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, 2000
[ ] 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
EVTC, INC.
(Name of Registrant as Specified in Its Charter)
DELAWARE 22-3005943
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or Organization) Identification No.)
3125 BOLT STREET
FORT WORTH, TEXAS 76110
(Address of Principal Executive Offices) (Zip Code)
(817) 759-8900
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b)
of the Securities Exchange Act of 1934:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------------------------------------------------------------------------------
NONE
Securities registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, par value $.01 per share
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
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.[X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant on December 28, 2000 computed by reference to the price at
which the stock was sold on that date: $4,420,043.
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share (the "Common Stock"), as of December 28, 2000, was
7,444,283.
Documents Incorporated by Reference: None
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EVTC, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
---- ----
1. Description of Business ............................................. 3
2. Description of Property ............................................. 13
3. Legal Proceedings ................................................... 14
4. Submission of Matters to a Vote of Security Holders ................. 14
5. Market for Common Equity and Related Stockholder Matters ............ 14
6. Selected Financial Data ............................................. 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 17
7a. Quantitative and Qualitative Disclosures About Market Risk .......... 22
8. Financial Statements ................................................ 23
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................................ 45
10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) Of the Exchange Act ................. 46
11. Executive Compensation .............................................. 48
12. Security Ownership of Certain Beneficial Owners and Management ...... 50
13. Certain Relationships and Related Transactions ....................... 51
14. Exhibits and Reports on Form 8-K .................................... 52
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ITEM 1. DESCRIPTION OF BUSINESS.
EVTC, Inc. (the "Company") was incorporated in 1989 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." EVTC, through its
wholly owned subsidiaries engage in the marketing and sale of refrigerants,
refrigerant reclaiming services and 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
and the Company marketed business to consumer services via the Internet until
its discontinuation in 2000.
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:
YEARS ENDED SEPTEMBER 30,
(000'S)
2000 1999 1998
------------- ------------- --------------
Refrigerants $32,474 90% $34,897 90% $34,482 90%
Ballast Recycling 3,767 10% 3,835 10% 4,001 10%
------- --- ------- --- ------- ---
$36,241 100% $38,732 100% $38,483 100%
======= === ======= === ======= ===
REFRIGERANTS
REFRIGERANT INDUSTRY BACKGROUND
In the mid 1980's, increasing concern about damage to the earth's stratospheric
ozone layer 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 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 initiatives 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 20 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 R-12, 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 has 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.
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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.
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 that 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 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.
To further broaden the scope of its core business, the Company acquired
Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona in May of
2000. RMS is the dominant refrigerant reclaimer and service provider in the
Southwestern portion of the United States, having developed and refined a
business model which incorporates custom built refrigerant service vehicles that
economically and profitably provide enhanced onsite refrigerant recovery and
cylinder evacuation services to the Heating, Ventilation, Air Conditioning and
Refrigerant ("HVAC/R") industry.
This premium onsite service component greatly enhances the Company's ability to
offer complete and comprehensive refrigerant solutions programs to customers
across the country while mitigating, to a certain extent, pricing pressure
resulting from seasonality and commodity pricing. In addition, this local level
service will allow the Company's traditional sales force to expand into
longer-term, higher volume prospects such as national accounts, institutional,
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governmental and larger corporate end-users, thus greatly increasing the market
share potential within the HVAC/R industry.
The acquisition of the remaining 50% interest of Liberty Technology
International, Inc. ("LTI") resulted in the ownership of a refrigeration
separation plant that provides a cost effective and environmentally sound
alternative to total destruction of mixed refrigerants. LTI is one of the
largest separation facilities in the country.
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 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. Onsite
recovery and cylinder evacuation services provide a key source of used
refrigerant with the acquisition of RMS.
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.
MARKETING AND SALES
Marketing programs are conducted through the efforts of Company sales personnel
and manufacturers sales representatives. The Company utilizes various marketing
methods, including direct mailings, trade publications, telemarketing, print
advertising, in-person solicitation, participation in trade shows and the
Internet (www.fcrefrigerant.com).
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 utilizing a network of commissioned sales
representatives. The Company's distributors then resell to automobile repair
shops, service stations and retail automotive supply stores.
During fiscal year 2000, Autozone, Inc. accounted for 10% of the Company's
annual net sales. No single customer accounted for more than 10% of the
Company's revenues during the years ended September 30, 1999 or 1998.
The Company typically seeks to fill customer orders within two days of receipt.
Accordingly, at September 30, 2000, 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 and solicits customers to place preseason order commitments
for their in season refrigerant needs.
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes with numerous well-established companies that 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.
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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 program. Such proposed regulations would also require laboratories designed
to test refrigerant purity to undergo a certification process. As of December
1999, 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 substantially 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."
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BALLAST & LAMP RECYCLING
INDUSTRY BACKGROUND
FulCircle Recyclers, Inc. (d/b/a Full Circle) recycles and disposes fluorescent
lighting ballasts of the type commonly found in office, industrial and
institutional buildings. Prior to 1985, ballasts were manufactured using
hazardous compounds, which created a need for special handling and disposal
procedures when replacing ballasts or removing them at the end of their useful
lives.
Polychlorinated biphenyls (commonly known as PCBs) were widely used before 1979
as insulators in electrical equipment such as capacitors, switches and voltage
regulators. Virtually all fluorescent light ballasts manufactured before 1979
contain PCBs. PCBs have been shown to cause cancer as well as reproductive and
developmental defects in laboratory animals. PCBs do not readily decompose when
released into the environment. Instead, they accumulate in plants and animals,
working their way up the food chain. Between 1979 and 1985, certain ballasts
were manufactured with di (2-ethylhexy) phthalate (DEHP) in place of PCBs. DEHP
has since been identified as a probable human carcinogen and is listed as a
hazardous substance under the Superfund laws; however, it is not a hazardous
waste under the Resource Conservation and Recovery Act (RCRA) when discarded
inside a ballast. Its use in ballast manufacturing has been discontinued.
Demand for Full Circle's services is triggered when facility owners replace
fluorescent light fixtures with more energy-efficient fixtures. In recent years,
lighting manufacturers have made dramatic improvements in the energy efficiency
of fluorescent lighting fixtures. Using electronic ballasts and new types of
fluorescent lamps, the new fixtures are able to achieve comparable illumination
with approximately 25 to 50% less electrical energy than required by older
fixtures. 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.
BALLAST RECYCLING
Full Circle recycles and disposes of the hazardous wastes contained in used
ballasts. Full Circle has developed a unique "de-manufacturing" process that
efficiently separates the ballast into recyclable products and hazardous waste.
Both PCBs and DEHP are interchangeably de-manufactured 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 de-manufacturing.
The ballasts are transported by truck to the Full Circle facility in New York.
At the plant, drums of ballasts are weighed, stored and de-manufactured 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.
LAMP RECYCLING
Full Circle also manages the disposal of fluorescent lamps, which are regulated
under The Universal Waste Rule. Management does not expect any adverse effect
from these regulations. Currently the company utilizes a national network of
"strategic alliances" for the processing of this material.
MARKETING AND SALES
In addition to Full Circle's New York operation, it has regional sales offices
located across the country. Most of the sales managers have significant prior
experience in selling hazardous waste disposal services or selling lighting
products. Sales managers 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
TSCA
The Toxic Substance Control Act, or (TSCA) specifically directs EPA to regulate
the marking, disposal, manufacturing, processing, and distribution in commerce,
and use of Polychlorinated Biphenyl (PCBs). Since 1978, EPA has promulgated
numerous rules addressing all aspects of the lifecycle of PCBs.
Recent changes in federal regulations known as, The PCB MEGA Rule makes the
disposal of ballasts more stringent than before. The MEGA Rule preamble states
that a generator should either test these ballasts for PCB concentration or
assume the ballasts contain PCBs at greater than 50 ppm. Ballasts which contain
potting material that is contaminated with over 50 ppm (which is the regulatory
threshold) must be disposed of at a facility permitted for the Commercial
Storage of PCB waste by the Federal EPA. Presently, there are only four
facilities in the United States that have this approval including Full Circle.
