SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year
Ended September 30, 1997
[ ] Transition Report Under 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.
(Name of Registrant as Specified in Its Charter)
Delaware 22-3005943
(State or Other Jurisdiction of (I.R.S. Employer
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)
Securities registered under Section 12(b) of the Securities Exchange Act of
1934:
Name of Each Exchange
Title of Each Class On Which Registered
NONE
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934:
Common Stock, par value $.01 per share
Check whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. XX Yes No
Page 1 of 59 Pages
<PAGE>
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant on January 9, 1998, computed by reference to the price at
which the stock was sold on that date: $17,852,072.
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "Common Stock"), as of January 9, 1998, was 4,989,719.
Documents Incorporated by Reference: None
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Item Page
1. Description of Business 1
2. Description of Property 15
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security
Holders 16
5. Market for Common Equity and Related
Stockholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
8. Financial Statements 26
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 49
10. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 50
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners
and Management 55
13. Certain Relationships and Related Transactions 56
14. Exhibits and Reports on Form 8-K 56
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS.
Item 1 first discusses the refrigerant business and then the ballast recycling
business and concludes with certain information related to the entire Company.
The Company is engaged in the marketing and sale of refrigerants,
refrigerant reclaiming services, the manufacture and distribution of refrigerant
recycling and recovery equipment and the recycling of fluorescent light ballasts
and lamps.
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, equipment and ballast recycling services:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended September 30,
1997 1996 1995
------- -------- -----
Refrigerants.... $50,606 88% $26,871 75% $26,020 75%
Ballast Recycling 4,491 8 5,787 17 6,013 17
Equipment....... 2,353 4 2,885 8 2,645 8
------- ---- ------ ---- ------- --
$57,450 100% $34,543 100% $34,678 100%
======= ==== ======= ==== ======= ====
</TABLE>
REFRIGERANTS
Refrigerant 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 ceased at the end of
1995. 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 refrigerants in general and ozone depleting substances, in
particular, has resulted in significant opportunities for companies engaged in
the development and commercialization of equipment designed to recycle and
recover
<PAGE>
refrigerants and the recovery, reclaiming and resale of refrigerants which are
still in demand, but production of which has been eliminated, such as R-12. CFCs
and refrigerants 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, no longer have ready
access to sources of newly manufactured CFC refrigerants. The CFC replacement
products 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 access to a supply of R-12 for sale in 1998. Beyond 1998 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. CFC substances contained in most
commonly used refrigerants, including R-12, 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 tetrafluorethane,
or R-134a, which do not contain CFCs, as a replacement for R-12.
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.
<PAGE>
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. The Company commenced marketing R-134a in 1992 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 by their d/b/a, "Full Circle, Inc."). RRSI 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
choosing 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
(collectively, "Recycling Systems"). 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 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 the Recycling Systems. 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;
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;
and the trend of mechanics to use recovery equipment to extract mixed
refrigerant from automobiles to avoid contamination of their larger recycled
supplies.
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 typically 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,
throughout the 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
newer 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/R wholesalers, mechanical contractors and large
corporate, institutional and governmental users of refrigerants.
No single customer accounted for more than 10% of the Company's revenues
during the years ended September 30, 1997, 1996 and 1995.
Production and Sources of Supply
The Company's refrigerants are packaged and/or distributed at its Lakewood,
New Jersey, Hurst (Fort Worth) and Houston, Texas, Blue Island (Chicago),
Illinois, Livermore, California and Orlando, Florida 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 various
reclaiming facilities in various size containers where it is stored and
consolidated and eventually transported to Hurst, Texas where it is reclaimed,
packaged and redistributed. 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 have ceased production of R- 12, they have correspondingly reduced
or stopped 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, a tax of $.45 per pound
was imposed for inventory on hand at January 1, 1996 and 1997 and is scheduled
to be $.45 per pound for inventory on hand on January 1, 1998. 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 "Item 2 Description of Property."
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.
<PAGE>
The Company typically seeks to fill customer orders for both refrigerants
and refrigerant recycling and recovery equipment within ten days of receipt.
Accordingly, at September 30, 1997, 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 September 30, 1997, the Company
had a significant inventory of completed refrigerant 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. The
Company anticipates that a significant portion of such inventory will be sold
during fiscal 1998.
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.
<PAGE>
The Company believes that RRSI, 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
required its signatories to reduce and ultimately eliminate production and
consumption of certain ozone depleting substances, including R-12. U.S.
production of refrigerant products containing CFCs ceased at 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, 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.
The Clean Air Act also requires the recycling of R-12 and its various non
CFC 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."
BALLAST RECYCLING
Ballast Recycling Industry Background
FulCircle Recyclers, Inc. (d/b/a Full Circle) recycles and disposes
fluorescent lighting ballasts of the type commonly found in office, industrial
and institutional buildings. 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 Full Circle'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 have been motivated by utility
sponsored "Demand Side Management" (DSM) programs, where facility owners are
given economic incentives to install replacements.
Services - Disposal and Recycling
Full Circle recycles and disposes of the hazardous wastes contained in used
ballasts. Full Circle has developed a unique "demanufacturing" process that
efficiently separates the ballast into recyclable products and hazardous waste.
Both PCBs and DEHP are interchangeably demanufactured using the same plant and
processes.
As part of its service, Full Circle subcontracts with transportation
companies to pick up ballasts from customers. At the point of receipt, ballasts
have already been packaged in sealed drums and are ready for demanufacturing.
The ballasts are transported by truck to the Full Circle facility in New York.
At the plant, drums of ballasts are weighed, stored and demanufactured on its
processing lines.
The disposal process separates the components, recycles all materials that
can be economically recovered and repackages volume reduced hazardous elements
for safe destruction. Over 75% of the weight of a ballast is copper, steel and
aluminum, which is recovered and sold to scrap metals dealers. Only the PCB
contaminated materials are sent off-site to an incinerator of PCB waste or to a
chemical waste landfill, depending on the customer's preference.
Full Circle has PCB disposal contracts with two major companies which
collectively control four PCB incinerators. The Company also has a PCB disposal
contract with two major PCB landfill operators.
Marketing and Sales
In addition to Full Circle's New York operation, it has 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.
Full Circle has extensive educational and promotional materials which are
distributed through trade journals, targeted mailing campaigns and conferences.
Full Circle's sales personnel market at over 30 conferences and trade shows each
year. Full Circle also advertises in many magazines targeted at the lighting,
DSM, electric utility, facility management, waste disposal and environmental
remediation industries.
Competition
The market for Full Circle's services is highly competitive. Full Circle
competes with numerous well-established companies which market ballast recycling
services.
Full Circle believes that it competes on the basis of price, reliability
and reputation and that it is one of the largest companies in its industry.
