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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, 1998
[ ]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
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EVTC, INC.
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(Name of Registrant as Specified in Its Charter)
Delaware 22-3005943
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
121 South Norwood Drive
Hurst, Texas 76053
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(Address of Principal Executive Offices) (Zip Code)
(817) 282-0022
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(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
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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
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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 12, 1999, computed by reference to the price at
which the stock was sold on that date: $2,027,995.
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "Common Stock"), as of January 12, 1999, was
4,989,719.
Documents Incorporated by Reference: None
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EVTC INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
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<S> <C>
1. Description of Business 1
2. Description of Property 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security
Holders
17
5. Market for Common Equity and Related
Stockholder Matters
17
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
7a. Quantitative and Qualitative Disclosures
About Market Risk 25
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 53
12. Security Ownership of Certain Beneficial Owners
and Management 55
13. Certain Relationships and Related Transactions 57
14. Exhibits and Reports on Form 8-K 57
</TABLE>
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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.
EVTC, Inc. (the "Company") was incorporated under the name "Environmental
Technologies Corporation" under the laws of Delaware. In 1997, the Company
changed its corporate name to "EVTC, Inc." but continues to trade and do
business as "Environmental Technologies Corporation." The Company is engaged in
the marketing and sale of refrigerants, refrigerant reclaiming services and the
recycling of fluorescent light ballasts and lamps. The Company also
manufactured and distributed refrigerant recycling and recovery equipment prior
to the discontinuation of such operations in July 1998 (see Notes to the
Consolidated Financial Statements regarding discontinued operations).
The following table sets forth information relating to the approximate
dollar amounts and percentages of revenues derived from the Company's sales of
refrigerants and ballast recycling services:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
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(000'S)
1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
Refrigerants $34,482 90% $50,606 92% $25,871 82%
Ballast Recycling 4,001 10 4,491 8 5,787 18
----------- ----------- -----------
$38,483 100% $55,097 100% $31,658 100%
======= === ======= === ======= ===
</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"). CFC
refrigerants primarily used include R-11, R-12, and R-502. 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 refrigerants. The Montreal
Protocol has been implemented in the United States through the Clean Air Act
and the regulations promulgated thereunder by the Environmental Protection
Agency (EPA). Pursuant to the Clean Air Act, which was amended in 1990 in
response to additional evidence linking the use of CFCs to damage to the
earth's ozone
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layer, production of CFCs ceased at the end of 1995. The Clean Air Act also
requires the recovery or recycling of all refrigerants used in automobile,
residential and commercial air conditioning and refrigeration systems.
While CFC production ceased in 1995 continued initatives of government
agencies, primarily the EPA, have placed additional restrictions on other ozone
depleting and non-ozone depleting substances.
Hydrochlorflorocarbon refrigerants ("HCFCs") are also considered to be an
ozone depleting substance. However, their potential for ozone depletion is
substantially less than CFCs.
During the phaseout of CFCs, HCFCs are used as interim CFC substitutes.
HCFC refrigerants include R-22, R-123, R-124, R-401, and R-402. Due to HCFCs
ozone depletion potential, their production in the United States is scheduled to
be phased out over the next 10 years. Several European countries and Canada
have already put stringent production and import caps on HCFCs. While no
production or import caps are currently in place in the United States, the
Environmental Protection Agency is closely monitoring production and importing
of HCFCs into the United States.
CFCs are also being replaced by hydrofluorocarbons ("HFCs"). HFCs do not
deplete the ozone and are recognized as the long-term replacement for CFCs and
HCFCs. Tetrafluoroethane, or R-134a, is currently the primary replacement for
R12, the most common CFC refrigerant. Other HFCs include R-23, R-404, R-407,
R-410, R-507, and R-508. HFCs, while not ozone depleting, are considered to be
a "green house" gas that contributes to global warming. As a result current
regulations also require that they be reclaimed and recycled.
The Company, and most other companies in the industry, no longer have
readily available access to sources of newly manufactured CFC refrigerants.
HCFC and HFC virgin products are readily available to the Company and its
competitors in the industry. See "Suppliers" disclosure.
In general, working capital levels for the Company and industry-wide reflect
the highly seasonal nature of sales for refrigerants that are significantly
related to weather conditions. Sales of the Company's products generally
precede warm weather and continue through much of the warm weather months.
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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.
The most widely used commercial refrigerants are R-11, R-12, R-22, R-134a
and R-502. R-11 is primarily used in commercial air conditioning systems. R-12
and R134a are the predominant refrigerants used in automobile air conditioning
systems. R-12 can also be used as a refrigerant in residential air conditioning
and refrigeration systems. R-22 is a refrigerant capable of providing extensive
cooling of large areas, making it suitable for use in residential and
commercial air conditioning. R-502 is used extensively as a refrigerant in
commercial refrigeration systems.
The Company's automotive line of refrigerants includes R-12, R-22 and
R-134a and is 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 a complete line of reclaimed and virgin refrigerants to
HVAC/R wholesalers, mechanical contractors and large institutional and
government users of refrigerants.
The Company markets R-134a in spray cans under its customers' private
labels for use on dusting moisture-sensitive equipment, including personal
computer screens, cabinets, peripherals and photographic equipment.
The Clean Air Act mandated that automobile manufacturers develop 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 automobile air conditioning
systems.
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."). Full Circle, Inc. 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 purity standards set
by the
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Air Conditioning and Refrigerant Institute ("ARI"). Reclaimed refrigerants,
unlike recycled refrigerants, meet the same specifications as newly
manufactured products. Full Circle, Inc. 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. Full
Circle, Inc. also purchases used refrigerants for reclamation and resale.
Typically, refrigerant is purchased from users choosing to retrofit or replace
their CFC bearing equipment for equipment using non-CFC refrigerants.
RECYCLING AND RECOVERY EQUIPMENT
The Clean Air Act required 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 and prevent their discard into the atmosphere. A recycled
product 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.
The recycling and recovery equipment market did not meet the Company's
expectations due to a lack of governmental enforcement of the Clean Air Act and
intense competition. After five consecutive years of operating losses, the
Company adopted a formal plan to discontinue its recycling and recovery
equipment business segment in July 1998.
SUPPLIERS
The Company is not dependent on any one source of refrigerant for its
supply of refrigerants. The Company does not maintain long-term supply
agreements with its suppliers. The Company has firm purchase orders with
several suppliers to meet the majority of their refrigerant needs in 1999.
The Company purchases used refrigerant from major HVAC wholesalers,
mechanical contractors, salvage operations, large industrial and institutional
users of refrigerant as well as brokers. The Company uses a network of
wholesale HVAC supply stores that serve as collection stations for used
refrigerants.
The Company's operating results are in part dependent on its ability to
obtain sufficient quantities of domestic virgin (pure) and reclaimable
refrigerants from its suppliers. In the event that the Company is unable to
obtain sufficient quantities of refrigerants in the future, or resell reclaimed
refrigerants at a profit, the Company's financial condition and results of
operations would be adversely affected.
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MARKETING AND SALES
The Company primarily markets its various reclaimed refrigerants and
reclaiming services directly to HVAC/R wholesalers, mechanical contractors and
large corporate, institutional and governmental users of refrigerants. The
Company also markets refrigerants to wholesale distributors of automotive
suppliers throughout the United States. The Company's distributors resell to
automobile repair shops, service stations and retail automotive supply stores.
Marketing programs are conducted through the efforts of the Company's
executive officers, Company sales personnel and manufacturers sales
representatives. The Company utilizes various marketing methods, including
direct mailings, trade publications, telemarketing, print advertising,
in-person solicitation and participation in trade shows.
No single customer accounted for more than 10% of the Company's revenues
during the years ended September 30, 1998, 1997 and 1996.
The Company typically seeks to fill customer orders within two days of
receipt. Accordingly, at September 30, 1998, the Company had no material
backlog for any product line. In order to fill orders within the foregoing time
frame, the Company seeks to maintain a significant inventory of refrigerants,
raw materials and finished goods.
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. Such companies may 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 believes that it competes on the basis of product availability
and customer service in the marketing and sale of refrigerants. The Company
believes that its refrigerant recovery and reclamation operation is one of the
largest in its industry.
The Company believes that its wholesale distributors market other products that
compete with the Company's products. The Company anticipates that competition
will, in all probability, increase from existing competitors as well as from
new entrants.