The company believes that this relatively new regulation offers a distinct
competitive advantage.
CERCLA
The Comprehensive Environmental Compliance and Liability Act of 1980, or CERCLA
(also known as the Superfund law) also regulates PCB's. Under this law any
release or even threat of release of a hazardous substance constitutes a "CERCLA
release", and requires immediate cleanup action and notification by all
Responsible Parties, as defined. As a result, discarding over 16 ballasts in a
landfill, which is equal to an aggregate of over one pound of PCB's, technically
creates a Superfund Liability because there is a threat that the ballasts could
rupture in the landfill and leak into the soil.
UWR
The Universal Waste Rule (UWR) was adopted in May 1995 (40 CFR Part 273). At
that time, tires, pesticides and certain mercury containing devices were covered
under this law. On January 6, 2000, the EPA included fluorescent lamps in the
UWR. This rule is designed to reduce the amount of hazardous waste disposed of
in municipal solid waste, landfills, and encourages recycling and proper
disposal of fluorescent lamps. It also reduces the regulatory burden on
businesses that generate these wastes.
The company believes this new regulation will significantly increase the number
of lamps that are recycled each year, and increase the total market for this
service.
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THE COMPANY
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 was providing
investment banking and consulting services.
On June 28, 1999 the Company reached an agreement on the termination of the
contract with Colmen. Under the agreement, the Company paid Colmen a termination
fee of $ 330,000, Colmen forfeited all Company stock options previously granted
to them, Mr. Peter Colella, Colmen's Managing Partner, and Mr. James Hellauer,
its Executive Director, resigned from EVTC's Board of Directors and Mr. Hellauer
resigned as President and Chief Executive Officer of EVTC. Mr. George Cannan,
EVTC's Chairman of the Board, assumed Mr. Hellauer's responsibilities as Chief
Executive Officer.
RISK FACTORS
On May 17, 1999 the Company received notification from the Nasdaq Listing
Qualifications Panel (the "Panel") informing the Company of the Panels decision
to move trading of the Company's common stock from the National Market to the
Nasdaq Small Cap Market, subject to successfully completing the required
application and review process. The Panel determined that the Company had
evidenced compliance with the minimum bid price requirement of $1.00 per share;
however, the Panel was of the opinion that the Company failed to present a
definitive plan which would enable it to evidence compliance with the $5,000,000
minimum market value of public float requirement for continued listing on the
Nasdaq National Market within a reasonable period of time. The Panel noted that
the Company appears to comply with all requirements for continued listing on The
Nasdaq Small Cap Market, and expressed confidence in the Company's ability to
sustain compliance with those requirements over the long term, particularly
given the Company's improved results from operations. The Company successfully
completed the application and review process, demonstrating compliance with all
requirements for inclusion on the Nasdaq SmallCap Market and effective with the
open of business on May 20, 1999, the Company's common stock began trading on to
the Nasdaq SmallCap Market. The Company is confident of its ability to comply
with all requirements for continued listing on the Nasdaq Small Cap Market,
however if the Company were to fail to meet the requirements for continued
listing it could have a materially adverse effect on the price of the Company's
common stock.
The Company has financed its working capital requirements with The CIT
Group/Business Credit through a $12.3 million long-term revolving credit
facility (the "Credit Facility"). As of September 30, 2000, $8.3 million was
outstanding under the Credit Facility. The Credit Facility is due in December
2002.
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RESEARCH AND DEVELOPMENT
The Company's management places emphasis on obtaining the technology and
developing the products to achieve superiority in its industry. However,
research and development costs to date have not been material.
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 that provides a cost effective and
environmentally sound alternative to total destruction of mixed refrigerants. On
April 1, 2000, the Company acquired the remaining 50% interest in LTI. As a
result of this transaction, LTI became a wholly owned subsidiary of EVTC, which
changed its method of accounting for LTI from the equity method to the
consolidation method. At September 30, 1999, the Company had advanced/invested
approximately $0.4 million 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.
During 1999, the Company reported the earnings and losses related to the
aforementioned venture under the equity method of accounting. Investment income
or loss is included in other income of the consolidated financial statements. To
date, the income related to this joint venture has not been material to the
Company's financial statements. The Company recorded an $85,392 investment loss
for the months prior to the acquisition (October 1999 - March 2000). Since the
remaining 50% interest was acquired on April 1, 2000, Liberty is accounted for
using the consolidation method in the September 30, 2000 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 is 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.
TRADEMARKS
The Company has several registered and/or pending trademarks that it uses to
market its products.
INSURANCE
The Company carries insurance coverage that it considers sufficient to protect
the Company's assets and operations. The Company currently maintains general
commercial liability insurance for claims up to $1.0 million per occurrence and
$2,000,000 in the aggregate. 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 and liquidation sales of recycling and recovery equipment. 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.
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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").
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 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.
11
<PAGE>
EMPLOYEES
At September 30, 2000, the Company employed approximately 188 persons, including
its executive officers. The Company believes its employee relations are good.
ACQUISITIONS
Effective March 24, 2000, EVTC, through its wholly owned subsidiary,
e-solutions, acquired afreegift.com, Inc. As a result of this transaction,
e-solutions directly marketed business to consumer services through its
getafreegift.com web site. The total consideration paid for getafreegift.com at
the time of acquisition was approximately $1.0 million of which $0.8 million
advanced to e-solutions prior to the closing of the transaction and $0.2 million
was assumed in liabilities. In December 2000, the Company's Board of Directors
adopted a plan to discontinue the operations of e solutions Marketing, Inc. The
Company has initiated a plan to liquidate the tangible assets of this segment as
is seeks a strategic alternative for the business concept. The plan to
discontinue this segment is discussed in detail in Note 8 - Discontinued
Operations in the Notes to Consolidated Financial Statement section and in the
Dispositions section below.
On April 1, 2000, the Company acquired the remaining 50% interest in Liberty
Technologies International, Inc. ("Liberty") from Concorde Science and
Technology, Inc. ("Concorde"), its previous joint venture partner. As a result
of this transaction, Liberty became a wholly owned subsidiary of EVTC, which
changed its method of accounting for Liberty from the equity method to the
consolidation method. The acquisition of Liberty enhances the Company's ability
to separate mixed refrigerant, which will facilitate better margin potential and
provide additional streams of revenue, which reside outside of the normal
refrigerant market. The total consideration paid by EVTC for the remaining fifty
percent interest in Liberty was approximately $1.6 million. Of the $1.6 million
paid, $0.6 million was paid by issuing EVTC common stock, $0.4 million in loan
cash advances to the joint venture (which occurred in prior periods), and
approximately $0.6 million in assumed liabilities. Furthermore, the purchase
agreement contained a provision whereby the Company would be obligated to issue
additional shares to Concorde in the event that EVTC's common stock was trading
at a price lower than $5.00 per share at March 31, 2001.
Effective May 5, 2000, the Company acquired all the common stock of Refrigerant
Management Services, Inc. ("RMS") of Phoenix, Arizona. By virtue of this
acquisition, EVTC acquired the dominant refrigerant reclaimer and service
provider in the southwestern portion of the United States. Total consideration
for the acquisition of RMS at the date of acquisition was approximately $2.5
million, of which approximately $0.5 million was paid in EVTC's common stock,
$1.4 million was paid in cash, and $0.6 million of liabilities were assumed by
the Company. The former shareholders of RMS have rights to additional contingent
consideration if they achieve certain financial objectives over the three-year
period following the closing date of the acquisition. EVTC recorded
approximately $1.3 million in intangibles as a result of this transaction, which
was accounted for as a purchase.