Government Regulation
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 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 the "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 disclosed plans to regulate PCB ballast disposal;
management expects that the release and implementation of such regulations will
further expand the services provided by the Company. There are two categories of
new regulations which may 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. The
final regulations are still under review and could take several more years to
complete.
Another area of growing regulatory attention is the disposal of fluorescent
lamps. Fluorescent light bulbs have historically been manufactured with mercury
and therefore require special handling. The EPA and lamp manufacturers have
conducted detailed studies, which have concluded that these lamps constitute a
hazardous waste because they fail the Toxicity Characteristic Leaching Procedure
(TCLP).
The EPA has proposed special regulations that address lamp disposal and
these are currently receiving comments from the public. This proposal is
highlighting the need for proper disposal of all lighting waste, including
ballasts.
THE COMPANY
The balance of Item 1 relates to the whole Company including its refrigerant and
ballast recycling businesses.
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 Total
Transformation, 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.
Through September 30, 1997 the Company had invested approximately $183,000. TTL
will require additional funding to complete its development 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 development that the technology will be commercially viable.
During the fiscal year ended September 30, 1996, the Company entered into a
second 50% joint venture with an unaffiliated company. The ventures's name is
Liberty Technology International, Inc. ("LTI"). LTI utilized technology
developed in Eastern Europe to construct a refrigeration separation plant which
was completed in the year ended September 30, 1997. The purpose of the plant is
to provide an alternative to total destruction of mixed refrigerants. The plant
was completed in fiscal 1997 and began operating during that fiscal year.
Through September 30, 1997 the Company has invested approximately $559,000.
The Company's earnings from these joint ventures were not material to
its consolidated results of operations.
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 $1,000,000 per occurrence and $2,000,000 aggregate, 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 cost. 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 Administration, 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 occupational 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 September 30, 1997, the Company employed approximately 125 persons,
including its executive officers. None of the Company's employees is subject to
a collective bargaining agreement and the Company believes its employee
relations are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies ten locations in the United States, all of which, with
one exception, are leased from third parties. The following summarizes the
location, square footage of the building or leased space, and use of each
facility. The Company believes that these facilities are adequate for its
existing and near-term future needs and that its facilities are adequate for its
current and proximate future needs.
<TABLE>
<CAPTION>
<S> <C> <C>
Location Square Footage Use
Lakewood, NJ 21,000 Refrigerant packaging and
distribution; executive
and administrative offies.
Bronx, NY 13,500 Ballast recycling; execu-
tive and administrative offices.
Keller, TX 55,000 Recycling and recovery
equipment production and
servicing.
Hurst, TX 26,000 Refrigerant reclaiming
Houston, TX 14,170 Refrigerant reclaiming
Bridgeview, IL 15,000 Refrigerant reclaiming
Livermore, CA 8,700 Refrigerant reclaiming
Garden Grove, CA 1,500 Refrigerant reclaiming
Orlando, FL 7,000 Refrigerant reclaiming
Kapolei, HI 6,000 Refrigerant reclaiming
Memphis, TN 1,500 Office
</TABLE>
The Company leases the 21,000 square foot building in Lakewood, NJ from
George Cannan, Sr., the Company's founder, Chairman and principal stockholder.
The pays a gross rental of $10,000 per month pursuant to an oral, month-to-month
lease. The Company believes that the terms of this lease are at least as
favorable as it could obtain from an unaffiliated third party. See Item 13 -
Certain Relationships and Related Party Transactions.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or to which it
is a party which, if adversely determined, would result in a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market System
under the symbol "EVTC". The following table sets forth, for the period since
October 1, 1995, the high and low prices 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.
Common Stock
High Low
Year Ended September 30, 1997
First Quarter.................... $ 8 7/8 6 5/8
Second Quarter................... 8 1/4 6 7/8
Third Quarter.................... 9 7/8 7 1/8
Fourth Quarter................... 10 7/8 7 7/8
Year Ended September 30, 1996
First Quarter.................... $12-3/8 $8-1/2
Second Quarter................... 10 7-1/2
Third Quarter.................... 10-7/8 6-5/8
Fourth Quarter................... 11-1/8 7-3/8
As of September 30, 1997, there were 41 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.
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.
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for each of the
five fiscal years ended September 30, 1997. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited financial statements and related
notes thereto included elsewhere in this Report.
Years Ended September 30,
1997 1996 1995 1994 1993
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Net Sales.................. $57,450 $34,543 $34,678 $24,727 $21,895
Cost of Sales.............. 47,301 24,330 24,914 17,400 15,088
Selling, General and
Administrative Expenses... 7,386 6,843 6,199 4,645 4,818
Operating Income........... 2,763 3,370 3,565 2,682 1,988
Interest Expense........... 1,000 414 297 208 157
Income before Income Tax
Expense.................. 1,782 3,006 3,321 2,536 1,765
Income Tax Expense......... 897 1,278 1,338 1,033 709
Net Income................. $ 885 $1,728 $1,983 $ 1,504 $1,056
Net Income Per Common and
Common Equivalent Shares("Primary")$ 0.18 0.34 $ 0.43 $ 0.37 $ 0.27
Weighted Average
Number of Common
Shares Outstanding 5,040 5,151 4,863 4,014 3,971
<TABLE>
<S> <C> <C> <C> <C> <C>
September 30,
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(In thousands)
Working Capital.... $14,519 $15,538 $15,489 $ 4,484 $ 6,146
Total Assets....... 36,934 31,907 22,164 13,427 11,318
Total Debt......... 13,500 9,498 1,267 1,920 2,329
Total Shareholders'
Equity............ $18,595 19,064 $17,600 $ 8,187 $ 6,594
</TABLE>
<PAGE>
ITEM 7. 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 reclaiming services, refrigerant separation services, the
manufacture and distribution of refrigerant recycling and recovery 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
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., ("RRSI")(d/b/a Full Circle, 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. 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. (d/b/a Full Circle) 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. Full Circle is subject to the rules and standards of several
governmental agencies and commercial industrial organizations throughout the
United States.
The Company's fiscal year-end is September 30.
The following discussion of results of operations for the fiscal years
ended September 30, 1997, 1996 and 1995 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 Recyclers, Inc. on
December 31, 1995 accounted for as a pooling of interests and the purchase of
the assets of Global Refrigerant Management, Inc. ("Global") in February 1995.
As a result of the February 1995 purchase of Global, the Company's consolidated
operating results for 1995 include seven months with the assets of Global. See
Notes to Consolidated Financial Statements for details of the acquisitions.
