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 June 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OFTHE 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 22-3005943
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or Organization)
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 August 14, 1998).
Page 1 of 14 pages.
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)
ASSETS
June 30, September 30,
1998 1997
Current Assets:
Cash and cash equivalents $ 3,235,644 $ 2,321,071
Accounts receivable, net 10,044,359 5,665,329
Inventories 18,244,668 24,430,301
Other current assets 314,228 441,237
Total current assets 31,838,899 32,857,938
Property and equipment 2,017,306 2,243,797
Goodwill, net 573,249 610,101
Other Assets 1,276,113 1,222,520
Total assets $35,705,567___ $36,934,356
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $13,942,280 $13,500,000
Accounts payable 4,436,321 3,690,787
Accrued liabilities 754,390 1,148,415
Total current liabilities 19,132,991 18,339,202
Stockholders' Equity
Common stock 49,867 49,897
Paid-in-capital 11,396,562 11,396,532
Retained earnings 5,126,147 7,148,725
Total stockholders' equity 16,572,576 18,595,154
Total liabilities and
stockholders' equity 35,705,567 $36,934,356
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997___
Net sales $ 15,779,539 $ 17,248,692 $ 30,822,784 $ 47,319,239
Cost of sales 14,561,473 12,347,491 26,780,238 36,577,119
Gross profit 1,218,066 4,901,201 4,042,546 10,742,120
Selling, general and
administrative expenses
2,193,817 1,990,082 6,731,901 5,492,117
Operating income (975,751) 2,911,119 (2,689,355) 5,250,003
Interest expense 305,426 276,774 818,241 718,168
Investment income 30,252 30,771 127,805 36,260
Other income, net 905 22,010 _8,099 57,531
Income before income tax
expense (1,250,020) 2,687,126 (3,371,692) 4,625,626
Income tax expense (498,065) 1,072,000 (1,349,114) 1,844,000
Net income $ (751,955) $ 1,615,126 $ (2,022,578) $ 2,781,626
Net income per common and common
equivalent shares:
Basic $ (.15) $ .33 $ (.41) $ .55
Fully diluted $ (.15) $ .33 $ (.41) $ .55
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JUNE 30,
--------------------------
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Cash Flows From Operating
Activities
Net (loss) income $(2,022,578) $ 2,781,626
Adjustments to reconcile net
(loss) income to net cash
(used in) provided by operating
activities:
Depreciation and amortization 584,701 589,045
Provision for bad debt (8,715)
Gain on sale equipment (13,423)
(Increase) decrease in assets:
Accounts receivable (4,379,030) (6,007,470)
Inventory 6,185,633 (4,300,398)
Other current assets 127,009 (246,344)
Other assets (53,593) 108,323
Increase (Decrease) in liabilities:
Accounts payable and accrued
liabilities 351,509 6,107,137
-------------------------------------
Net cash used in
operating activities 784,936 (981,504)
Cash Flows From Investing Activities
Capital expenditures (312,643) (1,586,631)
Cash Flows From Financing Activities
Proceeds from short-term debt, net
of repayments 442,280 4,644,761
Proceeds from long-term debt 252,121
Proceeds from exercise of warrants 174,375
Proceeds for exercise of options 47,500
Retirement of stock (2,160,000)
-------------------------------------
Net cash provided by
financing activities 442,280 2,958,757
Net (decrease) in cash and
cash equivalents 914,573 390,622
Cash and cash equivalents - Beginning 2,321,071 942,709
of period -------------------------------------
Cash and cash equivalents - End of
period $3,235,644 $1,333,331
-------------------------------------
</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 nine month periods ended June 30, 1998 and June
30, 1997, respectively, have been made. The results of operations for the nine
month period ended June 30, 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.
NOTE 3 - EARNINGS PER SHARE
Net income per share for the first nine months 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
nine-month periods ended June 30, 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 June 30, 1998 as compared to the three months ended June
30, 1997
Revenues for the three-month period ended June 30, 1998 were approximately
$15.8 million, as compared to revenues of approximately $17.2 million for the
three-month period ended June 30, 1997, a decrease of approximately $1.4
million, or 9%. The decrease in revenues was primarily attributable to the weak
demand and pricing for refrigerant R-12 during the three month period ended June
30, 1998. The weak demand coupled with the fact that several large automotive
original equipment manufactures were selling large quantities of refrigerant
R-12 into the market resulted in weak pricing through out the period ending June
30, 1998.
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 or 134a 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 June 30, 1998 were
approximately $14.6 million, as compared to $12.3 million for the three-month
period ended June 30, 1997, a increase of approximately $2.3 million, or 19%.
This increase is primarily attributed to the increase in refrigerant 134a sales
which historically have had a lower gross margin than R-12 sales and the fact
that the company sold large quantities of R-12 below cost during the period. The
Company was forced to sell R-12 below cost to meet market pricing set by the
automotive original equipment manufactures. The Company has greatly enhanced its
access to low cost R-12 through its reclaiming and separating activities.
Selling and administrative expenses increased to $2.2 million for the
three-month period ended June 30, 1998 from $1.9 million for the three-month
period ended June 30, 1997, an increase of approximately $0.3 million, or 16%.