Except for the historical information contained herein, the matters discussed in
this Acquisition section are forward-looking statements that involve risks and
uncertainties. The forward-looking statements in this section are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Actual results may differ materially due to a variety of factors,
including without limitation, the market and the pricing for direct marketing
Internet services, operating costs, the presence of competitors with greater
resources, the Company's need for liquidity, and other risks detailed from time
to time in the Company's reports filed with the Securities and Exchange
Commission.
DISPOSITIONS
RECYCLING AND RECOVERY EQUIPMENT BUSINESS SEGMENT
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 intended for
the disposal of the segment to be completed by June 30, 1999 (the Phase-Out
Period), however during fiscal 1999 those estimates were revised to June 30,
2000. In fiscal 1998, loss on discontinued operations included a $0.5 million
charge for future operating results through the phase-out period and a write
down of $4.8 million to inventory, accounts receivable, leasehold improvements,
and equipment to estimated net realizable values. The Company had liquidation
revenues of $0.6 and $1.2 million and incurred direct costs of $0.3 million and
$0.4 million for fiscal year 2000 and 1999, respectively
12
<PAGE>
During fiscal 2000, in conjunction with the end of the phase-out period, the
Company elected to write down the remaining assets of its Recycling and Recovery
Equipment segment by approximately $0.4 million. The Company wrote down the
remaining assets to reflect the salvage value of such assets to effectively
complete the plan to discontinue the Recycling and Recovery Equipment segment,
which was adopted in 1998.
E SOLUTIONS MARKETING, INC. BUSINESS SEGMENT
During December 2000, the Company's Board of Directors adopted a plan to
discontinue the operations of e solutions Marketing, Inc., its segment that
directly marketed business to consumer services via the Internet. The Company
has initiated a plan to liquidate the tangible assets of this segment as it
seeks a strategic alternative for the business concept. Management intends to
complete the disposal of the segment within ninety days from the adoption of the
liquidation plan. For financial statement purposes, the Company accounted for
this segment as discontinued operations in fiscal year 2000.
In fiscal year 2000, losses on discontinued operations were $0.8 million. At
September 30, 2000, the remaining assets of e Solutions Marketing, which were
comprised of goodwill, gift inventory, web site development costs and certain
pieces of machinery and equipment were written down from $1.3 million to $0.0 to
reflect the estimated net realizable value of such assets.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies nine locations in the United States, which are leased from
third parties, with the two exceptions noted below. 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.
LOCATION SQUARE FOOTAGE USE
-------- -------------- ---
Lakewood, NJ 21,000 Refrigerant packaging and Distribution
center
Bronx, NY 13,500 Ballast recycling
Fort Worth, TX 60,000 Reclamation and refrigerant storage
facility; Executive offices (Replaces
Hurst, TX Facility)
Hurst, TX 26,000 Reclamation and refrigerant storage
facility; Executive offices
Chicago, IL 9,375 Recovery, storage and Distribution center
Orlando, FL 3,640 Recovery, storage and Distribution center
Kapolei, HI 5,000 Recovery, storage and Distribution center
Phoenix, AZ 5,842 Recovery, storage and Distribution center
Holland, MI 4,800 Manufacturing, recovery, storage and
Distribution center
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 a 5-year lease
agreement with George Cannan through December 31, 2004. 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.
13
<PAGE>
Additionally, the Company acquired the 60,000 square foot warehouse facility and
office space in Fort Worth, Texas in July 2000. The warehouse will replace the
Hurst location as its reclamation and refrigerant storage facility and corporate
headquarters. The Hurst lease expires December 31, 2000. This acquisition was
financed through a note payable to Heritage National Bank. See Note (5) - Note
Payable for details of the loan.
ITEM 3. LEGAL PROCEEDINGS.
The only legal proceeding pending against the Company or involving the Company
is a tax levy by the Internal Revenue Service ("IRS"). During fiscal 2000, the
IRS imposed an excise tax levy of $0.4 million relating to refrigerant imported
by the Company during fiscal year 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq SmallCap Market System under
the symbol "EVTC". The following table sets forth, for the period since October
1, 1998, the high and low prices for the Common Stock as reported by NASDAQ. The
NASDAQ quotations represent quotations between dealers without adjustments for
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
COMMON STOCK HIGH LOW
----------------------------------------- ---------- ----------
YEAR ENDED SEPTEMBER 30, 2000
First Quarter............................ $ 6 23/32 $ 1 1/32
Second Quarter........................... 13 7/8 2 1/2
Third Quarter............................ 15 1/4 9 1/8
Fourth Quarter........................... 14 7/8 2 9/32
YEAR ENDED SEPTEMBER 30, 1999
First Quarter............................ $ 1 3/4 $ 3/8
Second Quarter........................... 1 1/4
Third Quarter............................ 3 5/16 1/2
Fourth Quarter........................... 2 1/16 7/8
As of September 30, 2000, there were 46 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.
On May 20,1999, the Company's securities began trading on the Nasdaq SmallCap
Market.
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.
14
<PAGE>
During fiscal 2000, the Company sold shares of unregistered stock, which is
described in detail in Note 12 - Equity in the Notes to the Consolidated
Financial Statements section.
On July 20, 1999 the Company's board of directors authorized the Company to sell
792,800 shares of restricted Section 144 common stock to several private
investors. The Company entered into an agreement to sell the 792,800 shares of
its common stock to the private investors on August 9, 1999. In December 1999,
the Company received the cash payment for the subscription stock issued. The
Company used these funds for working capital and other general corporate
purposes.
On October 1, 1999 the Company's board of directors voted to sell and issue up
to one million shares of restricted Section 144 common stock to several private
investors for the sole purpose of providing working capital and short term
financing that would be required if the Company was successful in acquiring e
solutions Marketing, Inc. See Note 4 - Acquisition for additional information
regarding e solutions. The selling price of such stock was set at approximately
85% of the prior 5 days average closing price on October 1, 1999 or $1.00 per
share. In conjunction with the execution of the formal agreement to purchase e
solutions, the Company issued an aggregate of 750,000 shares for $750,000 (or
$1.00 per share). The funding from the stock sale occurred during March 2000.
In March 2000, the Company entered into an agreement with several investors to
issue 200,000 shares of the Company's unregistered common stock at a price of
$4.50 per share. The proceeds from such stock issuance were received in March
and April 2000 and used to fund ongoing working capital requirements associated
with the acquisitions of afreegift.com, Inc. and RMS.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for each of the five fiscal
years ended September 30, 2000. 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,
------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Sales ........................ $ 36,241 $ 38,732 $ 38,483 $ 55,097 $ 31,657
Income (Loss) From
Continuing Operations ........... 130 470 (5,188) 3,261 2,640
Income (Loss) From
Continuing Operations Per Share
Basic ......................... .02 .09 (1.04) 0.65 0.51
Diluted ....................... .02 .09 (1.04) 0.64 0.50
Income (Loss) From
Discontinued Operations ......... (2,395) -- (6,298) (2,376) (912)
Income (Loss) From
Discontinued Operations Per Share
Basic ......................... (.36) -- (1.26) (.47) (.17)
Diluted ....................... (.34) -- (1.26) (.47) (.17)
</TABLE>
SEPTEMBER 30,
------------
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
------ ------- ------- ------- -------
Working Capital ........ $ 2,553 $ 5,656 $ 4,104 $14,893 $15,538
Total Assets ........... 24,902 21,950 23,561 37,546 31,907
Total Debt ............. 10,244 9,742 11,992 13,500 9,498
Total Shareholders'
Equity ................ 9,412 $ 8,378 $ 7,110 $18,595 $19,064
During July 1998, the Board of Directors adopted a plan to discontinue its
Recycling and Recovery Equipment Business and in December 2000, they approved a
plan to discontinue its Internet Marketing business sector. See Note 8 of Notes
to the Consolidated Financial Statements for additional information regarding
discontinued operations. The Statements of Operations Data above have been
recast to exclude such discontinued operations.