<PAGE>
Year ended September 30, 1997 compared to year ended September 30,
1996
Net sales for the year ended September 30, 1997 were $57,449,743, as
compared to net sales of $34,542,675 for the year ended September 30, 1996, an
increase of $22,907,068, or 66.3%. The increase in net sales was primarily
attributed to a 95.6% increase in sales of refrigerant products, resulting from
increased sales of R-134a and increased sales of reclaiming services. The
increase in net sales was offset by a 18.5% decrease on sales of recycling and
recovery equipment resulting from competitive forces and mild weather conditions
which reduced demand for such products, and a 22.4% decrease of ballast
recycling sales due to enhanced competition.
Cost of sales for the year ended September 30, 1997 was $47,300,645, as
compared to $24,330,064 for the year ended September 30, 1996, which resulted in
a gross profit of $10,149,098 or 17.7% in 1997 as compared to a gross profit of
$10,212,611 or 29.6% in 1996. The decrease in the gross profit percentage in
fiscal 1997 related to the Company's efforts to increase its market share of
refrigerant products, primarily R-134a and reclaiming services sales.
Refrigerant product net sales represented approximately 88.1% of total net sales
in 1997 compared to 74.9% of total net sales in 1996 with a corresponding 18.9%
gross profit in 1997 compared to 21.0% in 1996. The gross profit further
declined in 1997 as a result of decreased higher margin sales at the ballast
recycling subsidiary and decreased sales in recycling and recovery equipment
operations. Additionally, as a result of Management's decision at the end of the
mild 1997 summer to reduce sales prices of its commercial refrigerant recovery
equipment, during the fourth quarter of fiscal 1997, the Company recorded a
charge of approximately $500,000 to write down the existing commercial
refrigerant recovery equipment to its estimated net realizable value. Also
during the fourth quarter of 1997, the Company recorded a charge of
approximately $1,100,000 to write down both automotive and commercial recovery
equipment raw materials inventories for obsolete and excess (slow moving)
inventory as well as for inventory shrink.
Selling, general and administrative expenses increased $543,482 or 7.9% to
$7,386,341 in 1997 from $6,842,859 in 1996. The increase primarily relates to
expanding the infrastructure of the refrigerant recycling business including
sales offices and employees.
Interest expense increased $595,554 from $413,554 in 1996 to $1,009,108
in 1997. The increase is a result of increased borrowing during the year used
primarily to maintain the Company's supply of R- 12.
During the year ended September 30, 1997, the Company's effective tax rate
increased to 50.3% from 42.5% in 1996. The increase relates to and increase in
state income taxes.
Year ended September 30, 1996 as compared to year ended September
30, 1995
Net sales for the year ended September 30, 1996 was $34,542,675, as
compared to net sales of $34,677,971 for the year ended September 30, 1995, a
decrease of $135,296, or approximately 0.4%. The decrease in net sales was
primarily attributable to a 3.8% decrease in ballast recycling sales which was
partially offset by an 9.1% increase on a smaller sales dollar base in recycling
and recovery equipment sales. Refrigerant related revenues were virtually
unchanged. Equipment revenues were increased primarily as a result of the sale
of equipment assets purchased from Wynn's International, Inc. ("Wynn's").
Management believes 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 1997 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 1997 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.
Cost of sales for the year ended September 30, 1996 was $24,330,064, as
compared to $24,914,443 for the year ended September 30, 1995, a decrease of
$584,379. Of this decrease, approximately $1.3 million was attributable to a
decrease in refrigerant related costs which was partially offset by an increase
in equipment related costs which were related to the inefficiencies incurred
following the relocation of the manufacturing plant from Michigan to Texas.
Selling, general and administrative expenses increased to $6,842,859 for
the year ended September 30, 1996 from $6,198,552 for the prior year, an
increase of $644,307. The majority of this increase is attributable to expenses
associated with increased sales and administrative expenses at RRSI, as
operations and staffing were significantly increased during the year. In
addition, expenses related to the purchase of FulCircle Recyclers, Inc. were
recognized in the period as expenses. The excise tax, paid by the Company for
virgin CFC floor stocks as of December 31, 1995 was $.45 per pound for the year.
The Company believes that expenses associated with the Federal Excise Tax will
continue. Such tax for fiscal year 1997 will also 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
expenses to enhance or develop new products for its recycling and recovery
equipment will not materially change the relationship between the Company's
revenues and expenses.
During the year ended September 30, 1996 the Company's effective tax rate
increased from approximately 40.3% to 42.5%. This increase reflects the relative
shift of income to states with higher tax rates.
The Company generated net income during the year ended September 30, 1996
of $1,728,207, as compared to net income of $1,982,654 during the year ended
September 30, 1995, a 12.8% decrease.
Liquidity and Capital Resources
The Company had working capital of $14,518,736 at September 30, 1997
compared to $15,537,803 at September 30, 1996, a decrease of $1,019,067. The
significant components of working capital changed during the year as follows:
Cash and cash equivalents increased $1,378,362 from $942,709 at September 30,
1996 to $2,321,071 at September 30, 1997; accounts receivable increased
$1,167,011; inventory increased $1,825,056; notes payable increased $4,002,481;
and accounts payable increased $1,562,185. Accounts receivable, inventory, notes
payable and accounts payable increased as a result of increased sales in the
refrigerant product businesses.
The Company relies on its bank debt as a source of funds for operations.
The Company has financed its working capital requirements through operating
cash flow and a $13.5 million working capital revolving line of credit obtained
from a bank (the "Credit Facility").
The Credit Facility provides for advances bearing interest per annum based
upon a percentage of the Bank's prime rate or at 1.75% over LIBOR and is secured
by a pledge of substantially all the Company's assets. The Credit Facility
expires on June 30, 1998. The Company expects to renew the Credit Facility with
the Bank during June 1998.
<PAGE>
Net cash used in operating activities for the years ended September 30,
1997 and 1996 was $395,038 and $9,907,485, respectively. Net cash (used in)
investing activities in 1997 of $(874,923) and in 1996 of $(1,177,446)
primarily relates to capital expenditures during the year. The net cash
provided by financing activities in 1997 of $2,648,323 primarily reflects
the proceeds from the utilization of the Company's Credit Facility during the
period offset by approximately $2,188,000 of funds used in 1997 for stock
repurchases.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that cash flow from operations and its Credit
Facility 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.
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.
As of the date of this Report, other than as set forth in this Report, the
Company has no material commitments for capital expenditures, research and
development, or additional employees.
Seasonality
Refrigerant sales are highly seasonal, with Company shipments of such
products heavily concentrated in the months of March through July, reflecting
seasonal use and 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 operating cash flow
short falls, which in the past necessitated loans from the Company's banks. The
Company believes that its seasonal cash needs are 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 will place their orders for equipment during
the second and third fiscal quarters.
Year 2000
During recent years, there has been significant global awareness raised
regarding the potential disruption to business operations worldwide resulting
from the inability of current technology to process properly the change from the
year 1999 to 2000. Although, based on a review of its data processing, operating
and other computer-based systems, the Company does not currently believe that it
will experience any significant adverse effects or material unbudgeted costs
resulting therefrom, the Company cannot provide any assurance in this regard,
and any such costs or effect could materially and adversely effect the
operations of the Company.