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GOVERNMENT REGULATION
In the mid 1980's, 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. 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 are subject to extensive,
stringent and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the EPA, the
United States Occupational Safety and Health Administration and the United
States Department of Transportation.
Among other things, these regulatory authorities impose requirements which
regulate the handling, packaging, labeling, transportation and disposal of
hazardous and non-hazardous materials and the health and safety of workers, and
require the Company and, in certain instances, its employees, to obtain and
maintain licenses in connection with its operations. This extensive regulatory
framework imposes significant compliance burdens and risks on the Company.
The Company and its customers are subject to the requirements of the Clean Air
Act, and the regulations promulgated thereunder by the EPA, which make it
unlawful for any person in the course of maintaining, servicing, repairing, and
disposing of air conditioning or refrigeration equipment, to knowingly vent or
otherwise release or dispose of ozone depleting substances, and non-ozone
depleting substitutes, used as refrigerants.
Pursuant to the Clean Air Act, reclaimed refrigerant must satisfy the same
purity standards as newly manufactured refrigerants in accordance with
standards established by the ARI prior to resale to a person other than the
owner of the equipment from which it was recovered. The ARI and the EPA
administer certification programs pursuant to which applicants are certified to
reclaim refrigerants in compliance with ARI standards. Under such programs, the
ARI issues a certification for each refrigerant and conducts periodic
inspections and quality testing of reclaimed refrigerants.
The Company has obtained ARI certification for most refrigerants at its
reclamation facility, and is certified by the EPA. The Company is required to
submit periodic reports to the ARI and pay annual fees based on the number of
pounds of reclaimed refrigerants.
During 1996 and 1997, the EPA published proposed regulations, which, if
enacted, would require participation in third-party certification programs
similar to the ARI
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program. Such proposed regulations would also require laboratories designed to
test refrigerant purity to undergo a certification process. As of December
1998, the regulations had not been mandated and were under review. The Company
anticipates these regulations to pass and has initiated steps to obtain EPA
certification.
The Company is subject to regulations adopted by the United States Department
of Transportation ("DOT") which classify most refrigerants handled by the
Company as hazardous materials or substances and impose requirements for
handling, packaging, labeling and transporting refrigerants. The Company
believes that it is substantial in compliance with these regulations.
Amendments to existing statutes and regulations or adoption of new statutes and
regulations which affect the marketing and sale of refrigerants 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 on the Company.
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
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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. Consequently, 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.
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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". Consequently, in case of 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.
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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, as 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 currently under review and may require 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. EPA and lamp manufacturers' detailed
studies have concluded that these lamps constitute a hazardous waste, as they
fail the Toxicity Characteristic Leaching Procedure (TCLP).
The EPA has proposed special regulations that address lamp disposal,
including ballasts. The proposed regulations are currently under review.
THE COMPANY
The balance of Item 1 relates to the whole Company including its refrigerant
and ballast recycling businesses.
CONSULTING AGREEMENT
In September 1998, the Company appointed Colmen Capital Advisors, Inc.
("Colmen") to provide executive management, investment banking, and advisory
services on an exclusive basis. Colmen, located in King of Prussia,
Pennsylvania, is a private investment banking firm that provides advisory
services in business turnarounds, financing, mergers, acquisitions, and
strategic planning. Under the terms of the agreement, Colmen will develop,
institute and operate a business improvement program with respect to the
immediate and future needs of the Company. The term of the contract is one
year.
Pursuant to the Agreement the Company is to pay Colmen $17,500 each month
(subsequently increased in November 1998 to $30,000 each month) for these
services, and to grant Colmen options to acquire 500,000 shares of common stock
at an exercise price of $2.23 per share 90 days from the Agreement date of which
250,000 options vest and are exercisable immediately and 250,000 options vest
and are exercisable six months and one day from the Agreement date. In addition,
the Company agreed to issue options to acquire 500,000 common shares six months
and one day from the Agreement date that will vest and become exercisable
immediately at an exercise price of $5 per share. The options terminate the
earlier of one year after termination of the Agreement by either party or three
years after the Agreement date. The Company may terminate this Agreement in the
event Colmen fails to pursue in good faith its obligation duties as specified in
the Agreement.
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In November 1998, the Company's Board of Directors appointed James Hellauer
as President and Chief Executive Officer. George Cannan remained Chairman of
the Board.
RISK FACTORS
In October 1998, the Company received a letter from the NASDAQ National Market
expressing concern that the Company's common stock had failed to maintain a
market value of public float greater than or equal to $5,000,000 for the past 30
consecutive days (a requirement in accordance with Marketplace Rule 4450 (a)(2)
under Maintenance Standard I). Per the letter, the Company has been provided 90
calendar days to regain compliance with Marketplace Rule 4450 (a)(2). If at
anytime within the 90 calendar days from the date of the NASDAQ letter (October
29, 1998), the closing bid price of the Company's shares of common stock allows
for the maintenance of greater than $5,000,000 of public float, for a minimum of
ten consecutive trading days, the Company would be within compliance of
continued listing requirements. Should the Company not demonstrate compliance
with Marketplace Rule 4450 (a)(2) on or before the end of the ninety day period
(January 29, 1999), the Company's securities will be delisted at the opening of
business on February 2, 1999.
As of the date of this report, the Company's line of credit balance was
approximately $12 million. The Company's line of credit balance exceeded
eligible security by $192,583. The line of credit is due on January 15, 1999.
The Company has received a non-binding verbal agreement from the bank to extend
the due date for 120 days to allow the Company to obtain long term permanent
financing from another financial institution The Company is negotiating with a
number of other banks and financial institutions to refinance the existing note
payable and provide the Company with a long term credit facility. Based on
negotiations to date and its operating and financial forecast for 1999, Company
management believes they will be able to obtain replacement financing within the
120 day extension period. Should the Company not succeed in refinancing the
note, the bank has the option to demand payment and the Company may not have the
financial resources available to meet such a demand. The inability of the
Company to refinance its existing indebtedness could have a material adverse
effect on the Company's financial position, results of operations and liquidity.
RESEARCH AND DEVELOPMENT
The Company's management places emphasis on obtaining the technology and
developing the products to achieve superiority in its industry. The Company
employs a full-time chemist to administer such projects. However, research and
development costs to date have not been material.
During the fiscal year ended September 30, 1995 the Company entered into a
50% joint venture with two unaffiliated individuals. The venture's name is
Transformation Technologies Ltd. ("TTL"). TTL was formed to research 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. At September 30, 1997
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the Company had advanced/invested approximately $183,000 in TTL. The investment
was written off in fiscal year 1998, as TTL has been unable to develop
technology that was commercially viable and had no significant operations
through September 30, 1998.
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 developed and constructed a
refrigeration separation plant which provides a cost effective and
environmentally sound alternative to total destruction of mixed refrigerants.
At September 30, 1998 and 1997, the Company has advanced/invested approximately
$547,786 and $669,000, respectively, in LTI, which is included in other assets
in the accompanying consolidated balance sheets. LTI's operations commenced in
January of 1997. LTI is one of the largest refrigerant separation facilities in
the country.
The Company reports the earnings and losses related to the aforementioned
ventures under the equity method of accounting. To date, the income related to
these joint ventures have not been material to the Company's financial
statements.
QUALITY ASSURANCE & ENVIRONMENTAL COMPLIANCE
The Company utilizes in-house quality and regulatory compliance control
procedures. The Company maintains its own in-house analytical testing
laboratory to assure that reclaimed refrigerants comply with ARI purity
standards and employs portable testing equipment when performing on-site
services to verify certain quality specifications. The Company employees three
full time employees dedicated to quality control and regulatory compliance and
provides extensive quality control and regulatory compliance training to all
operations personnel. In addition, management is significantly involved in
regulatory compliance efforts.
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.
12
<PAGE> 16
TRADEMARKS
The Company has several registered and/or pending trademarks that it uses
to make its products.
INSURANCE
The Company carries insurance coverage which it considers sufficient to protect
the Company's assets and operations. The Company currently maintains general
commerical liability insurance for claims up to $1,000,000 per occurrence and
$2,000,000 in the aggregate. This coverage includes product liability that
covers recycling and recovery equipment sales. There can be no assurance that
such insurance will be sufficient to cover potential claims or that an adequate
level of coverage will be available in the future at a 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.