16
<PAGE>
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.
Management's discussion and analysis of the consolidated results of operations
and financial condition should be read in conjunction with the Consolidated
Financials and the related Notes.
The Company, as a result of the Board of Directors' decision on December 14,
2000, to discontinue the operations of e solutions marketing, inc., has two
reportable operating segments: refrigerant and ballast recycling. The
refrigerant segment engages in the marketing and sales of refrigerant and
refrigerant related services as well as performing refrigerant reclaiming
services. The ballast recycling segment engages in the recycling and disposal of
fluorescent light ballasts and the brokering of fluorescent lamps for their
ultimate disposal.
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
DEC. 31 MAR. 31 JUN. 30 SEPT. 30 YEAR
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Revenue .................. $ 4,774 $ 8,909 $ 12,266 $ 10,292 $ 36,241
Gross Profit ............. 1,133 1,802 3,521 3,083 9,539
Net Income/(loss) ........ (459) 126 561 (2,492) (2,264)
Basic Earnings per share . (.08) .02 .08 (.32) (.34)
Diluted Earnings per share (.08) .02 .07 (.31) (.32)
Common stock price per share
High ................... 6.72 13.88 15.25 14.88 15.25
Low .................... 1.03 2.50 9.13 2.28 1.03
--------------------------------------------------------------------------------------------------------
1999
Revenue .................. 4,533 10,115 12,396 11,687 38,731
Gross Profit ............. 1,279 2,054 2,639 398 6,370
Net Income/(loss) ........ (812) 14 517 751 470
Basic Earnings per share . (.17) .00 .10 .18 .09
Diluted Earnings per share (.17) .00 .10 .18 .09
Common stock per share
High ................... 1.75 1.00 3.31 2.06 3.31
Low .................... .38 .25 .50 .88 .25
--------------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999
RESULTS OF CONTINUING OPERATIONS
REVENUE
Our Revenue was $36.2 million for the year ended September 30, 2000, a decrease
of $2.5 million or 6.5% from $38.7 million generated in fiscal year 1999.
Revenues generated from the sale of refrigerant were $32.5 million, a decrease
of $2.4 million or 6.9% from $34.9 million generated during the prior year. The
decrease in sales occurred primarily as a result in weaker demand and pricing
for two of
17
<PAGE>
our core refrigerants, R-22 and R-134a. This decrease in sales was offset
slightly by incremental revenue resulting from the inclusion of the operating
results of both RMS and Liberty (which were acquired during 2000) combined with
increased sales of other refrigerants. Ballast revenue for the year ended
September 30, 2000 was $3.7 million, a decrease of $0.1 from 1999.
GROSS MARGIN
Gross margin generated from sales were $9.5 million, an increase by $3.1 million
or 48.4% compared to $6.4 million generated during fiscal year ended 1999. Total
gross margin as a percentage of sales increased to 26.3% for the year ended
September 30, 2000 compared to 16.4% generated during the prior year.
Of the $3.1 million increase in gross profit, approximately $1.2 million
occurred as a result of the inclusion of RMS and Liberty in the Company's
operations. The acquisition of RMS provides an additional channel of
distribution of refrigerant, recovery, and reclamation services into the HVAC/R
industry. Because the RMS business model provides value added services and
complete reclaiming and recovery solutions to its customer base, it realized
significantly higher margins than our traditional core refrigerant sales, which
in turn mitigates, to a certain extent, some of the Company's exposure to
volatile refrigerant pricing conditions. The remaining increase of $1.9 million
in gross margin occurred as a result of higher than normal demand and prices for
R-12 offset slightly by lower than normal prices of R-22 and R-134a. The
Company's ability to maintain its current level of R-12, R-134a and R-22 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 these refrigerants and historically
has purchased from a number of manufactures and suppliers. The Company's
refrigerant reclamation and separation will continue to serve as important
sources of R-12, as well as other CFC and non-CFC refrigerants.
SELLING, GENERAL & ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for the year ended
September 30, 2000 were $8.1 million, an increase of $2.8 million or 52.8% from
$5.3 million incurred during the year ended September 30, 1999. Of the $2.8
million increase, $1.7 million resulted from the inclusion of both the RMS and
Liberty operations, which were acquired during the fiscal year 2000. In
addition, the Company incurred approximately $0.3 million in incremental SG&A
expenses related to the due diligence and various capital raising efforts which
were performed in conjunction with the Company's proposed acquisitions of both
Mercury Technology International, L.P. and Mercury Waste Solutions, Inc. In
1999, the Company's SG&A expenses contained a recovery of a receivable which was
recorded as a reduction to SG&A expense of $0.8 million. During 2000, the
Company recovered $0.2 million from such a receivable.
INTEREST EXPENSE
Interest expense for the year ended September 30, 2000 was $0.8 million, a
decrease of $0.2 million or 20% percent from the prior year. The decrease
occurred primarily as a result of a decrease in the average balance of the
Company's revolving credit agreement offset slightly by an increase in interest
rates over the prior year and the assumption of certain debt associated with the
acquisitions of RMS and Liberty.
OTHER EXPENSE, NET
Other expense, net increased $0.6 million in 2000, to $0.5 million compared to
income of $0.1 million generated during the prior year. The increase during 2000
occurred primarily as a result of a $0.4 million charge levied by the IRS, which
related to refrigerant that the Company imported during 1994. The $0.4 million
charge is combined with $0.2 million in other miscellaneous non operating
expenses. The prior year amount contained $0.1 million in interest income which
was not generated during fiscal year 2000 primarily because the Company changed
its cash management policy to encourage a quicker repayment of its revolving
credit facility.
RESULTS OF DISCONTINUED OPERATIONS
During December of 2000, the Company's Board of Directors adopted a plan to
discontinue e solutions Marketing, Inc., its business segment which directly
marketed business to consumer services via the Internet. The Company has
initiated a plan to liquidate the tangible assets of this segment as it seeks a
strategic alternative for the business concept. Management intends for the
disposal of the segment to be completed within ninety days from the adoption of
the liquidation plan. The Company recorded a loss from discontinued operations
of $0.8 million and loss on the disposal of the discontinued segment of $1.2
million. For financial reporting purposes, management's decision to discontinue
e-solutions after yearend is presented in the fiscal 2000 financial statements.
During July of 1998, the Company's Board of Directors adopted a plan to
discontinue its recycling and recovery equipment segment for which the Company
initiated a liquidation program to sell all assets of the segment. In July of
2000, the Company
18
<PAGE>
recognized a charge of $0.4 million to loss from discontinued operations to
write down the segment's remaining assets to its salvage value.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
RESULTS OF CONTINUING OPERATIONS
REVENUE
Net sales for continuing operations for the year ended September 30, 1999 were
$38.7 million, an increase of $0.2 million, less than 1%. The increase in net
sales is primarily attributed to the increase in sales of refrigerant products,
resulting from stronger demand for R-22 refrigerant and R-134a refrigerant.
Although there was a strong demand for R-134a, which is the primary replacement
for R-12, sales were significantly limited by the industry wide shortage of the
product. During 1999, its suppliers placed the Company under a tight allocation
of R-134a. However, the shortage of R-134a available for sale by the Company was
partially offset by the increase in the average selling price. Sales of
refrigerant R-12 continue to provide a significant portion of the Company's
revenues, although its relative percentage continues to decline. This decline in
R-12 sales is primarily attributed to the significant increase in the demand for
R-134a and the Company's increasing emphasis on refrigerant reclaiming and
commercial HVAC/R refrigerant sales. The Company's ability to maintain its
current level of R-12, R-134a and R-22 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 these refrigerants 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 and non-CFC refrigerants. Additionally, ballast-recycling sales
decreased by 4.2% primarily due to a decline in scrap metal revenues caused by
the worldwide decline in scrap metal pricing. Revenues from ballast-recycling
services were slightly higher for the year.