Recent Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130
(SFAS 130), "Reporting Comprehensive Income," was issued to establish standards
for reporting and displaying of comprehensive income and its components in a
full set of general-purpose financial statements. This statement requires
disclosure of the components of comprehensive income including among other
things, foreign currency translation adjustments, minimum pension liability
items and unrealized gains and losses on certain investments in debt and equity
securities. The Company would be required to show components of comprehensive
income in a financial statement displayed as prominently as the other required
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates adoption this Statement in
fiscal 1999.
In June 1997, SFAS 131 "Disclosures About Segments of an Enterprise and
Related Information", was issued to establish standards for public business
enterprises reporting information regarding operating segments in annual and
interim financial statements issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company anticipates adopting this
Statement in fiscal 1999 which will result in certain additional disclosures to
the current segment disclosure information.
Forward Looking Information
This Annual Report on Form 10-K may contain forward-looking information
about the Company. The following factors, and others, may cause the Company's
actual results to differ from those set forth in any forward-looking statements
made by the Company. Some of the most significant factors include an
unanticipated downturn in the demand for the Company's refrigerant products, the
lack of demand for the Company's refrigerant recycling and recovery equipment,
and any unforeseen inefficiencies at the Company's new manufacturing facility in
Texas. Accordingly, there can be no assurances that any future results will be
achieved.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Reports 27-28
Consolidated Balance Sheets as of
September 30, 1997 and 1996 29
Consolidated Statements of Income
for each of the years ended September 30, 1997, 1996
and 1995 30
Consolidated Statements of Stockholders' Equity for
each of the years ended September 30, 1997, 1996 and 1995 31
Consolidated Statements of Cash Flows for each of the years
ended September 30, 1997, 1996 and 1995 32
Notes to Consolidated Financial Statements 33-47
__________________
Schedule II - Valuation and Qualifying Accounts 48
<PAGE>
Independent Auditors' Report
The Board of Directors
Environmental Technologies Corp.:
We have audited the accompanying consolidated balance sheets of Environmental
Technologies Corp. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended September 30, 1997. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of
FulCircle Recyclers, Inc. as of and for the year ended September 30, 1995,
acquired pursuant to a business combination as of December 31, 1995 and
accounted for as a pooling of interests, which financial statements reflect
total assets and net sales constituting 7% and 17%, respectively, of the related
consolidated totals in 1995. Those financial 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. as of and for the
year ended September 30, 1995, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Short Hills, New Jersey
December 30, 1997
<PAGE>
Independent Auditors' Report
FulCircle Recyclers, Inc.:
We have audited the balance sheet of FulCircle Recyclers, Inc. as of
September 30, 1995 and the related statements of income, retained earnings, and
cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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, the financial statements referred to above present fairly,
in all material respects, the financial position of FulCircle Recyclers, Inc. as
of September 30, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The Company agreed to merge with Environmental Technologies Corp. in an
acquisition accounted for using the pooling of interest method.
Yohalem Gillman & Company
New York, New York
December 30, 1995
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,321,071 942,709
Accounts receivable, less allowance for doubtful
accounts of $317,430 in 1997 and $191,085
in 1996 5,665,329 4,498,318
Due from officer 100,000 -
Inventories 24,430,301 22,605,245
Prepaid expenses and other current assets 341,237 334,336
---------- ----------
Total current assets 32,857,938 28,380,608
Property and equipment, net 2,243,797 2,153,150
Goodwill, net 610,101 659,236
Other assets 1,222,520 713,733
---------- ----------
$36,934,356 31,906,727
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable 13,500,000 9,497,519
Accounts payable 3,690,787 2,128,602
Accrued liabilities 1,148,415 1,216,684
---------- ----------
Total current liabilities 18,339,202 12,842,805
---------- -----------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
1,000,000 shares; none issued or out-
standing - -
Common stock, $.01 par value. Authorized
10,000,000 shares; issued 4,989,719
shares in 1997 and 5,153,411 shares
in 1996 49,897 51,534
Additional paid-in capital 11,396,532 12,749,053
Retained earnings 7,148,725 6,263,335
---------- ----------
Total stockholders' equity 18,595,154 19,063,922
Commitments and contingencies ---------- ----------
$36,934,356 31,906,727
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Net sales $57,449,743 34,542,675 34,677,971
Cost of sales 47,300,645 24,330,064 24,914,443
------------- ------------- ----------
Gross profit 10,149,098 10,212,611 9,763,528
Selling, general and administrative
expenses 7,386,341 6,842,859 6,198,552
------------- ------------- ----------
Operating income 2,762,757 3,369,752 3,564,976
Interest expense 1,009,108 413,554 296,534
Other income, net (28,741) (50,009) (52,212)
------------- ------------- ------------
Income before income
tax expense 1,782,390 3,006,207 3,320,654
Income tax expense 897,000 1,278,000 1,338,000
------------- ------------- -------------
Net income $ 885,390 1,728,207 1,982,654
============= ============= ============
Net income per common and common equivalent shares:
Primary $ .18 .34 .43
=== === ===
Fully diluted $ .18 .34 .42
=== === ===
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
Balance at September 30, 1994 4,013,942 $ 40,139 4,725,134 3,422,036 8,187,309
Issuance of common stock for Global
Refrigerant Management, Inc. 58,089 581 499,419 - 500,000
Proceeds from exercise of warrants 1,078,380 10,784 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)
Pro forma tax adjustment - - 119,265 - 119,265
Net income - - - 1,982,654 1,982,654
---------- ------- ------- ---------- ----------
Balance at September 30, 1995 5,150,411 51,504 12,823,634 4,725,136 17,600,274
Distributions to shareholders - - - (190,008) (190,008)
Pro forma tax adjustment - - (34,000) - (34,000)
Proceeds from options exercised 3,000 30 17,970 - 18,000
Costs related to warrants - - (58,551) - (58,551)
Net income - - - 1,728,207 1,728,207
---------- ------- -------- --------- ----------
Balance at September 30, 1996 5,153,411 51,534 12,749,053 6,263,335 19,063,922
Proceeds from options exercised 47,833 478 373,970 - 374,448
Proceeds from warrants exercised 61,500 615 458,760 - 459,375
Stock repurchase and retirement (273,025) (2,730) (2,185,251) - (2,187,981)
Net income - - - 885,390 885,390
---------- ------- ---------- --------- -----------
Balance at September 30, 1997 4,989,719 $49,897 11,396,532 7,148,725 18,595,154
========== ======= ========= ========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income 885,390 1,728,207 1,982,654
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Pro forma tax adjustment - (34,000) 119,265
Conform fiscal year of FulCircle Recyclers, Inc.