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 to increase its market share in several key
markets across the United States. Management believes that the desired market
share in most key markets has been achieved and significant steps subsequent to
June 30, 1998 have been take to reduce sales and distribution expenses at Full
Circle, Inc. The effect of these cost reductions will be reflected in the period
ending September 30, 1998. Due to the Company's changeable product mix and
seasonality of revenues, the Company's results of operations for the three-month
period ended June 30, 1998 may not necessarily be indicative of the Company's
future operating results.
Nine months ended June 30, 1998 as compared to the nine months ended June
30, 1997
Revenues for the nine-month period ended June 30, 1998 were approximately
$30.8 million as compared to revenues of approximately $47.3 million for the
nine month period ended June 30, 1997, a decrease of approximately $16.5
million, or 35%. The decrease in revenue was primarily attributable to an
decrease in refrigerant R-12 revenue and refrigerant reclaiming revenues. The
weak demand for R-12 was a result of below average temperatures through out the
United States and the shift to refrigerant 134a, the alternative for R-12. The
weak demand coupled with the fact that several large automotive original
equipment manufactures were selling large quantities of refrigerant R-12 into
the market resulted in weak pricing through out the nine month period ending
June 30,1998.
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 June 30,
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 nine-month period ended June 30, 1998 were
approximately $26.8 million, as compared to approximately $36.6 million for the
nine-month period ended June 30, 1997, an decrease of $9.8 million, or
approximately 27%. The decrease is primarily attributable to decreased
refrigerant sales during the period.
Selling and administrative expenses increased to $6.7 million for the
nine-month period ended June 30, 1998 from $5.5 million for the period ended
June 30, 1997, a 22% increase. The increase was attributable primarily to the
organizational costs and expenses associated with the expansion of the Company's
reclaiming operations. The Company has taken steps subsequent to June 30, to
reduce sales and distribution costs associated with the Company's reclaiming
operations that will be reflected in the period ending September 30, 1998.
The Company generated a net loss during the nine-month period ended June
30, 1998 of $2.0 million as compared to a net income of $2.8 million during the
nine-month period ended June 30, 1997.
Due to the Company's varied product mix and the seasonality of refrigerant
revenues, the Company's results may not be necessarily indicative of the
Company's future operating results.
Liquidity and Capital Resources
The Company had working capital of approximately $12.7 million at June 30,
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 nine month periods ended June
30, 1998 and 1997 was $0.8 million and ($1.0) million, respectively. The net
cash provided in 1998 was primarily attributable to the reduction in inventory
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 $0.4 million and $4.6 million for the nine
month periods ended June 30, 1998 and 1997, respectively. Credit Facility
borrowings during the period primarily accounted for cash provided by financing
activities. At June 30, 1998, the Company had $13.9 million of short-term
borrowings under the Credit Facility
The Company had cash and cash equivalents of $3.2 million and $2.3 million
at June 30, 1998 and June 30, 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 September 30, 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 September 30,
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 July 21, 1998 the Board of Directors of the Company adopted a formal
plan to discontinue its Recycling and Recovery Equipment business segment. The
Company has retained an outside investment banking firm to assist the Company in
locating a buyer for this segment. The Company expects the plan to dispose of
this segment to be carried out and completed with six months (the Divestiture
Period).
Company's management estimates that the Company will record a pretax charge
of approximately $5,000,000 related to the disposal of this segment. The charge
includes estimated operating losses for this segment of approximately $170,000
during the Divestiture Period.
The following summarizes the effects of the discontinued segment on the
Companies results of operation for the period ending June 30:
Nine months ended Nine months ended
June 30, 1998 June 30, 1997
Net Income:
Income from
continued operation $(1,226,703) $3,409,010
Income from discontinued
operations (795,875) (627,384)
Net income $(2,022,578) $2,781,626
Earnings per common share:
Income from
continued operations $ (.24) $ .67
Income from discontinued
operations (.17) (.12)
$ (.41) $ .55
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
<PAGE>
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: August 19, 1998 By: /s/ George Cannan, Sr.
-----------------------
George Cannan, Sr.
Chief Executive Officer
By: /s/ David A. Keener,
-----------------------
David A. Keener
Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,235,644
<SECURITIES> 0
<RECEIVABLES> 10,044,359
<ALLOWANCES> 0
<INVENTORY> 18,244,668
<CURRENT-ASSETS> 31,838,899
<PP&E> 2,017,306
<DEPRECIATION> 3,243,092
<TOTAL-ASSETS> 35,705,567
<CURRENT-LIABILITIES> 19,132,991
<BONDS> 0
0
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<COMMON> 49,897
<OTHER-SE> 16,572,576
<TOTAL-LIABILITY-AND-EQUITY> 35,705,567
<SALES> 15,779,539
<TOTAL-REVENUES> 15,779,539
<CGS> 14,561,473
<TOTAL-COSTS> 2,193,817
<OTHER-EXPENSES> 2,193,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,426
<INCOME-PRETAX> (1,250,020)
<INCOME-TAX> (751,955)
<INCOME-CONTINUING> (751,955)
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