COST OF SALES
Cost of sales for continuing operations for the year ended September 30, 1999
was $32.3 million, a decrease of 9.3% from the $35.7 million reported in fiscal
year 1998. Continuing operations costs of sales were 83.6% of continuing
operations revenues, a decrease from 92.6% for fiscal year 1998. The decrease is
primarily attributable to sales of R-12, R-134a and R-22 at higher margins for
fiscal year 1999. Additionally, cost of sales for ballast recycling decreased
due to improved productivity and increased ballast-recycling service margins. In
fiscal year 1998, the Company was forced to sell R-12 below cost to meet
market-pricing set by the automotive original equipment manufacturers.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) related to continuing
operations for 1999 decreased to $5.3 million, a decrease of $2.6 million or
32.9% from $7.9 million reported in fiscal 1998. The decrease is primarily
attributable to the Company's cost reduction program initiated late in the first
quarter that, resulted in reduced marketing, distribution, and administrative
expenses related to its refrigerant reclaiming subsidiary. Additionally, the
Company's reserve for bad debt as of September 30, 1999 was reduced by $0.8
million due to a partial recovery on a trade receivable and a change in the
estimated net realizable value of the note that was in default at September 30,
1998 and fully reserved in fiscal 1998. Management revised its estimate of the
collectibility based on subsequent cash received of $0.5 million and estimated
value of $0.3 million for underlying collateral. The recovery included cash
payments, common stock shares assigned to the Company and security interests in
real property.
INTEREST EXPENSE
Interest expense in fiscal year 1999 was $1.0 million, a decrease of $73,564 or
6.8% from the prior year. This is primarily attributed to a decreased 1999
average line of credit advance balance from 1998.
INCOME (LOSS) FROM CONTINUING OPERATIONS
The Company recognized income from continuing operations of $0.5 million for
1999, an increase of $5.7 million over the prior year loss of $5.2 million. The
increased profitability was primarily attributed to the Company's cost reduction
program resulting in reduced marketing, distribution and administrative
expenses, the 126% improvement in gross margin, the partial recovery of a
certain trade receivable in the amount of $0.8 million, and the recognition of
$0.3 million in Federal income tax benefit related to the Company's $7.7 million
federal tax net operating loss carryforward. The increase in profitability was
offset by a $0.4 million inventory theft at one of the Company's branch
locations and $0.5 million in payments to Colmen, primarily related to the
termination of their consulting contract and $0.2 million in fees and charges
paid to the Company's former bank to extend the Credit Facility.
19
<PAGE>
RESULTS OF DISCONTINUED OPERATIONS
In July 1998, the Company's Board of Directors adopted a plan to discontinue its
recycling and recovery equipment segment. The Company initiated a liquidation
program to sell all assets of the segment. Management intended for the disposal
to be completed by June 30, 1999 (the phase-out period) however, during fiscal
1999 those estimates were revised to June 30, 2000. In fiscal 1999, the Company
had liquidation revenues of $ 1.2 million and incurred direct costs of $0.4
million. Based on the past years operations of the discontinued segment,
management has revised its net realizable values of assets at $1.1 million with
direct costs estimated at $0.3 million to continue the liquidation process
through June 30, 2000. The Company did not incur any additional expenses or
charges during the year ended September 30, 1999 related to discontinued
operations, and based on current estimates, the Company does not foresee
incurring any material charges related to the discontinuation of this segment in
fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company is able to fund its normal working capital requirements mainly
through operations or, when necessary, through its utilization of its existing
credit facilities. During December 1999, the Company entered into a three-year
loan agreement with CIT, which provides for borrowings under a $12.3 million
credit facility. Under the terms of the CIT Credit Facility, the credit facility
bears an interest rate of the Prime lending rate plus six tenths of one percent
and is payable when the CIT Credit Facility's three year term expires. The CIT
Credit Facility is subject to certain financial covenants based on the existing
calculated borrowing base and is secured by certain accounts receivable,
inventory and property and equipment.
EVTC's cash and cash equivalents decreased by $1.9 million to $0.3 million at
September 30, 2000. The decrease occurred primarily as a result of cash used in
investing activities of $3.7 million offset by cash provided by financing
activities of $1.8 million.
Net cash provided by operating activities from continuing operations of $0.7
million was comprised of $0.2 million used in operating activities which created
minor fluctuations in working capital accounts resulting primarily from the
timing of cash receipts and cash disbursements combined in part by net income
from continuing operations adjusted for non-cash items of $0.9 million.
Net cash used in discontinued operations was approximately $0.7 million
primarily related to the discontinued operations of the Company's business
segment which directly marketing business to consumer services via the internet.
Net cash used in investing activities was comprised of $1.5 million in cash paid
for the acquisition of RMS and Liberty and $0.9 million related to an
acquisition the operations for which were ultimately discontinued. In addition,
EVTC used $1.7 million for capital expenditures related to the construction of
additional onsite service trucks and other building improvements. Such uses of
cash for investing activities were offset partially by a $0.4 million payment
received on a note receivable from an officer of the Company.
Net cash provided by financing activities during the year ended September 30,
2000 was approximately $1.8 million. Of the cash provided by financing
activities, $2.3 million resulted from the issuance of common stock to private
investors, $0.6 million resulted from the collection of funds under stock
subscription agreements, offset, partially, by net repayments on various notes
payable and revolving lines of credit totaling approximately $1.1 million.
EVTC has made a number of business acquisitions during the year ended September
30, 2000, all accounted for by the purchase method of accounting. Accordingly,
the consolidated financial statements include the operating results for each
business from the date of acquisition.
Effective March 24, 2000, EVTC, through its wholly owned subsidiary,
e-solutions, acquired afreegift.com, Inc. As a result of this transaction,
e-solutions directly marketed business to consumer services through its
getafreegift!com web site. The web site hosted over twelve consumer brand and
service categories, each of which were anchored by national name brand sponsors.
In this permission based marketing initiative, each brand name sponsor provided
free gifts in exchange for their personal data profile. The total consideration
paid for getafreegift.com at the time of acquisition was approximately $0.9
million of which $0.8 million was paid in cash advances during fiscal year 2000
prior to closing and approximately $0.1 million in liabilities were assumed. In
addition, the former shareholders of afreegift.com, Inc. had an opportunity to
receive up to 8 million shares of EVTC's common stock if they satisfy certain
financial performance objectives by April 2001. During December 2000, the
Company's Board of Directors, citing the notable increase in the cost of capital
necessary to fund the ongoing operations of this business segment adopted a plan
to formally discontinue the operations of e solutions marketing, inc.
On April 1, 2000, the Company acquired the remaining 50% interest in Liberty
from Concorde Science and Technology, Inc. ("Concorde"), its previous joint
venture partner. As a result of this transaction, Liberty became a wholly owned
subsidiary of
20
<PAGE>
EVTC. The acquisition of Liberty enhances the Company's ability separate
refrigerant, which will facilitate better margin potential and additional
streams of revenue which reside outside of the normal refrigerant market. The
total consideration paid by EVTC for the remaining fifty percent interest in
Liberty was approximately $1.6 million of which $0.6 million was paid by issuing
EVTC common stock, $0.4 million in cash advances to the joint venture which
occurred in prior periods, and approximately $0.6 million in liabilities were
assumed. Furthermore, the purchase agreement contained a provision whereby the
Company would be obligated to issue additional shares to Concorde in the event
that EVTC's common stock was trading at a price lower than $5.00 per share at
March 31, 2001.
Effective May 5, 2000, the Company acquired all the common stock of Refrigerant
Management Services, Inc. ("RMS") of Phoenix, Arizona. By virtue of this
acquisition, EVTC acquired the dominant refrigerant reclaimer and service
provider in the southwestern portion of the United States. Total consideration
for the acquisition of RMS at the date of acquisition was approximately $2.5
million of which approximately $0.5 million was paid in EVTC's common stock,
$1.4 million was paid in cash, and $0.6 million of liabilities were assumed by
the Company. The former shareholders of RMS have rights to additional contingent
consideration if they achieve certain financial objectives over the two-year
period following the closing date of the acquisition.