and eliminate duplicate net income - - (59,631)
Depreciation and amortization 848,414 706,096 400,569
Provision for bad debt 290,659 206,683 185,124
(Gain) loss on sale of equipment (15,003) 3,422 -
(Increase) decrease in assets:
Accounts receivable (1,557,670) 234,417 (1,444,943)
Inventory (1,825,056) (12,658,532) (123,688)
Prepaid expenses and other current assets (6,901) 438,750 (219,354)
Other assets (508,787) (580,376) (35,476)
Increase (decrease) in accounts payable and
accrued liabilities 1,493,916 47,848 (22,477)
------------- --------------- -------------
Net cash (used in) provided by
operating activities (395,038) (9,907,485) 782,043
------------- --------------- -------------
Cash flows from investing activities:
Proceeds from sale of equipment 52,485 70,215 -
Capital expenditures (927,408) (1,247,661) (882,743)
Acquisition of business - - (1,925,000)
------------- -------------- -------------
Net cash used in investing activities (874,923) (1,177,446) (2,807,743)
------------- --------------- -------------
Cash flows from financing activities:
Principal payments on note payable - related party - - (252,144)
Net proceeds (payments) on notes payable 4,002,481 8,997,519 (1,911,749)
Principal payments on long-term debt - (766,669) (239,164)
Costs related to warrants - (58,551) -
Distributions to stockholders - (190,008) (690,489)
Proceeds from long-term debt - - 1,000,000
Stock repurchase and retirement (2,187,981) - -
Proceeds from exercise of warrants 459,375 - 7,211,166
Proceeds from contributions to capital - - 350,000
Proceeds from options exercised 374,448 18,000 -
------------- --------------- --------------
Net cash provided by financing
activities 2,648,323 8,000,291 5,467,620
------------- --------------- --------------
Net increase (decrease) in cash and
cash equivalents 1,378,362 (3,084,640) 3,441,920
Cash and cash equivalents at beginning of year 942,709 4,027,349 585,429
------------- --------------- --------------
Cash and cash equivalents at end of year $ 2,321,071 942,709 4,027,349
============= =============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(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
reclaiming services; 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.
(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 include the accounts of FulCircle for all periods
presented.
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 pro forma 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>
<S> <C> <C> <C>
Environ-
mental FulCircle
Technologies Recyclers
Corp. Inc. Combined
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
common equivalent shares:
Primary .50 - .43
Fully diluted .49 - .42
============= ============ ==============
(c) Risks and Uncertainties
</TABLE>
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 1997 and 1996.
In conformity with generally accepted accounting principles,
management of the Company has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses 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 1998. However, beyond 1998 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 for R-134a to
develop.
The Company has a significant supply of commercial refrigerant recovery
equipment on hand at September 30, 1997. Management believes the demand for this
equipment will increase in 1998 as customers in both the automotive and
commercial sectors comply with the Clean Air Act and as the demand for R-12,
R-12 replacement refrigerants 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 R-134a will also
have a favorable impact on the sales of this equipment. However, the achievement
of such anticipated sales cannot be assured. Further, the Company adjusted the
carrying value of certain inventories to its estimated net realizable value in
1997 since a reduction in sales prices may be offered by the Company to increase
sales (see note 3).
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), Continued
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, 1997, the Company has fully funded 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 interests in two joint ventures
using the equity method.
(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, 1997
and 1996 are marketable equity securities of approximately $ 0 and $40,000,
respectively. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," during the year ended September 30, 1995. Under SFAS No.
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 No. 115 in fiscal 1995 was immaterial.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), Continued
(h) Inventories
Inventory is stated at the lower of cost or market, determined
using the average cost and the first-in, first-out (FIFO) methods.
(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 $0.45 per pound excise tax on certain R-12
and other CFC-based refrigerants owned by entities holding them for resale as of
January 1, 1997 and 1996. The Company paid excise tax on certain CFC refrigerant
inventory on hand at January 1, 1997 and 1996 and accounted for this tax as an
expense in the respective fiscal year. A $0.45 per pound excise tax will also be
imposed on January 1, 1998 for certain R-12 owned at January 1, 1998 and this
tax will be payable in June 1998.
(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
For 1997 and 1996, both primary and fully diluted net income per
share is based upon the weighted average number of shares outstanding during the
year (5,040,398 weighted average shares in 1997 and 5,150,911 weighted average
shares in 1996).
In February 1997 the Financial Accounting Standard Board issued SFAS No.
128, "Earnings Per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements, primary earnings per share is replaced by a new measure call basic
earnings per share which excludes common stock equivalents. The impact of SFAS
No. 128 on the calculation of fully diluted earnings per share is not expected
to be material. The impact of the new statement would not be material to the
Company's reported earnings per share as both primary and fully diluted net
income per share in 1997 and 1996 is based upon the weighted average number of
shares outstanding during the year.
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).
(n) Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are reflected in the consolidated financial statements at
carrying value, which approximates fair value due to the short-term nature of
these instruments. The carrying value of the Company's borrowings approximates
the fair value based on the current rates available to the Company for similar
instruments.
(o) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as
of October 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), Continued
of the carrying amount or fair value less the cost to sell. Adoption of
this statement did not have an impact on the Company's financial position or
results of operations as the Company previously followed the basic tenets of
this statement.
(p) Stock-Based Compensation
Effective as of October 1, 1996, the Company adopted SFAS No. 123,
"Accounting For Stock-Based Compensation." SFAS No. 123 encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured at the excess, if any, of the quoted market
price at the date of the grant over the amount an employee must pay to acquire
the stock. Because the Company grants options at a price equal to the market
price of the stock at the date of grant plus 10%, no compensation expense is
recorded. The Company, as required, has provided pro forma disclosures of
compensation expense as determined under the provisions of SFAS No. 123.
(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, 1997 and 1996 was approximately $139,000 and $90,000,
respectively.
The following unaudited pro forma financial information for 1995 gives
effect to the 1995 acquisition as noted above as though such acquisition
occurred on October 1, 1994, 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, 1994:
1995
Net sales $ 35,783,193
Net income 1,961,916
Net income per share .42
=========
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Inventories
Inventories at September 30, 1997 and 1996 consist of the following:
1997 1996
---- ----
Raw materials $ 9,566,779 12,527,735
Work in process 113,050 -
Finished goods 14,750,472 10,077,510
------------- ----------
Total inventories $24,430,301 $2,605,245
============= ============
Management believes that due to a number of circumstances (i.e., mild
weather conditions, lack of enforcement of certain November 15, 1995 Clean Air
Act provisions and certain production difficulties encountered in connection
with a move of its facilities from Michigan to Texas) the Company did not meet
sales expectations in recent years on its commercial refrigerant recovery
equipment. However as a result of increased sales and marketing efforts in 1997,
management expected that a substantial portion of its commercial refrigerant
recovery equipment would be sold during 1997.