The Company attempts to operate in a professional and prudent manner and to
reduce its liability risks through specific risk management efforts, including
employee training. Nevertheless, a partially or completely uninsured claim
against the Company, if successful and of sufficient magnitude, would have a
material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory
and common-law liability for environmental damage and personal injury. The
Company, and in certain instances, its officers, directors and employees, may
be subject to claims arising from the Company's on-site or off-site services,
including the improper release, spillage, misuse or mishandling of refrigerants
classified as hazardous or non-hazardous substances or materials. The Company
may be strictly liable for damages, which could be substantial, regardless of
whether it exercised due care and complied with all relevant laws and
regulations. The Company does not maintain environmental impairment insurance.
There can be no assurance that the Company will not face claims resulting in
substantial liability for which the Company is uninsured, that hazardous
substances or materials are not or will not be present at the Company's
facilities, or that the Company will not incur liability for environmental
impairment or personal injury (See 'Legal Proceedings').
13
<PAGE> 17
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 EPA, 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 Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the
hazardous waste in accordance with the manifest to a facility with an
appropriate RCRA permit. Under RCRA, impurities removed from refrigerants
consisting of oils mixed with water and other contaminants are not presumed to
be hazardous waste. The Company believes that it is in substantial compliance
with these regulations.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA. The Company believes that
it is in substantial compliance with these regulations.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), establishes liability for clean-up costs and environmental
damages to current and former facility owners and operators, as well as persons
who transport or arrange for transportation of hazardous substances. Almost all
states, including New York, have similar statutes regulating and handling and
storage of hazardous substances, hazardous wastes and non-hazardous wastes.
Many such statutes impose requirements, which are more stringent than their
federal counterparts. The Company could be subject to substantial liability
under these statutes to private parties and government entities, in some
instances without any fault, for fines, remediation costs and environmental
damage, as a result of the mishandling, release, or existence of any hazardous
substances at any of its facilities.
The Occupational Safety and Health Act of 1970 mandates requirements for safe
work places for employees and special procedures and measures for the handling
of certain
14
<PAGE> 18
hazardous and toxic substances. State laws, in certain circumstances, mandate
additional measures for facilities handling specified materials.
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, 1998, the Company employed approximately 125 persons,
including its executive officers. None of the Company's employees are
represented by a union. The Company believes its employee relations are good.
15
<PAGE> 19
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>
Location Square Footage Use
- -------- -------------- ---
<S> <C> <C>
Lakewood, NJ 21,000 Refrigerant packaging and
distribution center
Bronx, NY 13,500 Ballast recycling
Keller, TX 55,000 Recycling and recovery
equipment production and
distribution.
Hurst, TX 26,000 Reclamation facility;
Executive offices
Houston, TX 6,400 Recovery, storage and
distribution center
Bridgeview, IL 15,000 Recovery, storage and
distribution center
Livermore, CA 8,700 Recovery, storage and
distribution center
Orlando, FL 7,000 Recovery, storage and
distribution center
Kapolei, HI 6,000 Recovery, storage and
distribution center
Memphis, TN 1,500 Sales and administrative 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 Company 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.
16
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or involving the
Company 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.
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, 1996, 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.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ---- ---
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
First Quarter.................... $ 8 5/8 $ 6
Second Quarter................... 7 1/4 5 5/8
Third Quarter.................... 7 3/8 5 1/4
Fourth Quarter................... 5 5/8 1 1/4
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
</TABLE>
17
<PAGE> 21
As of September 30, 1998, 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.
18
<PAGE> 22
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, 1998. 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.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales......................... $38,483 $55,097 $31,657 $32,033 $23,524
Income (Loss) From
Continuing Operations............ (5,188) 3,261 2,640 2,337 2,090
Income (Loss) From
Continuing Operations Per Share
Basic ......................... (1.04) 0.65 0.51 0.48 0.52
Diluted........................ (1.04) 0.64 0.50 0.47 0.51
<CAPTION>
As of September 30,
---------------------------
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Working Capital................... $ 4,104 $14,893 $15,538 $15,489 $ 4,484
Total Assets...................... 23,561 37,546 31,907 22,164 13,427
Total Debt........................ 11,992 13,500 9,498 1,267 1,920
Total Shareholders'
Equity........................... 7,110 18,595 19,064 17,600 8,187
</TABLE>
During July 1998, the Company adopted a plan to discontinue its Recycling
and Recovery Equipment Business. See Note 8 of Notes to the Consolidated
Financial Statements. The Statements of Operations Data above have been recast
to exclude such discontinued operations.
19
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained herein which are not historical facts are forward
looking statements that involve risks and uncertainties, including but not
limited to, changes in the markets for refrigerants (including unfavorable
market conditions adversely affecting the demand for, and the price of,
refrigerants), regulatory and economic factors, increased competition, the
nature of supplier or customer arrangements which become available to the
Company in the future, adverse weather conditions, technological obsolescence
and potential environmental liability. The Company's actual results may differ
materially from the results discussed in any forward-looking statement.
The Company's fiscal year-end is September 30.
RESULTS OF CONTINUING OPERATIONS
Year ended September 30, 1998 compared to year ended September 30, 1997
Net sales for continuing operations for the year ended September 30, 1998
were $38,483,170, a decrease of $16,613,784, or 30.2%. The decrease in net
sales is primarily attributed to a 31.8% decrease in sales of refrigerant
products, resulting from weak demand and pricing for refrigerant R-12 and other
CFC refrigerants. The weak demand during fiscal year 1998 is primarily due to
the relatively mild climate in the Western and Northeast portions of the United
States during summer of 1998 and customer inventory carry over from the mild
summer of 1997. The weak demand coupled with the fact that several large
automotive original equipment manufacturers were selling large quantities of
refrigerant R-12 into the market resulted in weak pricing during fiscal year
1998. Additionally, ballast-recycling sales decreased 10.9%, primarily due to a
turnover in sales personnel. The Company does not anticipate ballast sales to
be affected in fiscal 1999 by the 1998 turnover in sales personnel.
Sales of refrigerant R-12 continue to provide a significant portion of the
Company's revenues although its relative percentage is declining. The decline
in R-12 sales is primarily attributed to the significant increase in the demand
for R-134a, the replacement for R-12, and the Company's increasing emphasis on
refrigerant reclaiming and commercial refrigerant sales. The Company's ability
to maintain its current level of R-12 sales for the foreseeable future will be
dependent, to a large extent, upon the availability of adequate sources of
supply. The Company is not dependent on any one source of refrigerant for its
supply of R-12 or R-134a refrigerant and historically has purchased from a
number of manufacturers and suppliers. The Company's refrigerant reclaiming and
separation activities will continue to serve as an important source of R-12, as
well as other CFC refrigerants.
Cost of sales for continuing operations for the year ended September 30,
1998 was $35,669,958, a decrease of 16.7% from the $42,841,492 reported in
fiscal year 1997.
20
<PAGE> 24
Continuing operations costs of sales were 92.6% of continuing operations
revenues, an increase from 77.8% for fiscal year 1997. The increase is
primarily attributable to sales of refrigerant R-12 below cost during fiscal
year 1998. The Company was forced to sell R-12 below cost to meet market
pricing set by the automotive original equipment manufacturers. In addition,
cost of sales was impacted by a $600,000 lower of cost or market writedown on
refrigerant R-12 inventory at year-end. The Company has substantially enhanced
its access to low cost R-12 through its reclamation and separation, and does
not foresee a reoccurrence of this problem in 1999.
Selling, general, and administrative expenses related to continuing
operations for 1998 increased to $7,857,941, an increase of $1,960,230 or 33.2%
from $5,897,711 reported in prior year. This increase resulted from reserving
approximately $1,300,000 for potential bad debts, $200,000 in increased legal
fees and $183,000 related to the TTL investment. The Company's reserve for bad
debt was primarily attributed to an allowance placed on a note receivable that
was in default in the amount of $1,236,000 at September 30, 1998. The Company
does not foresee the reoccurrence of such charges in future years. In addition,
the increase is attributed to sales and marketing expenses associated with the
expansion of the Company's reclaiming operations.
Interest expense in fiscal year 1998 was $1,088,241, an increase of $79,133
or 7.8% from prior year. This is primarily attributed to an increased 1998
average line of credit advance balance from 1997.