On July 31, 2000, EVTC closed the contract to acquire a warehouse facility and
office space in Fort Worth, Texas where it will consolidate operations and
relocate its corporate headquarters. The total purchase price for the building
was approximately $1.5 million, of which $0.3 million was paid immediately upon
closing, the remainder of which was financed through a note payable to Heritage
National Bank. The note bears interest at the prime lending rate plus one
percent (1%) and is payable in monthly installments of $6,944 plus interest over
a fifteen year period. The note payable to Heritage Bank is secured by the
warehouse facility and office space.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. We do not believe this will have a material effect on the
operations. Implementation of this standard was delayed by the FASB for a 12-
month period through the issuance of SFAS No 137 "Accounting for Derivative
Instruments and Hedging Activities - deferral of the effective date of FASB
Statement No 133". In addition, SFAS 133 was amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activity." The Company
will now adopt SFAS 133, as amended, as required for its first quarterly filing
of fiscal year 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue recognition in Financial
Statements." SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. In June 2000, the SEC issued SAB101B that delayed the implementation
date of SAB 101 until the quarter ended December 31, 2001 with retroactive
application to the beginning of our fiscal year. The Company does not expect the
adoption of SAB 101 to have a material impact on its financial position of
results of operations.
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.
21
<PAGE>
Assuming year-end 2000 variable rate debt and investment levels, a one-point
change in interest rates would impact net interest expense by less than
$100,000.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports - BDO Seidman, LLP ........................ 24
Independent Auditors' Report - KPMG LLP ................................. 25
Consolidated Balance Sheets - as of September 30, 2000 and 1999 ......... 26
Consolidated Statements of Operations and Comprehensive Income (Loss) -
for each of the years ended September 30, 2000, 1999 and 1998 ......... 27
Consolidated Statements of Stockholders' Equity - for each of the
years ended September 30, 2000, 1999 and 1998 ......................... 28
Consolidated Statements of Cash Flows -
for each of the years ended September 30, 2000, 1999 and 1998 ......... 29
Notes to Consolidated Financial Statements .............................. 30
Schedule II - Valuation and Qualifying Accounts ......................... 45
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EVTC, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of EVTC, Inc. and
subsidiaries as of September 30, 2000 and 1999, and the related consolidated
statements of operations and comprehensive income (loss), stockholders' equity,
and cash flows for the years then ended. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Also in our opinion, the 2000 and 1999 data in 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.
BDO Seidman, LLP
Dallas, Texas
December 15, 2000
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EVTC, Inc.:
We have audited the accompanying consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows of EVTC, Inc.
and subsidiaries for the year ended September 30, 1998. In connection with our
audit of the consolidated financial statements, we also have audited the 1998
data in the financial statement schedule listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of EVTC, Inc. and subsidiaries for the year ended September 30, 1998 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the 1998 data in the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
January 5, 1999
25
<PAGE>
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 262,644 $ 2,159,434
Marketable securities ....................................... 33,992 54,460
Accounts receivable, net of allowance of $452,007 in 2000 and
$409,732 in 1999 ............................................ 7,085,873 6,655,772
Income taxes receivable ..................................... -- 58,108
Subscriptions Receivable .................................... -- 594,600
Inventories ................................................. 7,813,674 6,805,492
Prepaid expenses and other current assets ................... 588,608 681,337
Deferred income taxes ....................................... 300,000 300,000
Assets of discontinued operations ........................... 394,523 1,098,760
------------ ------------
Total current assets ........................................ 16,479,314 18,407,963
Property and equipment, net ................................. 5,013,941 1,401,036
Intangibles, less accumulated amortization .................. 2,597,573 511,829
Investment in joint ventures and other assets ............... 810,879 1,257,964
Due from officer ............................................ -- 371,016
------------ ------------
Total other assets .......................................... 8,422,393 3,541,845
$ 24,901,707 $ 21,949,808
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long term debt ........................... $ 8,679,977 $ 9,742,380
Accounts payable - trade .................................... 2,603,059 2,387,771
Accrued liabilities ......................................... 2,290,055 1,137,212
Liabilities of discontinued operations ...................... 353,331 304,209
------------ ------------
Total current liabilities ................................... 13,926,422 13,571,572
Long term debt .............................................. 1,563,596 --
------------ ------------
Total liabilities ........................................... 15,490,018 13,571,572
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
1,000,000 shares; none issued or outstanding ............... -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; 7,444,283 shares issued and outstanding in 2000
and 4,989,719 shares were issued and outstanding in 1999
(excludes 792,801 of subscribed stock) ..................... 74,443 57,825
Additional paid-in capital .................................. 15,435,375 12,133,204
Accumulated other comprehensive income ...................... 33,992 54,460
Retained deficit ............................................ (6,132,121) (3,867,253)
------------ ------------
Total stockholders' equity .................................. 9,411,689 8,378,236
------------ ------------
$ 24,901,707 $ 21,949,808
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ..................................... $ 36,240,901 $ 38,731,683 $ 38,483,170
Cost of sales ................................. 26,701,669 32,361,928 35,669,958
------------ ------------ ------------
Gross profit .................................. 9,539,232 6,369,755 2,813,212
Selling, general and administrative
Expenses, including recovery of credit loss of
$223,000 in 2000 and $820,000 in 1999 ....... 8,055,831 5,263,936 7,857,941
------------ ------------ ------------
Operating income (loss) ....................... 1,483,401 1,105,819 (5,044,729)
Interest expense .............................. 834,412 1,014,677 1,088,241
Other (income) expense, net ................... 518,931 (78,466) 60,629
------------ ------------ ------------
Income (loss) from continuing operations
Before income taxes ......................... 130,058 169,608 (6,193,599)
Income tax expense (benefit) .................. -- (300,000) (1,005,858)
------------ ------------ ------------
Income (loss) from continuing operations ...... 130,058 469,608 (5,187,741)
Discontinued operations:
Loss from discontinued operations, net of
Income taxes .................................. (750,576) -- (1,024,840)
Estimated loss on disposal of discontinued
Operations, net of tax ........................ (1,644,350) -- (5,273,005)
------------ ------------ ------------
(2,394,926) -- (6,297,845)
Net income (loss) ............................. $ (2,264,868) $ 469,608 $(11,485,586)
------------ ------------ ------------
Other comprehensive income (loss), net of tax;
Unrealized gain (loss) on securities .......... (20,468) 54,460 --
------------ ------------ ------------
Comprehensive income (loss) ................... $ (2,285,336) $ 524,068 $(11,485,586)
============ ============ ============
Income (loss) per share
Basic
Continuing operations ......................... $ .02 $ .09 $ (1.04)
Discontinued operations ....................... $ (.11) $ -- $ (.21)
Loss on disposal .............................. $ (.25) $ -- $ (1.05)
------------ ------------ ------------
$ (.34) $ .09 $ (2.30)
Diluted
Continuing operations ......................... $ .02 $ .09 $ (1.04)
Discontinued operations ....................... $ (.11) $ -- $ (.21)
Loss on disposal .............................. $ (.23) $ -- $ (1.05)
------------ ------------ ------------
$ (.32) $ .09 $ (2.30)
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE>
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
----------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL
---------- --------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
---------- --------- ----------- ------------ --------- ------------
Warrants issued to lender ................... -- -- 150,000 -- -- 150,000
Subscription stock .......................... 792,801 7,928 586,672 -- -- 594,600
Unrealized gain on securities ............... -- -- -- -- 54,460 54,460
Net income .................................. -- -- -- 469,608 -- 469,608
---------- --------- ----------- ------------ --------- ------------
Balance at September 30, 1999 ............... 5,782,520 $ 57,825 $12,133,204 $ (3,867,253) $ 54,460 $ 8,378,236