During 1997, the Company did not sell all of its existing commercial
refrigerant recovery equipment which, management believes was primarily due to
mild summer weather conditions resulting in reduced demand for the equipment.
The Company continues to believe that it will be able to sell substantially all
of its existing commercial refrigerant recovery equipment; however, at the end
of the mild summer of 1997, Management decided that it expects to reduce the
selling price to a level below the previously existing carrying cost for these
units. Consequently, during the fourth quarter of fiscal 1997, the Company
recorded a charge of approximately $500,000 to write down the existing
commercial refrigerant recovery equipment to its estimated net realizable value.
Additionally, during the fourth quarter of fiscal 1997, the Company recorded a
charge of approximately $1,100,000 to write down both automotive and
commercial recovery equipment raw material inventories for obsolete and excess
(slow moving) inventory as well as for inventory shrink.
Through September 30, 1996, the Company carried certain raw material
inventory at LIFO. The estimated replacement cost of inventories exceeded the
LIFO inventory cost by $190,000 at September 30, 1995. During 1996, inventory
layers of this raw material inventory were reduced and LIFO reserves were not
required as of September 30, 1996. 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, 1996. The effect of this was an
increase in net income of approximately $109,000 or $.02 per share in 1996.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Property and Equipment
Property and equipment at September 30, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Depreciable
1997 1996 lives
---- ---- -----
Machinery and equipment $ 3,522,110 2,929,650 2-7 years
Office equipment 948,732 745,588 2-5 years
Vehicles 176,942 164,810 5 years
Leasehold improvements 254,404 206,688 2-5 years
-------------- ------------- =========
4,902,188 4,046,736
Accumulated depreciation (2,658,391) (1,893,586)
-------------- -------------
$ 2,243,797 2,153,150
============== =============
</TABLE>
Leasehold improvements are amortized over the shorter of the estimated
useful life of the assets or the lease term.
(5) Investments and Loans
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 Total
Transformation, Ltd. (TTL). TTL is researching the applicability of transforming
mixed or contaminated refrigerants (defined as a hazardous substance) into a
useful by-product. At September 30, 1997 and 1996, the Company has
advanced/invested approximately $183,000 and $152,000, respectively, in TTL,
which is included in other assets in the accompanying consolidated balance
sheets. TTL has had no significant operations through September 30, 1997.
During the fiscal year ended September 30, 1996, the Company entered into a
50% joint venture with an unaffiliated company. The venture's name is Liberty
Technology International, Inc. (LTI). LTI has constructed a refrigeration
separation plant which provides an alternative to total destruction of mixed
refrigerants. At September 30, 1997 and 1996, the Company has advanced/invested
approximately $559,000 and $339,000, respectively, in LTI, which is included in
other assets in the accompanying consolidated balance sheets. LTI's operations
commenced in fiscal 1997.
The Company's share of earnings or loss from the aforementioned ventures
is not material to its consolidated financial position or results of operations.
Due from officer at September 30, 1997 represents a non-interest bearing
advance to an executive officer of the Company.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Notes Payable
At September 30, 1997 and 1996, notes payable consists of a secured line of
credit in the aggregate amount of $13,500,000 with a bank. The balance
outstanding at September 30, 1997 and 1996 was $13,500,000 and $9,497,519,
respectively, and bears interest at LIBOR plus 1.75% (7.75% and 7.25% at
September 30, 1997 and 1996, respectively). Borrowings in excess of $10,000,000
bear interest at the bank's prime rate. The line is secured by eligible accounts
receivable and inventory. The line of credit is due June 30, 1998.
(7) Cash Flows
Cash paid during 1997, 1996 and 1995 for interest and income taxes is as
follows:
1997 1996 1995
---- ---- ----
Interest $ 1,011,233 413,554 292,766
Income taxes 1,045,584 1,285,000 1,406,119
============= ============ =========
For significant noncash financing 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.
(8) Income Taxes
The components of income tax expense for the years ended September 30,
1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current:
Federal $500,000 937,500 1,033,000
State 426,000 386,500 326,500
---------- ------------ ------------
926,000 1,324,000 1,359,500
---------- ------------ ------------
Deferred:
Federal (24,600) (40,000) (21,500)
State (4,400) (6,000) -
---------- ------------ -----------
(29,000) (46,000) (21,500)
---------- ------------ ------------
$ 897,000 1,278,000 1,338,000
========== ============ ============
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), Continued
Income tax expense for the years ended September 30, 1997, 1996 and 1995
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>
<S> <C> <C> <C>
1997 1996 1995
----- ---- ---- ----
Computed "expected" in-
come tax expense $ 606,013 1,022,110 1,129,022
State income taxes, net
of Federal benefit 278,256 251,130 212,612
Other 12,731 4,760 (3,634)
---------- ------------ ------------
$ 897,000 1,278,000 1,338,000
========== ============ ============
</TABLE>
The temporary differences which give rise to a significant portion of
deferred tax assets and liabilities as of September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Deferred tax assets:
Allowance for bad debts $ 126,972 76,434
Inventory 24,000 24,000
Accruals 8,000 36,000
Net operating loss carryforwards 13,050 13,050
Plant and equipment 4,780 -
Other 4,048 4,048
--------- ----------
Gross deferred tax assets 180,850 153,532
Valuation allowance - -
Net deferred tax assets 180,850 153,532
--------- ----------
Deferred tax liabilities:
Plant and equipment - 2,150
Other 19,257 18,789
Deferred tax liabilities 19,257 20,939
--------- ----------
Net deferred tax asset $ 161,593 132,593
========= ==========
</TABLE>
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, 1997 and 1996, management believes that no valuation
allowance is required based on the Company's history of profitable operations.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), Continued
At September 30, 1997, the Company has federal net operating loss
carryforwards of $38,000 which expire in 2007.
(9) 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 1997, 1996 and 1995.
The Company leases other manufacturing and office facilities pursuant to
operating leases expiring in 1997 through 2001.
The following is a schedule of future minimum rental payments under
operating leases:
1998 $ 540,433
1999 497,205
2000 232,575
2001 73,278
Thereafter -
-----------
Total $ 1,343,491
============
Total rental expense was $641,372, $620,830 and $450,265 for the years
ended September 30, 1997, 1996 and 1995, respectively.
During 1997 and 1996, consulting fees paid to related parties amounted to
$0 and $50,000, respectively.
The Company is self-insured for product liability in connection with the
marketing and sale of its refrigerants. No material losses have occurred.
