flows of the Company for the
three and six month periods ended March 31, 1998 and March 31, 1997,
respectively, have been made. The results of operations for the six month period
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2 - BUSINESS COMBINATIONS
On February 22, 1995, the Company acquired the assets of Global Refrigerant
Management, Inc ("Global"). The Company exchanged cash, notes and common stock
totaling approximately $3,175,000. Global provided refrigerant reclaiming
services. The operations of Global have been included since the acquisition
date.
The acquisition was accounted for under the purchase method of accounting.
On December 30, 1995, the Company executed and consummated an agreement under
which it issued 1,150,000 shares of the Company's voting common stock to the
shareholders of FulCircle Recyclers, Inc. in exchange for all of the issued and
outstanding common stock of FulCircle. The acquisition was accounted for as a
pooling of interests and accordingly, the accompanying consolidated financial
statements have been restated to include the results for all periods presented.
NOTE 3 - EARNINGS PER SHARE
Net income per share for the first six months and for the second quarter of
fiscal 1998 is computed on the basis of the weighted average number of common
shares outstanding in the period 4,989,719. The effect of dilutive options and
warrants is immaterial.
Net income per share in the first six months and for the second quarter of
fiscal 1997 is computed on the basis of the weighted average number of common
shares outstanding in the period 5,153,411. The effect of dilutive options and
warrants is immaterial.
Item 2. 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, mixed refrigerant separation, 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.
Through its wholly-owned subsidiary Refrigerant Reclaim Services, Inc. (d/b/a
Full Circle, Inc.), the Company offers refrigerant reclaiming services and
markets R-12, R-22, R-134a and a variety of other refrigerants primarily to
large users of air conditioning and refrigeration chemicals. Through a 50% owned
joint venture, Liberty Technology International, Inc. ("LTI"), the Company
separates mixed refrigerants. Through its wholly-owned subsidiary Envirogroup
Services, Inc. (d/b/a Envirotech Systems) 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 three-month
and six-month periods ended March 31, 1998 and 1997 should be read in
conjunction with the unaudited condensed financial statements, including notes
thereto, included elsewhere in this Report. All of the Company's historical
financial statements presented herein include the effects of acquiring FulCircle
Recyclers, Inc. in a pooling of interests and the purchase of the assets of
Global Refrigerant Management, Inc.
Three months ended March 31, 1998 as compared to the three months ended
March 31, 1997
Revenues for the three-month period ended March 31, 1998 were
approximately $8.7 million, as compared to revenues of approximately $18.7
million for the three-month period ended March 31, 1997, a decrease of
approximately $10.0 million, or 53%. The decrease in revenues was primarily
attributable to the weak demand for refrigerant R-12 and other CFC refrigerants
during the three month period ended March 31, 1998. The weak demand and
resulting low prices during the period are attributed to customer inventory
carry over from last years mild summer. The large quantities of inventory
carried over from last year delayed or eliminated significant preseason
purchases that have historically been placed in February and March. The Company
anticipates that pricing and demand for R-12 and other CFC refrigerants to
increase significantly and exceed historical seasonality trends during the three
month period ended June 30, 1998. As of January 1, 1996 all of the CFC
refrigerant products sold by the Company are no longer produced in the United
States.
Sales of refrigerant R-12 continue to provide a significant portion of
the Company's revenues although its relative percentage is declining. The
decline in R-12 sales is primarily attributed to the significant increase in the
demand for R-134a, the replacement for R-12, and the Company's increasing
emphasis on refrigerant reclaiming and commercial refrigerant sales. 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. The Company is not dependent on any one source of
refrigerant for its supply of R-12 refrigerant and historically has purchased
from a number of manufacturers and suppliers. The Company's refrigerant
reclaiming and separation activities will continue to serve as an important
source of R-12, as well as other CFC refrigerants.
The costs of sales for the three month period ended March 31, 1998 were
approximately $7.3 million, as compared to $15.2 million for the three-month
period ended March 31, 1997, a decrease of approximately $7.9 million, or 52%.
This decrease is the result of decrease refrigerant sales activity. The cost of
R-12 has increased significantly since the 1990 amendment to the Clean Air Act
and the ceasing of R-12 production in 1995. The Company anticipates that the
cost of R-12 will continue to increase due to scheduled annual excise tax
increases of 45 cents per pound and the limited supply of R-12. In anticipation
of increasing costs of R-12, the Company will seek to obtain and maintain an
inventory of R-12 at a commercially prudent level. In addition, the Company has
enhanced its access to low cost R-12 through reclaiming and separating
activities.
Selling and administrative expenses increased to $2.5 million for the
three-month period ended March 31, 1998 from $1.8 million for the three-month
period ended March 31, 1997, or 39%. This increase in the period is primarily
related to an increase in sales, marketing and distribution expenses related to
Full Circle, Inc., the Company's refrigerant reclaiming Subsidiary. Full Circle,
Inc. significantly expanded its sales force and distribution base and is well
positioned to increase its market share in several key markets across the United
States.