---------- --------- ----------- ------------ --------- ------------
Proceeds from shares issued for cash ........ 950,000 9,500 1,640,500 -- -- 1,650,000
Proceeds from options and warrants exercised 580,916 5,809 608,917 -- -- 614,726
Stock issued in acquisitions ................ 130,847 1,309 1,052,754 -- -- 1,054,063
Unrealized loss on securities ............... -- -- -- -- (20,468) (20,468)
Net income (loss) ........................... -- -- -- (2,264,868) -- (2,264,868)
---------- --------- ----------- ------------ --------- ------------
Balance at September 30, 2000 ............... 7,444,283 $ 74,443 $15,435,375 $ (6,132,121) $ 33,992 $ 9,411,689
========== ========= =========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing Operations ............. $ 130,058 $ 469,608 $ (5,187,741)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization ......................... 849,083 667,818 785,195
Deferred income taxes ................................. -- (300,000) 611,593
Provision for bad debts ............................... 77,080 (692,443) 1,335,438
Write-off of investment in joint venture .............. -- -- 183,096
(Gain) loss on sale of assets ......................... -- (3,660) (40,692)
Issuance of stock warrants ............................ -- 150,000 --
CHANGES IN ASSETS AND LIABILITIES, NET OF BUSINESSES
ACQUIRED:
Accounts receivable ................................... (235,128) (1,638,605) (1,210,740)
Income taxes receivable ............................... 58,108 1,365,551 (1,423,659)
Inventories ........................................... (747,121) 430,948 10,057,035
Prepaid expenses and other
Assets .............................................. 194,702 (239,137) 40,036
Accounts payable and accrued liabilities .............. 352,878 (457,350) (303,370)
------------ ------------ ------------
Net cash provided by (used in)
Continuing operations .............................. 679,660 (247,270) 4,846,191
Net cash provided by (used in) discontinued operations (672,101) 325,710 (799,412)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 7,559 78,440 4,046,779
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ....................... -- 5,000 --
Capital expenditures .................................. (1,707,466) (374,117) (276,952)
Business acquisition payments ......................... (1,424,214) -- --
Preacquisition advances to affiliates ................. (850,000) -- --
Due from officer ...................................... 371,016 (171,016) (100,000)
Capital expenditures of discontinued operations ....... -- -- (17,477)
Change in investment in joint ventures and other assets (114,238) 359,932 45,394
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................. (3,724,902) (180,201) (349,035)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving credit facility ........... (1,288,964) (2,250,000) (1,507,620)
Proceeds from other debt .............................. 350,000 -- --
Payments of other debt ................................ (99,809) -- --
Proceeds from subscription stocks ..................... 594,600 -- --
Proceeds from common stock and options exercised ...... 2,264,726 -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................................. 1,820,553 (2,250,000) (1,507,620)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .. (1,896,790) (2,351,761) 2,190,124
Cash and cash equivalents at beginning of year ........ 2,159,434 4,511,195 2,321,071
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 262,644 $ 2,159,434 $ 4,511,195
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE>
EVTC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 March 2000,
the Company, through its wholly owned subsidiary, e-solutions, acquired
afreegift.com, Inc. e-solutions marketed business to consumer services
through its getafreegift!com web site. However, subsequent to year-end,
the Board of Directors approved a plan to discontinue this segment of
their business. This is discussed in detail in Note 8. In 1998, the
Company discontinued its segment in the manufacturing and distribution
of refrigerant recycling and recovery equipment for automotive and
commercial use (see note 8 - Discontinued Operations).
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 in the United States 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 2001. However,
beyond fiscal 2001 the Company's access to R-12 is much less certain.
Management believes R-134a sales will continue to offset the decline of
R-12 sales in future periods.
The Company's ability to maintain its current level of R-12, R-134a and
other refrigerant 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 refrigerants 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 and non-CFC refrigerants.
(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 accounted for its 50% ownership interest in a joint venture
using the equity method until April 1, 2000 when the Company acquired
the remaining 50% interest in Liberty Technologies International, Inc.
("Liberty") from its joint venture partner. As a result of this
transaction, Liberty became a wholly owned subsidiary of EVTC, which
changed its method of accounting for Liberty from the equity method to
the consolidation method.
(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. In fiscal year 2000,
the Company had one customer that accounted for 10% of the total net
sales. No single customer accounted for more than 10% of total net
sales in fiscal 1999 and 1998.
30
<PAGE>
(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 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. Products shipped
on consignment to customers are not included in sales.
Ballast recycling revenues are recognized by the Company 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 1999, the Company recorded a
recovery of $820,000 to the allowance for bad debts and accounts
receivable related to a certain refrigerant product account receivable
that was fully reserved for in 1998. Management revised its estimate of
the collectibility based on subsequent cash received and estimated
value of the underlying collateral. The recovery included cash
payments, common stock shares assigned to the Company and security
interests in real property. During fiscal year 2000, the Company
recorded a $223,000 reduction in Selling, General and Administrative
expenses based on management's estimate of future recovery related to
the receivable.
(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 $167,527 and $1,244,649 on September 30, 2000 and
1999, 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 method.
(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) INTANGIBLES
Intangibles consist primarily of goodwill, which represents the excess
of purchase price over fair value of net assets acquired, and is
amortized on a straight-line basis over the expected periods to be
benefited, generally 15 years. Accumulated goodwill amortization was
$324,454 and $237,285 at September 30, 2000 and 1999, 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
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. During fiscal year 2000, the goodwill associated with the
discontinued operations of e-solutions Marketing, Inc. was written down
to reflect the net realizable value. See Note 8 - Discontinued
Operations for additional information.
(J) DUE FROM OFFICER
Due from officer at September 30, 1999 represents advances to an
executive officer of the Company. The non-interest-bearing advance was
converted to an interest-bearing, secured note (7%) during fiscal
1999. In January 2000, the officer paid the note in full.
31
<PAGE>
(K) 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. At September 30, 2000, the
Company has net operating loss carryforwards for federal income tax
purposes of $7,578,503 and recorded a $300,000 net deferred tax asset
(as detailed in Note 7 to the Consolidated Financial Statements).
(L) INCOME PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of
common shares outstanding for the reporting period. Diluted earnings
per share reflect 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 (loss) 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.
The denominator for continuing and discontinued operations is computed
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Denominator for basic earnings per share-
Weighted average shares .................. 6,673,703 4,989,719 4,989,719
Effect of dilutive securities:
Employee stock options ................... 396,725 --
Warrants ................................. 42,780 89,150 --
Subscription Stock ....................... -- 69,788
--------- --------- ---------
Dilutive potential common shares ........... 439,505 158,938 --
Denominator for diluted earnings per share -
Weighted-average shares and assumed
Conversions .............................. 7,113,208 5,148,657 4,989,719
========= ========= =========
</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.
2000 1999 1998
------- ------- -------
Employee stock options 165,000 98,000 283,500
Warrants ............. -- 300,000 --
(M) 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 or rates that approximate current market
rates.
(N) 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
32
<PAGE>
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.
(O) STOCK-BASED COMPENSATION
The Company accounts for stock based compensation in accordance with
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 greater than 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.
(P) 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.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. We do not
believe this will have a material effect on the operations.