(10) Stock Option Plan
In July 1992 and in July 1996, the Company adopted stock option plans (the
Option Plans) pursuant to which 500,000 shares of common stock for each plan
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 Plans 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. The options are exercisable for a period
that ends five years from the date the options become exercisable.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
Transactions relating to the Option Plans for the years ended September
30, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
------------------------ ------------------ -----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year
370,000 $ 7.90 256,000 $7.40 237,000 $ 6.55
Granted ........................................... 76,000 7.63 159,000 9.13 86,000 9.26
Exercised ......................................... (47,833) 7.83 (3,000) 6.00 -- --
Forfeited ......................................... (81,667) 9.25 (42,000) 9.40 (67,000) 6.76
-------- ----- -------- ----- -------- -----
Outstanding at end of year
316,500 $ 7.56 370,000 $7.90 256,000 $ 7.40
======== ==== ======= ===== ======== =====
Options exercisable at year end ................... 204,668 $ 7.35 209,670 $7.11 161,250 $ 6.91
======== ===== ======== ===== ======== =====
Weighted average fair value of
options granted during the year .................. $ 1.70 $2.20
====== =====
</TABLE>
The fair value of each stock option granted during 1997 and 1996 is
estimated on the grant date using the Black-Scholes option pricing model with
the following weighted average assumptions for 1997 and 1996: expected life of
5.0 years; expected volatility of 17% in 1997, 20% in 1996 and 23% in 1995;
expected dividend yield of 0%; and risk-free interest rate of 6.22% in 1997,
6.17% in 1996 and 6.39% in 1995.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
at September 30, 1997 at September 30, 1997
------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Range average Weighted Weighted
of Number remaining average Number average
exercise out- contractual exercise exercisable exercise
price standing life price price
$5.25-$ 7.00 146,000 .83 years $ 6.39 146,000 $ 6.39
$7.63-$11.88 170,500 5.39 years 8.56 58,668 9.75
--------- ------------ ------- -------- -----
316,500 3.29 years $ 7.56 204,668 $ 7.35
========== ============ ======== ======== ======
</TABLE>
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 in
accounting for its plans and, accordingly, has not recognized compensation cost
for stock option plans and stock purchase plans in its consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date consistent with the provisions of SFAS No. 123, the Company's
net income would have been changed to the pro forma amounts as of September 30,
1997 and 1996 indicated below (in thousands of dollars, except per share
amounts):
1997 1996
Net income:
As reported $ 885 1,728
Pro forma 820 1,718
Primary earnings per share:
As reported .18 .34
Pro forma .16 .33
Fully diluted earnings per share:
As reported .18 .34
Pro forma .16 .33
=== ===
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply for awards prior to
1996.
(11) 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. In fiscal 1995, the Company received $7,211,166 of net
proceeds from the exercise of warrants. Certain costs directly related to the
exercise of the warrants of approximately $59,000 were charged to additional
paid-in capital in fiscal 1996. In fiscal 1997, the Company received $459,238 of
net proceeds from the exercise of warrants. At September 30, 1997, warrants to
purchase approximately 180,000 shares of common stock were outstanding at
exercise prices ranging from $7.13 to $8.88.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Industry Segments
<TABLE>
<CAPTION>
Refrigerant Equipment products Ballast Elimi- Consoli-
product recycling nations dated
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997:
Net sales $ 50,605,971 2,352,789 4,490,983 - 57,449,743
========== ========= ========= ======= ==========
Operating income (loss) $ 5,989,790 (3,641,994) 414,961 - 2,762,757
========== ========== ========= ======= ==========
Net income (loss) $ 2,897,504 (2,193,915) 181,801 - 885,390
=========== ========== ========= ======= ==========
Identifiable assets at
September 30, 1997 $ 37,674,658 7,908,464 1,485,291 (10,134,057) 36,934,356
========== ========== ========= ======= ==========
Year ended September 30, 1996:
Net sales 25,870,777 2,885,295 5,786,603 - 34,542,675
========== ========== ========= ======== ==========
Operating income (loss) $ 4,267,622 (1,366,779) 468,909 - 3,369,752
========== ========== ========= ======== ==========
Net income (loss) $ 2,271,716 (820,079) 276,570 - 1,728,207
=========== ========== ========= ======== ==========
Identifiable assets at
September 30, 1996 $ 30,200,647 8,239,184 1,669,827 (8,202,931) 31,906,727
=========== ========= ========= =========== ==========
Year ended September 30, 1995:
Net sales 26,020,530 2,644,697 6,012,744 - 34,677,971
=========== ========= ========= =========== ==========
Operating income (loss) $ 3,683,625 (464,241) 345,592 - 3,564,976
============ ========== ========= =========== ==========
Net income (loss) $ 2,130,809 (354,622) 206,467 - 1,982,654
============ ============ ========== ========= =========== ==========
Identifiable assets at
September 30, 1995 $ 19,437,628 7,628,106 1,602,847 (6,504,200) 22,164,381
============ ========= ========= =========== ==========
</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 was included: income taxes, interest expense and other nonoperating
items.
<PAGE>
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), Continued
Depreciation and amortization for the refrigerant, equipment and ballast
recycling segments was $657,287, $60,087 and $131,040, respectively, in 1997,
$578,992, $40,026 and $87,078, respectively, in 1996, and $278,893, $23,876 and
$97,800, respectively, in 1995.
Capital outlay for the refrigerant, equipment and ballast recycling
segments was $804,046, $51,684 and $71,678, respectively in 1997, $944,624,
$141,071 and $161,966, respectively, in 1996, and $727,446, $3,305 and $151,992,
respectively, in 1995.
<PAGE>
Schedule II
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions Other
charged additions
Beginning to or Ending
Description balance expense (deductions) balance
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997 $ 191,085 290,659 (164,314) 317,430
1996 106,400 206,683 (121,998) 191,085
1995 61,500 185,124 (140,224) 106,400
========== ========== =========== =========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with the accountants in the years ended September
30, 1997, 1996 and 1995.
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
The directors and executive officers of the Company as of September 30
were:
Name Age Position
George Cannan, Sr 54 Chairman and Director
Jim Burns 47 President and Director
Caroline Costante 35 Secretary and Director
John Stefiuk 46 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.
Jim Burns has been President of EMC since April 1996 and President and a
Director of the Company since February 1997. Prior to that he owned and operated
a manufacturers' representative firm.
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.
<PAGE>
Information Concerning Board
The Board of Directors did not meet during the 1997 fiscal year and acted
once by unanimous consent.
The Board of Directors has an Audit Committee and a Compensation Committee,
both consisting of George Cannan, Sr., 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 compensation and benefits for such executive
officers and administering 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.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors, and holders of more than ten
percent of the Company's Common Stock to file reports of ownership and changes
in ownership with the Securities and Exchange Commission (the "Commission") and
NASDAQ. Such persons are required to furnish the Company with copies of all
Section 16(a) forms they file.