The Company recognized a loss from continuing operations of $5,187,741 for
1998. The loss is primarily attributed to the weak demand and pricing for
refrigerant R-12, the lower cost or market writedown of R-12, writeoff of
investment and bad debts, and increased legal fees, as mentioned above. The
Company does not anticipate any of these items recurring in future years. In
1997, the Company reported $3,261,384 in continuing operations income.
In July 1998, the Company's Board of Directors adopted a plan to
discontinue its recycling and recovery equipment segment. The Company has
initiated a liquidation program to sell all assets of the segment. Management
intends for the disposal of the segment to be completed by June 30, 1999 (the
Phase-Out Period). The Company recognized a loss from discontinued operations
of $1,024,840 in fiscal year 1998. The Company recognized a 1998 loss of
$5,273,005 related to the disposal of the discontinued segment. The disposal
loss is composed of an approximate $4,800,000 writedown of inventory to net
realizable value and estimated Phase-Out Period costs.
Year ended September 30, 1997 compared to year ended September 30, 1996
Net sales for continuing operations for the year ended September 30, 1997
were $55,096,954, as compared to continuing operations net sales of $31,657,380
for the year ended September 30, 1996, an increase of $23,439,574, or 74.0%.
The increase in net sales was primarily attributed to a 95.6% increase in sales
of refrigerant products, resulting
21
<PAGE> 25
from increased sales of R-134a and increased sales of reclaiming services. The
increase in net sales was offset by a 22.4% decrease of ballast recycling sales
due to enhanced competition.
Cost of sales for continuing operations for the year ended September 30,
1997 was $42,841,492, as compared to $21,676,868 for the year ended September
30, 1996, which resulted in a gross profit of $12,255,462 or 22.2% in 1997 as
compared to a gross profit of $9,980,512 or 31.5% 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 service sales. Refrigerant product net sales represented
approximately 91.8% of total net sales in 1997 compared to 81.7% of total net
sales in 1996 with a corresponding 19.8% gross profit in 1997 compared to 21.0%
in 1996. The gross profit percentage further declined in 1997 as a result of
decreased higher margin sales at the ballast recycling subsidiary
Selling, general and administrative expenses related to continuing
operations increased $653,730 or 12.5% to $5,897,711 in 1997 from $5,243,981 in
1996. The increase primarily relates to expanding the infrastructure of the
refrigerant recycling business including sales offices and employees.
Interest expense increased $609,885 from $399,223 in 1996 to $1,009,108 in
1997. The increase is a result of increased borrowing to maintain the Company's
supply of R-12.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $4,103,766 at September 30, 1998
compared to $14,893,311 at September 30, 1997, a decrease of $10,789,545. The
decrease in working capital is primarily attributable to the $4,800,000
writedown of the discontinued operations assets to net realizable value,
$1,300,000 write-off of bad debts, and lower refrigerant inventories at
year-end.
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"). At December 31, 1998, the line of credit
advance balance was $12 million.
Borrowings outstanding under the Credit Facility bear interest at the
bank's prime rate. The Credit Facility is secured by eligible accounts
receivable, eligible inventory and property and equipment. At September 30, 1998
the balance outstanding under the Credit Facility exceeded eligible security by
$192,583. As a result, the Company is not currently able to draw additional
funds under the Credit Facility. The Credit Facility is due on January 15, 1999.
The Company has received a non-binding verbal agreement from the bank to extend
the due date for 120 days to allow the Company to obtain long term
22
<PAGE> 26
permanent financing from another financial institution. The Company is
negotiating with a number of other banks and financial institutions to refinance
the existing bank note payable and provide the Company with a long-term credit
facility. Based on negotiations to date and its operating and financial forecast
for 1999, Company management believes they will be able to obtain replacement
financing within the 120-day extension period. The Company believes that current
cash on hand and cash provided by operations is sufficient to fund the Company's
working requirements until permanent long term financing is secured. Should the
Company not succeed in refinancing the Credit Facility, the bank has the option
to demand payment. The Company may not have the financial resources available to
meet such a demand. The inability of the Company to refinance its existing
indebtedness would have a material adverse effect on the Company's financial
position, results of operations and liquidity.
Net cash provided by operating activities related to continuing operations
was $4,846,191 and $1,074,158 for 1998 and 1997, respectively. Net cash used
for operating activities related to discontinued operations was $799,412 and
$1,092,915 for 1998 and 1997, respectively.
Net cash used in continuing operations investing activities was $331,558 in
1998 and $1,199,520 in 1997. Net cash used by discontinued operations investing
activities was $17,477 in fiscal year 1998 compared to $51,684 net cash used in
1997.
The net cash used in financing activities in 1998 of $1,507,620 reflects
payments on the Credit Facility.
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
The Company's operating results vary from period to period as a result of
weather conditions and the availability and price of refrigerant products
(virgin and reclaimable). The Company's business has historically been seasonal
in nature with peak sales of refrigerants occurring in the second and third
fiscal quarters. 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.
YEAR 2000
The Company continues to assess the potential issues and costs associated
with the year 2000 and believes that its cost to address such issues would not
be material. The Company has implemented a plan to review year 2000 compliance
of all accounting and operations systems. The Company is in the process of
reviewing year 2000
23
<PAGE> 27
compliance issues with its vendors, suppliers, and customers. At the present
time, the Company believes that costs or consequences of an incomplete or
untimely resolution would not result in the occurrence of a material event or
uncertainty reasonably likely to have a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", established standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by Management in deciding how to allocate
resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be recast. The Company is required to adopt these
statements in fiscal year 1999. The adoption of SFAS No. 130 is not expected to
have a material effect on the Company's financial position or results of
operations. The Company is currently reviewing the effect of SFAS No. 131 but
has of yet been unable to fully evaluate the impact, if any, it may have on
future financial statements disclosures.
24
<PAGE> 28
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are
interest rates on the Company's debt and short-term investment portfolios. The
Company centrally manages its debt and investment portfolios considering
investment opportunities and risks, tax consequences and overall financing
strategies. The Company's investment portfolios consist of cash equivalents and
short-term marketable securities; accordingly, the carrying amounts approximate
market value. The Company's investments are not material to the financial
position or performance of the Company.
Assuming year-end 1998 variable rate debt and investment levels, a
one-point change in interest rates would impact net interest expense by
approximately $120,000.
25
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 27
Consolidated Balance Sheets as of
September 30, 1998 and 1997 28
Consolidated Statements of Operations
for each of the years ended September 30, 1998, 1997 29
and 1996
Consolidated Statements of Stockholders' Equity
for each of the years ended September 30, 1998, 1997
and 1996 30
Consolidated Statements of Cash Flows
for each of the years ended September 30, 1998, 1997 31
and 1996
Notes to Consolidated Financial Statements 32
Schedule II - Valuation and Qualifying Accounts 48
</TABLE>
26
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EVTC, Inc.:
We have audited the accompanying consolidated balance sheets of EVTC, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1998. 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 schedules 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 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EVTC, Inc. and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998 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.