Due to the Company's changeable product mix and seasonality of
revenues, the Company's results of operations for the three-month period ended
March 31, 1998 may not necessarily be indicative of the Company's future
operating results.
Six months ended March 31, 1998 as compared to the six months
ended March 31, 1997
Revenues for the six-month period ended March 31, 1998 were
approximately $15.0 million as compared to revenues of approximately $30.1
million for the six month period ended March 31, 1997, a decrease of
approximately $15.1 million, or 50%. The decrease in revenue was primarily
attributable to an decrease in refrigerant repackaging and refrigerant
reclaiming revenues. Since the cessation of production of CFC chemicals at
December 31, 1995, the Company has sought to broaden its revenue base and to
increasingly emphasize R-134a and other non-CFC refrigerants. In addition to the
company's continued efforts in the refrigerant recovery, recycling equipment and
ballast recycling industries, the Company completed and has begun operating LTI,
the nation's largest mixed refrigerant processing facility, during the period
ended March 31, 1997. In its first year of operation, LTI contributed
significant earnings and was a major source of both CFC and non-CFC
refrigerants.
The costs of sales for the six-month period ended March 31, 1998 were
approximately 12.2 million, as compared to approximately 24.2 million for the
six-month period ended March 31, 1997, an increase of 12.0 million or
approximately 50%. The decrease is primarily attributable to decreased
refrigerant sales during the period.
Selling and administrative expenses increased to 4.5 million for the
six-moth period ended March 31, 1998 from $3.5 million for the period ended
March 31, 1997, a 29% increase. The increase was attributable primarily to the
organizational costs and expenses associated with the expansion of the Company's
reclaiming operations.
The Company generated a net loss during the six-month period ended
March 31, 1998 of 1.3 million as compared to a net income of $1.2 million during
the six-month period ended March 31, 1997.
Due to the Company's varied product mix and the seasonality of
refrigerant revenues, the Company" results may not be necessarily indicative of
the Company's future operating results.
Liquidity and Capital Resources
The Company had working capital of approximately $13.5 million
at March 31, 1998, as compared to working capital of approximately $14.5 million
at September 30, 1997. The Company has financed its working capital requirements
primarily through operating cash flow and a $15 million working capital
revolving line of credit obtained from a bank (the "Credit Facility").
Net cash used by operating activities for the six month
periods ended March 31, 1998 and 1997 was 1.4 million and 3.5 million,
respectively. The net cash used in 1998 was primarily attributable to increases
in account receivable and the usage in 1997 was primarily attributable to the
increase in the Company's accounts receivable and refrigerant inventory
balances. Net cash provided by financing activities was 1.2 million and 4.1
million for the six month periods ended March 31, 1998 and 1997, respectively.
Credit Facility borrowings during the period primarily accounted for cash
provided by financing activities. At March 31, 1998, the Company had $14.5
million of short-term borrowings under the Credit Facility
The Company had cash and cash equivalents of 1.9 million and
$541,217 at March 31, 1998 and March 31, 1997, respectively.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that cash flow from operations 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, recycling and
recovery equipment, and capital expenditures. 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.
The Credit Facility provides for advances bearing interest per
annum based upon a percentage of the Bank's prime rate or at 2% over the London
Interbank Borrowing Rate ("LIBOR") and is secured by a pledge of substantially
all the Company's assets. The Credit Facility expires on August 1, 1998. The
Company is currently working with the Bank to put in place a long term financing
arrangement and anticipates having such arrangement in place by August 1, 1998.
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, additional employees or increases to inventory.
The Company maintains inventories of various refrigerants,
including R-12, R-22 and R-134a, in packaged and bulk form. Inasmuch as these
refrigerants are classified as hazardous substances, prescribed handling,
storage and transportation regulations are required. The Company believes that
it is in 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On May 14, 1998, the Company announced that it had signed a letter of
intent to merge its refrigerant recovery equipment business with Refrigerant
Systems Technologies, Inc. of Garrett, Indiana. The Company will have a minority
interest in the new entity and will account for its investment in the new entity
as an equity investment.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL TECHNOLOGIES CORP.
Date: May 19, 1998 By: /s/ George Cannan, Sr.
-------------------------------
George Cannan, Sr.
Chief Executive Officer
By: /s/ David A. Keener
--------------------------------
David A. Keener
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 0
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,311,150
<ALLOWANCES> 0
<INVENTORY> 24,204,199
<CURRENT-ASSETS> 33,810,339
<PP&E> 2,053,655
<DEPRECIATION> 2,658,351
<TOTAL-ASSETS> 37,681,712
<CURRENT-LIABILITIES> 14,692,280
<BONDS> 0
0
0
<COMMON> 49,867
<OTHER-SE> 17,274,664
<TOTAL-LIABILITY-AND-EQUITY> 37,681,712
<SALES> 8,716,827
<TOTAL-REVENUES> 0
<CGS> 7,261,133
<TOTAL-COSTS> 7,261,133
<OTHER-EXPENSES> 2,517,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260,942
<INCOME-PRETAX> (1,232,260)
<INCOME-TAX> (495,549)
<INCOME-CONTINUING> (736,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (736,711)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