To the best knowledge of the Company, all filing requirements applicable to
its executive officers, directors, and greater than 10% beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years ended September 30,
1997, 1996 and 1995, cash and certain other compensation paid or accrued by the
Company for the Chairman and Chief Executive Officer ("CEO")(collectively, the
"Named Officers"). No other executive officer had a salary and bonus in excess
of $100,000 during such years:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation
Other Annual Long-Term
Compensation Compensation
Name and Principal Position Year Salary($) Bonus($) $ Options Awards
- --------------------------- ----- ---------- --------- -------- ------- ------
George Cannan, Sr.
Chairman/CEO 1997 $200,000 0 (1) - -
Chairman 1996 $200,000 0 (1) - -
Chairman/CEO 1995 $200,000 0 (1) - -
B. Brinkerhoff McCagg
CEO 1996 $125,000 0 (1) - -
Jim Burns
President 1997 $110,000 0 (1) - -
</TABLE>
(1) Represents less than 10% of the Executive's compensation.
Stock Option Grants in Last Fiscal Year
The following table sets forth certain information concerning the grant of
stock options during the year ended September 30, 1997 to the Named Officers. No
stock appreciation rights were awarded, either alone or in tandem with the stock
options, during the year ended September 30, 1997.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
<S> <C> <C> <C> <C> <C>
Potential
Realizable
Value at
Assumed
Annual
Number of % of Total Rates of
Securities Options Stock Price
Underlying Granted Exercise Appreciation
Options To Employees Price Expiration For Option
Name Granted In FY 1997 ($/Share) Date Term
- --------------------------------- ------------------------------------------------------------------
(5%) (10%)
(000)
Jim Burns 26,000 34% $7.63 3/31/03 $ 67 $153
25,000 33 7.63 3/31/04 78 181
25,000 33 7.63 3/31/05 91 218
--- ---- ----
100% $236 $552
---- ---- ----
</TABLE>
<PAGE>
Option Exercises During, and Stock Options Held at End of Fiscal 1997
The following table indicates the total number and value of exercisable
stock options held by the Named Officers as of September 30, 1997. No options
were exercised by the Named Officers in the fiscal year ended September 30,
1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 $171,000 0
Jim Burns 8,000 92,000 6,960 $ 80,040
Caroline Costante 20,000 0 50,000 0
John Stefiuk 10,000 0 4,150 0
</TABLE>
(1) Based on the last sale price for the Company's Common Stock on September
30, 1997 (the last day the Common Stock traded in the 1997 fiscal year) of $8.50
per share, as reported by NASDAQ.
Stock Option Plans
The Company maintains stock option plans designated as the 1992 Stock
Option Plan (the "1992 Plan") and the 1996 Stock Option Plan (the "1996 Plan")
collectively the "Option Plans" pursuant to each of 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 Plans 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 Plans are administered by the
Board of Directors. The Board, within the limitations of the Option Plans,
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 restrictions such as repurchase rights in the
Company are to be imposed on shares subject to options. ISOs granted under the
Option Plans 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 Plans 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 Plans 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). Any options
granted under the Option Plans 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 Report, options to purchase an aggregate of 240,500
shares of Common Stock are outstanding under the 1992 Plan, and to purchase
76,000 shares of Common Stock are outstanding options under the 1996 Plan.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 31, 1997, 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 and executive officer of the Company 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. 1,809,793(2) 35.6%
Jim Burns 100,000(3) 2.0%
Caroline Costante 93,261(4) 1.9%
John Stefiuk 10,000(5) 0.2%
Hartland Advisors 600,000 12.0%
- ---------
All Directors and Officers as
a Group (4 persons) 2,013,054(6) 38.6%
- -----------------------
(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 Report 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 Report have been
exercised.
(2) Includes 90,000 shares of Common Stock issuable upon the exercise of stock
options which are presently exercisable.
(3) Consists of 100,000 shares of Common Stock issuable upon the exercise of
stock options which are presently exercisable.
(4) Includes of 20,000 shares of Common Stock issuable upon the exercise of
stock options which are presently exercisable.
(5) Consists of 10,000 shares of Common Stock issuable upon the exercise of
stock options which are presently exercisable.
(6) Includes 90,000, 100,000, 20,000 and 10,000 shares of Common Stock
issuable to George Cannan, Sr., Jim Burns, Caroline Costante and John
Stefiuk, respectively, upon the exercise of stock options which are
presently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description
3.1 Amended and Restated Certificate of Incorporation*
3.2 By-Laws*
4.1 Form of Underwriter's Warrant*
4.2 Form of Warrant Agency Agreement together with attached
form of Redeemable
Common Stock Purchase Warrant*
10.1 1992 Stock Option Plan*
10.2 1996 Stock Option Plan**
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG Peat Marwick LLP
* Filed as an Exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-53496) and incorporated herein by reference.
** Filed as an Exhibit to the Company's Proxy Statement dated June 27, 1996 and
incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Lakewood, State of
New Jersey on the 12th day of January, 1998.
ENVIRONMENTAL TECHNOLOGIES CORP.
BY: /s/George Cannan, Sr.
GEORGE CANNAN, SR., Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/s/George Cannan, Sr. Chairman January 12, 1998
GEORGE CANNAN, SR. and Director
Chief Financial Officer
Principal Financial
and Accounting Officer
Principal Executive
Officer
/s/Jim Burns President and January 12, 1998
JIM BURNS Director
/s/Caroline Costante Secretary and January 12, 1998
CAROLINE COSTANTE Director
/s/John Stefiuk Director January 12, 1998
JOHN STEFIUK
</TABLE>
<PAGE>
Exhibit 21.1 Subsidiaries of Registrant
Effective December 31, 1997 the subsidiaries of the Company were:
Environmental Materials Corp.
Envirogroup Services, Inc.
Refrigerant Reclaim Services, Inc.
FulCircle Recyclers, Inc.
E.M.C. Export Co., Inc.
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Environmental Technologies Corp.:
We consent to incorporation by reference in the Registration Statements (No.
33-86494, No. 333-8487 and No. 333-8355) on Forms SB-2, S-3 and S-8,
respectively, of Environmental Technologies Corp. of our report, dated December
30, 1997, relating to the consolidated balance sheets of Environmental
Technologies Corp. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
and financial statement schedule for each of the years in the three-year period
ended September 30, 1997, which report appears in the September 30, 1997 annual
report on Form 10-K of Environmental Technologies Corp.
Our report indicates that we did not audit the financial statements of FulCircle
Recyclers, Inc. as of and for the year ended September 30, 1995, acquired
pursuant to a business combination as of December 31, 1995 and accounted for as
a pooling of interests, which financial statements reflect total assets and net
sales constituting 7% and 17% , respectively, of the related consolidated totals
in 1995. Those financial 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. as of and for the year ended September
30, 1995, is based solely on the report of the other auditors.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 12, 1998
<PAGE>