Dallas, Texas
January 5, 1999
27
<PAGE> 31
EVTC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,511,195 2,321,071
Accounts receivable, less allowance for doubtful accounts
of $1,512,868 in 1998 and $177,430 in 1997 5,144,724 5,269,422
Due from officer 200,000 100,000
Income taxes receivable 1,423,659 --
Inventories 7,236,440 17,293,475
Prepaid expenses and other current assets 442,200 482,236
Deferred income taxes -- 611,593
Assets of discontinued operations 1,596,948 7,766,309
------------ ------------
Total current assets 20,555,166 33,844,106
Property and equipment, net 1,646,941 2,106,873
Goodwill, less accumulated amortization 560,965 610,101
Investment in joint ventures and other assets 797,896 984,869
------------ ------------
$ 23,560,968 37,545,949
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 11,992,380 13,500,000
Accounts payable - trade 2,338,740 2,654,521
Accrued liabilities 1,643,593 1,631,182
Liabilities of discontinued operations 476,687 1,165,092
------------ ------------
Total current liabilities 16,451,400 18,950,795
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
1,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value. Authorized
10,000,000 shares; 4,989,719 shares
issued and outstanding 49,897 49,897
Additional paid-in capital 11,396,532 11,396,532
Retained earnings (deficit) (4,336,861) 7,148,725
------------ ------------
Total stockholders' equity 7,109,568 18,595,154
Commitments and contingencies
------------ ------------
$ 23,560,968 37,545,949
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 32
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 38,483,170 55,096,954 31,657,380
Cost of sales 35,669,958 42,841,492 21,676,868
------------ ------------ ------------
Gross profit 2,813,212 12,255,462 9,980,512
Selling, general and administrative
expenses 7,857,941 5,897,711 5,243,981
------------ ------------ ------------
Operating income (loss) (5,044,729) 6,357,751 4,736,531
Interest expense 1,088,241 1,009,108 399,223
Other (income) expense, net 60,629 (28,741) (48,964)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes (6,193,599) 5,377,384 4,386,272
Income taxes (1,005,858) 2,116,000 1,746,000
------------ ------------ ------------
Income (loss) from continuing operations (5,187,741) 3,261,384 2,640,272
Discontinued equipment products operations:
Loss from discontinued operations, net of
income taxes (1,024,840) (2,375,994) (912,065)
Loss on disposal of discontinued operations (5,273,005) -- --
------------ ------------ ------------
Net income (loss) $(11,485,586) 885,390 1,728,207
============ ============ ============
Income (loss) per share
Basic
Continuing operations $ (1.04) $ 0.65 $ 0.51
Discontinued operations (1.26) (0.47) (0.17)
------------ ------------ ------------
(2.30) 0.18 0.34
Diluted
Continuing operations $ (1.04) $ 0.64 $ (0.50)
Discontinued operations (1.26) (0.47) (0.17)
------------ ------------ ------------
(2.30) 0.17 0.33
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 33
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Net loss -- -- -- (11,485,586) (11,485,586)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 4,989,719 $ 49,897 11,396,532 (4,336,861) 7,109,568
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 34
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $ (5,187,741) 3,261,384 2,640,272
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operating activities:
Pro forma tax adjustment -- -- (34,000)
Depreciation and amortization 785,195 788,327 666,070
Deferred income taxes 611,593 (439,300) (46,000)
Provision for bad debts 1,335,438 6,345 84,685
Write-off of investment in joint venture 183,096 -- --
(Gain) loss on sale of assets (40,692) (15,003) 5,345
Changes in assets and liabilities:
Accounts receivable (1,210,740) (1,907,056) 566,649
Income taxes receivable (1,423,659) -- --
Inventories 10,057,035 (1,595,136) (11,500,950)
Prepaid expenses and other current assets 40,036 (185,041) 462,419
Accounts payable and accrued liabilities (303,370) 1,159,638 244,231
------------ ------------ ------------
Net cash provided by (used in)
continuing operations 4,846,191 1,074,158 (6,911,279)
Net cash used in discontinued operations (799,412) (1,092,915) (2,396,130)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 4,046,779 (18,757) (9,307,409)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment -- 52,485 70,215
Capital expenditures (276,952) (875,724) (1,106,590)
Due from officer (100,000) (100,000) --
Capital expenditures of discontinued operations (17,477) (51,684) (141,071)
Change in investment in joint ventures and other assets 45,394 (276,281) (600,076)
------------ ------------ ------------
Net cash used in investing activities (349,035) (1,251,204) (1,777,522)
------------ ------------ ------------
Cash flows from financing activities:
Net change in current notes payable to bank (1,507,620) 4,002,481 8,230,850
Costs related to warrants -- -- (58,551)
Distributions to stockholders -- -- (190,008)
Common stock repurchase and retirement -- (2,187,981) --
Proceeds from exercise of common stock warrants -- 459,375 --
Proceeds from common stock options exercised -- 374,448 18,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities (1,507,620) 2,648,323 8,000,291
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,190,124 1,378,362 (3,084,640)
Cash and cash equivalents at beginning of year 2,321,071 942,709 4,027,349
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,511,195 2,321,071 942,709
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 35
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) NATURE OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
(a) DESCRIPTION OF BUSINESS
EVTC, Inc. (the "Company") was incorporated under the name
"Environmental Technologies Corporation" under the laws of
Delaware. In 1997, the Company changed its corporate name to
"EVTC, Inc." but continues to trade and do business as
"Environmental Technologies Corporation." The Company is
primarily engaged in: the marketing and sale of refrigerants
(including dichlorofluoromethane (R-12) and tetrafluoroethane
(R-134a)) and refrigerant reclaiming fluorescent light fixture
ballasts and lamps (Ballast Recycling segment). In 1998, the
Company discontinued its segment in the manufacture and
distribution of refrigerant recycling and recovery equipment for
automotive and commercial use (see note 8).
The Company's sales are highly seasonal in nature, as
industry-wide refrigerant 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 through fiscal 1999. However, beyond
fiscal 1999 the Company's access to R-12 is much less certain.
Management believes R-134a sales will offset, to some extent, the
decline of R-12 sales in future periods.
The Company's note payable to a bank ($11,992,380 at September 30,
1998) is due on January 15, 1999. The Company has received a
non-binding verbal agreement from the bank to extend the due date
for 120 days to allow the Company to obtain long term permanent
financing from another financial institution. The Company is
negotiating with a number of other banks and financial
institutions
32
<PAGE> 36
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
to refinance the existing bank note payable and provide the
Company with a long-term credit facility. Based on negotiations to
date and its operating and financial forecast for 1999, Company
management believes they will be able to obtain replacement
financing within the 120-day extension period. Should the Company
not succeed in refinancing the notes, the bank has the option to
demand payment and the Company may not have the financial
resources available to meet such a demand. The inability of the
Company to refinance its existing indebtedness could have a
material adverse effect on the Company's financial position,
results of operations and liquidity.
(b) BASIS OF PRESENTATION
The consolidated financial statements include the financial
statements of EVTC, Inc. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Company accounts for its 50% ownership interest in two joint
ventures using the equity method.
During fiscal 1996, the Company consummated an acquisition
accounted for using the pooling of interests method. Because the
acquired company was taxed as an S corporation under the
provisions of the Internal Revenue Code, income tax expense was
adjusted to reflect the effective C corporation income tax rate
of the Company for periods prior to the pooling. The fiscal 1996
pro forma income tax benefit of the acquired company has been
charged to additional paid-in capital.
(c) CREDIT CONCENTRATION
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 fiscal 1998, 1997 and 1996.
(d) USE OF ESTIMATES
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
33
<PAGE> 37
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
revenues and expenses to prepare the Company's consolidated
financial statements. Actual results could differ from these
estimates.
(e) REVENUE RECOGNITION
Sales are generally recorded by the Company when products are
shipped to customers or services are performed. 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.
Ballast recycling revenues are recognized upon the receipt and
acceptance of waste material at its recycling facility in the
Bronx, New York. Waste material disposal costs are accrued as the
related revenues are recognized.
During the fourth quarter of fiscal 1998, the Company recorded a
charge of approximately $1,236,000 to create an allowance for bad
debts related to certain refrigerant product accounts receivable
based on the collectability of these balances.
(f) CASH EQUIVALENTS
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents. Cash equivalents were $2,015,428 and $972,134 at
September 30, 1998 and 1997, respectively, and consisted of
short-term money market accounts.
(g) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost and the first-in, first-out
(FIFO) methods.
(h) 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.
(i) GOODWILL
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally 15
years. Accumulated goodwill amortization was $188,070 and
$138,934 at September 30, 1998 and 1997, respectively.
The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount
of goodwill
34
<PAGE> 38
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
(j) 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.
Based upon current year losses, management recorded a valuation
allowance for deferred tax assets at September 30, 1998. The
valuation allowance for deferred tax assets as of September 30,
1998 was $3,034,294. At September 30, 1998, the Company has net
operating loss carryforwards for federal income tax purposes of
$800,000 which are available to offset future federal taxable
income if any, through 2013.
(k) INCOME PER SHARE
During fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per
Share." SFAS No. 128 requires disclosure of basic and diluted
earnings per share. In accordance with SFAS No. 128, all prior
period earnings per share amounts have been restated to reflect
adoption of this statement. Basic earnings per share is computed
by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock.
The computations of basic and diluted earnings per share from
continuing and discontinued operations for each year are based on
the following numerators and denominators.
The numerator for continuing operations is income (loss) from
continuing operations. The numerator for discontinued operations
is the aggregate of loss from discontinued operations, net of
income taxes, and loss on disposal of discontinued operations.
35
<PAGE> 39
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The denominator for continuing and discontinued operations is computed as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Denominator for basic earnings per share-
weighted average shares 4,989,719 5,040,398 5,150,911
Effect of dilutive securities:
Employee stock options -- 29,973 43,410
Warrants -- 10,506 36,406
---------- ---------- ----------
Dilutive potential common shares -- 40,479 79,816
---------- ---------- ----------
Denominator for diluted earnings per share -
weighted-average shares and assumed
conversions 4,989,719 5,080,877 5,230,727
========== ========== ==========
</TABLE>
The following stock options and warrants are not included in the
diluted earnings per share calculation since in each case the
exercise price is greater than the average market price.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Employee stock options 283,500 62,000 146,000
Warrants -- 33,750 15,000
</TABLE>
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents, accounts receivable and accounts payable are
reflected in the consolidated financial statements at their
respective carrying values, which approximate fair values due to
the short-term nature of these instruments. The carrying value of
the Company's bank borrowings approximates fair value because
such borrowings have variable rates of interest.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews for impairment long-lived assets and certain
identifiable intangibles 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 of the
carrying amount or fair value less the cost to sell.
36
<PAGE> 40
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(n) 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 as 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 to
employees at a price equal to or plus 10% of the market price of
the stock at the date, 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 (see note 9).
(o) CONTINGENCIES
Liabilities for loss contingencies, including environmental
remediation costs, arising from claims, assessments, litigation,
fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the
assessment and/or remediation can be reasonably estimated.
(2) INVENTORIES
Inventories at September 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $3,644,095 5,531,992
Finished goods 3,592,345 11,761,483
---------- ----------
Total inventories $7,236,440 17,293,475
========== ==========
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded a
charge of approximately $600,000 to write down refrigerant product
inventories to estimated net realizable values.
37
<PAGE> 41
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at September 30, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment 2-10 years $ 3,600,437 3,450,212
Office equipment 2-5 years 851,565 745,252
Vehicles 5 years 183,449 176,942
Leasehold improvements 2-5 years 170,067 157,960
----------- -----------
4,805,518 4,530,366
Accumulated depreciation (3,158,577) (2,423,493)
----------- -----------
$ 1,646,941 2,106,873
=========== ===========
</TABLE>
Leasehold improvements are amortized over the shorter of the estimated
useful life of the assets or the lease term.
(4) INVESTMENTS IN JOINT VENTURES AND LOANS
During fiscal 1995, the Company entered into a 50% joint venture
(Transformation Technologies, Ltd. (TTL)) with two unaffiliated
individuals to research the applicability of transforming mixed or
contaminated refrigerants (defined as a hazardous substance) into a
useful by-product. At September 30, 1997, the Company had
advanced/invested approximately $183,000 in the TTL joint venture. The
investment was written-off in the fourth quarter of fiscal 1998 as the
Company determined there was substantial uncertainty regarding the
realization of this investment.
During fiscal 1996, the Company entered into a 50% joint venture
(Liberty Technology International, Inc. (LTI)), with an unaffiliated
company. LTI constructed a refrigeration separation plant that provides
an alternative to total destruction of mixed refrigerants. At September
30, 1998 and 1997, the Company's investment in LTI was approximately
$548,000 and $669,000, respectively. LTI's operations commenced in
fiscal 1997.
The Company's share of net income (loss) from the joint ventures was not
material to the Company's results from operations for any of the years
presented.
Due from officer at September 30, 1998 and 1997 represents advances to
an executive officer of the Company. The non-interest-bearing advance
was converted to an interest-bearing, secured note subsequent to
year-end.
38
<PAGE> 42
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NOTE PAYABLE
At September 30, 1998 and 1997, the note payable consists of a
secured line of credit in the aggregate available amount of
$13,500,000 with a bank. The balances outstanding under the line of
credit at September 30, 1998 and 1997 were $11,992,380 and
$13,500,000, respectively. For fiscal 1997, borrowings up to
$10,000,000 bore interest at LIBOR plus 1.75% (7.75% at September
30, 1997) and borrowings in excess of $10,000,000 bore interest at
the bank's prime rate (8.5% at September 30, 1997). In fiscal 1998,
borrowings bore interest at the bank's prime rate or LIBOR plus
1.75%. Borrowings outstanding at September 30, 1998 was at the
bank's prime rate (8.25%). The line of credit is secured by
eligible accounts receivable, eligible inventory and property and
equipment. At September 30, 1998 the balance outstanding under the
line of credit exceeded eligible security by $192,583. The line of
credit is due on January 15, 1999. The Company has received a
non-binding verbal agreement from the bank to extend the due date
for 120 days to allow the Company to obtain long term permanent
financing from another financial institution. The Company is
negotiating with a number of other banks and financial institutions
to refinance the existing bank note payable and provide the Company
with a long-term credit facility. Based on negotiations to date and
its operating and financial forecast for 1999, Company management
believes they will be able to obtain replacement financing within
the 120-day extension period. Should the Company not succeed in
refinancing the note, the bank has the option to demand payment and
the Company may not have the financial resources available to meet
such a demand. The inability of the Company to refinance its
existing indebtedness could have a material adverse effect on the
Company's financial position, results of operations and liquidity.
(6) CASH FLOWS
Cash paid during fiscal 1998, 1997 and 1996 for interest and income taxes
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest $1,088,241 1,011,233 413,554
========== ========== ==========
Income taxes $ 261,097 1,045,584 1,285,000
========== ========== ==========
</TABLE>
39
<PAGE> 43
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended September 30, 1998, 1997
and 1996 is allocated as follows:
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income from continuing operations $ (1,005,858) 2,116,000 1,746,000
Discontinued operations - loss from
discontinued operations -- (1,219,000) (468,000)
------------ ------------ ------------
$ (1,005,858) 897,000 1,278,000
============ ============ ============
</TABLE>
The components of income tax expense (benefit) from continuing operations for
the years ended September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ (1,677,451) 2,129,300 1,405,500
State 60,000 426,000 386,500
------------ ------------ ------------
(1,617,451) 2,555,300 1,792,000
------------ ------------ ------------
Deferred:
Federal 587,354 (434,900) (40,000)
State 24,239 (4,400) (6,000)
------------ ------------ ------------
611,593 (439,300) (46,000)
------------ ------------ ------------
$ (1,005,858) 2,116,000 1,746,000
============ ============ ============
</TABLE>
Income tax expense (benefit) attributable to continuing operations for the
years ended September 30, 1998, 1997 and 1996 differed from the expected income
tax expense (computed by applying the U.S. Federal income tax rate to income
(loss) from continuing operations before income taxes) as a result of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" income
tax expense (benefit) $ (2,105,823) 1,828,311 1,491,332
State income taxes, net of
federal benefit 55,598 278,256 251,130
Change in deferred tax net asset
valuation allowance 935,679 -- --
Other 108,688 9,433 3,538
------------ ------------ ------------
$ (1,005,858) 2,116,000 1,746,000
============ ============ ============
</TABLE>
40
<PAGE> 44
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The temporary differences that give rise to a significant portion of deferred
tax assets and liabilities (continuing and discontinued operations) as of
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 656,731 126,972
Inventory reserve 1,997,957 474,000
Net operating loss carryforwards 272,777 --
Plant and equipment 13,385 4,780
Other 109,415 25,098
------------ ------------
Gross deferred tax assets 3,050,265 630,850
Valuation allowance (3,034,294) --
------------ ------------
Deferred tax assets - net of valuation allowance 15,971 630,850
------------ ------------
Deferred tax liabilities - other 15,971 19,257
------------ ------------
Net deferred tax assets $ -- 611,593
============ ============
</TABLE>
Valuation allowance for 1998 is allocated $935,679 to continuing
operations and $2,098,615 to discontinued operations.
The valuation allowance for deferred tax assets as of September 30, 1998
was $3,034,294. The net change in the total valuation allowance for the
year ended September 30, 1998 was an increase of $3,034,294. In assessing
the realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. Based upon current year losses and the preceding
criteria, management recorded a valuation allowance for deferred tax
assets at September 30, 1998.
At September 30, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of $800,000 which are available to offset
future federal taxable income if any, through 2013.
(8) DISCONTINUED OPERATIONS
During July 1998, the Company's Board of Directors adopted a plan to
discontinue its Recycling and Recovery Equipment business segment. The
Company has initiated a liquidation program to sell all assets of the
segment. Management intends for the disposal of the segment to be
completed by June 30, 1999 (the Phase-Out Period). Accordingly, the
operating results of the Recycling and Recovery Equipment business
operations, including provisions for lease termination costs, employee
benefits and expenses during the Phase-Out Period of approximately
$477,000 and a write-down of inventory, accounts receivable, leasehold
improvements, and equipment to estimated net realizable
41
<PAGE> 45
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
values of $4,796,005 have been segregated from continuing operations and
reported as a separate line item in the accompanying consolidated statement of
operations.
The Company has recasted the accompanying 1997 and 1996 consolidated statements
of operations to present the operating results of the Recycling and Recovery
Equipment business segment as discontinued operations. The consolidated balance
sheet at September 30, 1997 has been recast to segregate assets and liabilities
of the discontinued segment.
Operating results (exclusive of any corporate charges and interest expense and
the aforementioned provisions) from the discontinued Recycling and Recovery
Equipment segment are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 1,176,453 2,352,789 2,885,295
============ ============ ============
Loss before income taxes $ (1,024,840) (3,594,994) (1,380,065)
Income tax benefit -- (1,219,000) (468,000)
============ ============ ============
Loss from discontinued operations $ (1,024,840) (2,375,994) (912,065)
============ ============ ============
</TABLE>
During the fourth quarter of fiscal 1997, the Company recorded a charge of
approximately $1,600,000 to write down recycling and recovery equipment
inventories to estimated net realizable values.
Assets and liabilities of the discontinued Recycling and Recovery Equipment
business segment are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Accounts receivable $ 130,000 395,907
Inventories 1,436,948 7,136,826
Equipment and other 30,000 233,576
------------ ------------
$ 1,596,948 7,766,309
============ ============
Liabilities:
Accounts Payable 165,000 1,036,266
Accrued Liabilities 311,687 128,826
------------ ------------
$ 476,687 1,165,092
============ ============
</TABLE>
42
<PAGE> 46
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) STOCK OPTIONS
(a) EMPLOYEE
The Company has two 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.
Transactions relating to the Option Plans for the years ended
September 30, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 316,500 $ 7.56 370,000 $ 7.90 256,000 $ 7.40
Granted 100,000 5.10 76,000 7.63 159,000 9.13
Exercised -- -- (47,833) 7.83 (3,000) 6.00
Forfeited (133,000) 6.58 (81,667) 9.25 (42,000) 9.40
-------- --------- ------- --------- ------- ---------
Outstanding at end of
year 283,500 $ 7.15 316,500 $ 7.56 370,000 $ 7.90
======== ========= ======= ========= ======= =========
Options exercisable at
year end 160,500 $ 8.03 204,668 $ 7.35 209,670 $ 7.11
======== ========= ======= ========= ======= =========
Weighted average
fair value of
options granted
during the year $ 1.52 $ 1.70 $ 2.20
========= ========= =========
</TABLE>
43
<PAGE> 47
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The fair value of each stock option granted is estimated on the
grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions. Expected life of 5.0
years; expected volatility of 48% in 1998, 17% in 1997 and 20% in
1996; expected dividend yield of 0%; and risk-free interest rate
of 4.25% in 1998, 6.22% in 1997 and 6.17% in 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1998
------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF/OR REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ -------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.00 22,500 1.03 $ 6.00 22,500 $ 6.00
7.63 - 11.88 161,000 4.33 8.58 103,000 9.16
3.00 - 6.00 100,000 2.85 5.10 35,000 6.00
-------------- --------------- ------------- -------------- --------------
283,500 3.54 $ 7.15 160,500 $ 8.03
============== =============== ============= ============== ==============
</TABLE>
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 (loss) would have been changed
to the pro forma amounts as indicated below (in thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (11,485) 885 1,728
Pro forma (11,581) 841 1,710
Diluted income (loss) per share:
As reported $ (2.30) .18 .34
Pro forma (2.32) .17 .33
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure
are not indicative of future results. SFAS No. 123 does not apply
to awards prior to fiscal 1996.
(B) NONEMPLOYEE
On September 16, 1998 the Company executed an agreement
(Agreement) with Colmen Capital Advisors, Inc. ("Colmen") to
provide certain business improvement services to the Company over
a one-year period. Pursuant to the Agreement, services include,
among others, establishing a strategic business plan, developing
an annual operating plan, implementing day-to-day business and
management accountability, formulating a corporate financing
structure and
44
<PAGE> 48
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
implementing a strategic acquisitions and mergers program.
Pursuant to the Agreement the Company is to pay Colmen $17,500
each month (subsequently increased in November 1998 to $30,000
each month) for these services, and to grant Colmen options to
acquire 500,000 shares of common stock at an exercise price of
$2.23 per share 90 days from the Agreement date of which 250,000
options vest and are exercisable immediately and 250,000 options
vest and are exercisable six months and one day from the Agreement
date. In addition, the Company agreed to issue options to acquire
500,000 common shares six months and one day from the Agreement
date that will vest and become exercisable immediately at an
exercise price of $5 per share. The options terminate the earlier
of one year after termination of the Agreement by either party or
three years after the Agreement date. The Company may terminate
this Agreement in the event Colmen fails to pursue in good faith
its obligation duties as specified in the Agreement. The fair
value of the options will ultimately be measured at the
performance commitment date and will be charged to expense from
the Agreement date to the respective vesting dates. Based upon the
fair value of the options as of September 30, 1998, compensation
expense for the period from the Agreement date to September 30,
1998 was not material.
45
<PAGE> 49
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(11) INDUSTRY SEGMENTS
REFRIGERANT BALLAST CORPORATE
PRODUCT RECYCLING AND OTHER CONSOLIDATED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Year ended September 30, 1998:
Net sales $ 34,482,160 4,001,010 -- 38,483,170
=============== =============== =============== ===============
Operating income (loss) $ (4,492,954) 315,115 (866,890) (5,044,729)
=============== =============== =============== ===============
Identifiable assets at
September 30, 1998 $ 17,560,061 2,112,970 3,887,937 23,560,968
=============== =============== =============== ===============
Depreciation and amortization $ 651,152 134,043 -- 785,195
=============== =============== =============== ===============
Capital expenditures $ 207,116 69,836 -- 276,952
=============== =============== =============== ===============
Year ended September 30, 1997:
Net sales $ 50,605,971 4,490,983 -- 55,096,954
=============== =============== =============== ===============
Operating income $ 6,210,370 414,961 (267,580) 6,357,751
=============== =============== =============== ===============
Identifiable assets at
September 30, 1997 $ 24,556,793 1,485,291 8,892,272 36,934,356
=============== =============== =============== ===============
Depreciation and amortization $ 657,287 131,040 -- 788,327
=============== =============== =============== ===============
Capital expenditures $ 804,046 71,678 -- 875,724
=============== =============== =============== ===============
Year ended September 30, 1996:
Net sales $ 25,870,777 5,786,603 -- 31,657,380
=============== =============== =============== ===============
Operating income $ 4,454,627 468,909 (187,005) 4,736,531
=============== =============== =============== ===============
Identifiable assets at
September 30, 1996 $ 21,594,982 1,669,827 8,641,918 31,906,727
=============== =============== =============== ===============
Depreciation and amortization $ 578,992 87,078 -- 666,070
=============== =============== =============== ===============
Capital expenditures $ 944,624 161,966 -- 1,106,590
=============== =============== =============== ===============
</TABLE>
Operating income (loss) is net sales less cost of sales and selling, general
and administrative expenses. In computing operating income (loss), income
taxes, interest expense and other income or expense are not included.
46
<PAGE> 50
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS
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 fiscal 1998, 1997 and 1996. The
Company also leases other operating and office facilities
pursuant to operating leases expiring through 2001.
The following is a schedule of future minimum rental payments
under operating leases:
<TABLE>
<S> <C>
1999 $401,269
2000 189,007
2001 21,000
--------
Total $611,276
========
</TABLE>
Total rental expense was $606,708, $534,015 and $513,473 for the
years ended September 30, 1998, 1997 and 1996, respectively.
(b) CONTINGENCIES
The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
The Company is self-insured for product liability in connection
with the marketing and sale of its refrigerants. No material
losses have occurred during the periods presented.
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 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
was 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, 1998, the Company has fully funded
this obligation. The Company does not expect any significant
cleanup costs in connection with the closure of its facility.
47
<PAGE> 51
SCHEDULE II
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ENVIRONMENTAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ADDITIONS OTHER
BEGINNING CHARGED TO ADDITIONS OR ENDING
BALANCE EXPENSE (DEDUCTIONS) BALANCE
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Continuing Operations:
1998 $ 177,430 1,524,723 (189,285) 1,512,868
1997 171,085 170,659 (164,314) 177,430
1996 86,400 206,683 (121,998) 171,085
Discontinued Operations:
1998 $ 140,000 278,695 -- 418,695
1997 20,000 120,000 -- 140,000
1996 20,000 -- -- 20,000
Reserve for inventory obsolescence:
Continuing Operations:
1998 $ -- -- -- --
1997 -- -- -- --
1996 -- -- -- --
Discontinued Operations:
1998 $ 1,185,000 4,796,005 104,661 5,876,344
1997 60,000 1,625,000 500,000 1,185,000
1996 60,000 -- -- 60,000
</TABLE>
48
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
49
<PAGE> 53
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
30,1998 were:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------- --- ----------------------
<S> <C> <C>
George Cannan, Sr 55 Chairman and Director
Jim Burns 48 President and Director
Caroline Costante 36 Secretary and Director
John Stefiuk 47 Director
</TABLE>
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 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.
In November 1998, Jim Hellauer and Peter Colella, two members of Colmen,
were added to the Board of Directors. Carol Costante resigned from the Board of
Directors in November 1998. Additionally, Jim Hellauer was appointed Chief
Executive Officer by the Company's Board of
50
<PAGE> 54
Directors. George Cannan remains the Company's Chairman. See "Consulting
Agreement" disclosure in Item 1 regarding the Company's relationship with
Colmen.
INFORMATION CONCERNING BOARD
The Board of Directors met once during the 1998 fiscal year to authorize
the discontinuation of operations of the Company's recovery and recycling
equipment business segment.
The Board of Directors has an Audit Committee and a Compensation Committee,
both consisting of George Cannan, Sr., and John Stefiuk in fiscal 1998. 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.
In November 1998, the Board of Directors restructured its Audit and
Compensation Committees. The restructured Audit Committee is composed of Peter
Colella and John Stefiuk. The restructured Compensation Committee is composed
of Jim Hellauer and George Cannan. In addition, an Executive Committee was
formed. The Executive Committee possesses the authority to act, between
meetings of the full Board of Directors, on any matter that might properly be
brought before the Board of Directors, subject to exceptions for certain major
matters. Jim Hellauer, George Cannan and Jim Burns serve on the Executive
Committee.
PETER COLELLA is the Managing Director of Colmen. Mr. Colella is also
Executive Vice President of Windsor Sheffield & Company, a subsidiary of
Colmen. Mr. Colella has been in the investment banking business since 1981.
Prior to forming Colmen, Mr. Colella was Chief Financial Officer
51
<PAGE> 55
of a major packaging machinery manufacturing company and a financial officer
for the North American operations of Royal Doulton China, Ltd. Mr. Colella
holds a B.S. from LaSalle University and an MBA from St. John's University.
JAMES HELLAUER is Executive Director of Colmen Mr. Hellauer joined Colmen
Capital Advisors, Inc. in 1997. Prior to joining Colmen, Mr. Hellauer owned and
operated an investment-banking firm specializing in corporate reorganizations,
restructuring, turnarounds, sales, debt financing, and operations improvement
programs. Mr. Hellauer has over 35 years of Senior Management experience in a
wide range of manufacturing, distribution, and service industries. Mr. Hellauer
holds a B.S. degree from the U.S. Naval Academy and a M.B.A. from Harvard
University.
52
<PAGE> 56
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, compensation for the Company's Chairman and
Chief Executive Officer ("CEO) and each officer that earned over $100,000
during such years (the "Named Executives"):
<TABLE>
<CAPTION>
Name and Principal Position Year Salary ($) Bonus ($)
- --------------------------- ---- ---------- ---------
<S> <C> <C> <C>
George Cannan, Sr.
Chairman/CEO 1998 $200,000 (1)
1997 $200,000 (1)
1996 $200,000 (1)
B. Brinkerhoff McCagg(2)
CEO 1996 $125,000 (1)
Jim Burns
President 1998 $140,000 (1)
1997 $110,000
</TABLE>
(1) Represents less than 10% of the Executive's compensation.
(2) Mr. McCagg resigned in 1996.
Stock Option Grants in Last Fiscal Year
No Named Executive received stock options during the fiscal year. No stock
appreciation rights were awarded during the year ended September 30, 1998.
Option Exercises During, and Stock Options Held at End of Fiscal 1998
The following table indicates the total number and value of exercisable
stock options held by the Named Executives as of September 30, 1998. No options
were exercised by the Named Executives in the fiscal year ended September 30,
1998:
53
<PAGE> 57
<TABLE>
<CAPTION>
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
- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George Cannan, Sr. 0 0 0 0
Jim Burns 42,000 58,000 0 0
Caroline Costante 15,000 0 0 0
John Stefiuk 10,000 0 0 0
</TABLE>
(1) Based on the last sale price for the Company's Common Stock on September
30, 1998 (the last day the Common Stock traded in the 1998 fiscal year) of
$1.63 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.
Nonqualified options 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 people'
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 by 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. 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 283,500
shares of Common Stock are outstanding under the 1992 and 1996 Plans.
54
<PAGE> 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1998, 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., 121 S. Norwood
Dr., Hurst, Texas 76053. All shares are owned directly by the named person.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES OWNED PERCENT OF CLASS(1)
- ---- ------------ ----------------
<S> <C> <C>
George Cannan, Sr. 1,719,793 35.6%
Jim Burns 42,000(2) 0.9%
Caroline Costante 88,261(3) 1.7%
David Keener 40,000(4) 0.8%
John Stefiuk 10,000(5) 0.2%
Hartland Advisors 773,788(6) 15.2%
- ---------
All Directors and Officers as
a Group (5 persons) 1,900,054(7) 40.7%
</TABLE>
- -----------------------
(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) Consists of 100,000 shares of Common Stock issuable upon the exercise of
stock options (42,000 of which are presently exercisable).
(3) Includes 15,000 shares of Common Stock issuable upon the exercise of
stock options, which are presently exercisable.
(4) Includes 70,000 shares of Common Stock issuable upon the exercise of
stock Options (35,000 of which are presently exercisable).
55
<PAGE> 59
(5) Consists of 10,000 shares of Common Stock issuable upon the exercise of
stock options, which are presently exercisable.
(6) Hartland Advisors sold a significant portion of stock subsequent to
year-end. As of December 31, 1998, Hartland Advisors owned approximately
476,000 shares of Common Stock.
(7) Includes 42,000, 15,000 and 10,000 shares of Common Stock issuable to Jim
Burns, Caroline Costante and John Stefiuk, respectively, upon the exercise
of stock options, which are presently exercisable.
56
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's 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.
As of September 30, 1998, the Company had a $200,000 non-interest-bearing
advance to George Cannan. This advance was converted to an interest-bearing,
note secured by the 21,000 square foot building located at 550 James Street in
Lakewood New Jersey, on January 7, 1999.
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 LLP
27 Financial Data Schedule
* 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.
57
<PAGE> 61
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 city of Hurst, State of Texas on
the 12th day of January, 1999.
EVTC, INC.
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>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/George Cannan, Sr.
- ------------------------ Chairman January 12, 1999
GEORGE CANNAN, SR.
/s/Jim Hellauer Chief Executive Officer and January 12. 1999
- ------------------------ Director
JIM HELLAUER
/s/David Keener Chief Financial Officer January 12, 1999
- ------------------------
DAVID KEENER
/s/Jim Burns EMC President and January 12, 1999
- ------------------------ Director
JIM BURNS
/s/John Stefiuk
- ------------------------ Director January 12, 1999
JOHN STEFIUK
/s/Peter Colella
- ------------------------ Director January 12, 1999
PETER COLELLA
</TABLE>
58
<PAGE> 62
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
<S> <C>
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 LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT
Effective December 31, 1998 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> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
EVTC, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
333-8355) on Form S-8 of EVTC, Inc. of our report, dated January 11, 1999,
relating to the consolidated balance sheets of EVTC, Inc. and subsidiaries as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1998, and related financial statement
schedule which report appears in the September 30, 1998 annual report on Form
10-K of EVTC, Inc.
KPMG LLP
Dallas, Texas
January 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,511,195
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0
0
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</TABLE>