Implementation of this standard was delayed by the FASB for a 12- month
period through the issuance of SFAS No 137 "Accounting for Derivative
Instruments and Hedging Activities - deferral of the effective date of
FASB Statement No 133". In addition, SFAS 133 was amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activity." The Company will now adopt SFAS 133, as amended, as required
for its first quarterly filing of fiscal year 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue recognition in
Financial Statements." SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. In June 2000, the SEC issued SAB101B
that delayed the implementation date of SAB 101 until the quarter ended
December 31, 2000 with retroactive application to the beginning of our
fiscal year. The Company does not expect the adoption of SAB 101 to
have a material impact on its financial position of results of
operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation
of APB No. 25" ("FIN 44"). FIN 44 clarified the application of Opinion
No. 25 for certain issues including: (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
for consequences of various modifications to the terms of a previously
fixed stock option or various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. In
general, FIN 44 is effective July 1, 2000. The Company does not expect
the adoption of FIN 44 to have a material impact on its financial
position or results of operations.
(2) INVENTORIES
Inventories at September 30, 2000 and 1999 consist of the following:
2000 1999
---------- ----------
Raw materials .................. $3,264,126 $2,428,007
Finished goods ................. 4,549,548 4,377,485
---------- ----------
Total inventories ..... $7,813,674 $6,805,492
========== ==========
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.
33
<PAGE>
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at September 30, 2000 and 1999 is summarized as
follows:
DEPRECIABLE
LIVES 2000 1999
---------- ----------- -----------
Machinery and equipment ....... 2-10 years $ 5,166,400 $ 3,776,735
Buildings ..................... 39 years 1,602,617 --
Office equipment .............. 2-5 years 1,265,884 991,804
Vehicles ...................... 5 years 1,257,591 231,188
Leasehold improvements ........ 2-5 years 209,977 174,910
----------- -----------
9,502,469 5,174,637
Accumulated depreciation ...... (4,488,528) (3,773,601)
----------- -----------
$ 5,013,941 $ 1,401,036
=========== ===========
Leasehold improvements are amortized over the shorter of the estimated
useful life of the assets or the lease term.
(4) ACQUISITIONS
During the year ended September 30, 2000, EVTC made a number of
acquisitions that were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating
results for each business from the date of acquisition. For each
acquisition, the purchase price was allocated to the identifiable
tangible and intangible assets. Excess amounts were allocated to
goodwill and amortized on a straight-line basis over a period not to
exceed 15 years.
Effective March 24, 2000, EVTC, through its wholly owned subsidiary,
e-solutions, acquired afreegift.com, Inc. As a result of this
transaction, e-solutions directly marketed business-to-consumer
services through its getafreegift.com web site. The total consideration
paid for getafreegift.com at the time of acquisition was approximately
$0.9 million of which $0.8 million advanced to e-solutions prior to the
closing of the transaction and $0.1 million was assumed in liabilities.
In December 2000, the Company's Board of Directors adopted a plan to
discontinue the operations of e solutions Marketing, Inc. The Company
initialed a plan to liquidate the tangible assets of this segment as it
seeks a strategic alternative for the business concept. Management
intends to complete the disposal of the segment within ninety days from
the adoption of the liquidation plan. The plan to discontinue this
segment is discussed in detail in Note 8 - Discontinued Operations.
On April 1, 2000, the Company acquired the remaining 50% interest in
Liberty Technologies International, Inc. ("Liberty") from Concorde
Science and Technology, Inc. ("Concorde"), its previous joint venture
partner. For the six months ended March 31, 2000, the Company recorded
an $0.09 million investment loss in Liberty. As a result of this
transaction, Liberty became a wholly owned subsidiary of EVTC, which
changed its method of accounting for Liberty from the equity method to
the consolidation method. The acquisition of Liberty enhances the
Company's ability to separate mixed refrigerant, which will facilitate
better margin potential and provide additional streams of revenue,
which reside outside of the normal refrigerant market. The total
consideration paid by EVTC for the remaining fifty percent interest in
Liberty was approximately $1.6 million. Of the $1.6 million paid, $0.6
million was paid by issuing 60,000 shares of EVTC common stock, $0.4
million in loan cash advances to the joint venture (which occurred in
prior periods), and approximately $0.6 million in assumed liabilities.
Furthermore, the purchase agreement contained a provision whereby the
Company would be obligated to issue additional shares to Concorde in
the event that EVTC's common stock was trading at a price lower than
$5.00 per share at March 31, 2001.
Effective May 5, 2000, the Company acquired all the common stock of
Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona. By
virtue of this acquisition, EVTC acquired the dominant refrigerant
reclaimer and service provider in the southwestern portion of the
United States. Total consideration for the acquisition of RMS at the
date of acquisition was approximately $2.5 million, of which
approximately $0.5 million was paid by issuing 64,285 shares of EVTC's
common stock, $1.4 million was paid in cash, and $0.6 million of
liabilities were assumed by the Company. The former shareholders of RMS
have rights to additional contingent consideration if they achieve
certain financial objectives over the three-year period following the
closing date of the acquisition. EVTC recorded approximately $1.3
million in intangibles as a result of this transaction.
34
<PAGE>
Pro forma results of operations are presented on an aggregate basis
because, although pro forma effects are material to the financial
statements on an aggregate basis, they do not materially impact the
financial statements on an individual basis. Only the Liberty and RMS
financial information was included in the pro forma schedule below.
Since e-solutions Marketing, Inc. was discontinued, the related
financial information was excluded from the schedule below. Pro forma
revenue, net loss and loss per share information are presented for the
following 12 months ended September 30, assuming these acquisitions
occurred on October 1, 2000 and 1999:
2000 1999
------------ ------------
Revenue ................ $ 37,691,829 $ 41,126,336
Net Loss ............... (503,564) (301,121)
Loss Per Share ......... $ (0.08) $ (0.06)
The pro forma financial information does not purport to: (1) indicate
what the combined results of operations would have been had the
acquisitions occurred at the beginning of the periods presented, or (2)
the results of operations that may be obtained in the future.
Additionally, the pro forma financial information does not reflect any
anticipated cost savings resulting from the integration of the combined
companies' operations.
(5) LONG TERM DEBT
The Company's revolving line of credit and other debt obligations
consisted of the following as of:
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------ -----------
Note Payable - Chase Bank ........... $ 126,333 $ 9,742,380
Revolving Credit Agreement - CIT .... 8,327,083 --
Equipment Term Note - CIT ........... 260,000 --
Note Payable - Heritage National Bank 1,247,299 --
Note Payable - Concorde ............. 36,032 --
Note Payable - Navistar ............. 33,551 --
Capital Lease Obligations ........... 213,275 --
----------- -----------
Total Notes Payable ........ $10,243,573 $ 9,742,380
=========== ===========
NOTE PAYABLE - CHASE BANK
In December of 1999, the Company entered into an amended and restated
promissory note with Chase Bank in the amount of $750,000. Under the
terms of the agreement, the first payment of $371,000 was due on
January 31, 2000, with subsequent payments of $31,583 payable on a
monthly basis beginning February 15, 2000 and ending January 15, 2001.
The note bears the interest rate of the Prime rate plus 1.5% (11.0% at
September 30, 2000). The balance as of September 30, 1999 represented
the outstanding revolving line of credit with Chase Bank that was due
on January 15, 1999. The 1999 outstanding amount was refinanced as
part of the $12.3 million long-term revolving credit facility with
CIT.
CIT CREDIT FACILITY
During December 1999, the Company entered into a three-year loan
agreement with CIT, which provides for borrowings under a $12.3
million credit facility. Under the terms of the CIT Credit Facility,
$12.0 million of the credit facility bears an interest rate of the
Prime lending rate plus six tenths of one percent (10.1% at September
30, 2000) and is payable when the CIT Credit Facility's three year
term expires. However, since the Company uses the credit facility to
fund its working capital needs, it classifies the CIT Credit Facility,
in its entirety as a current liability. The CIT Credit Facility is
subject to certain financial covenants based on the existing
calculated borrowing base and is secured by certain accounts
receivable, inventory and property and equipment. At year-end, the
Company was in compliance with all covenants.
The remaining $0.3 million was secured against certain existing fixed
assets, bearing interest at the same rate described above and is
payable in equal installments over a sixty month period. Currently,
the balance is $260,000, of which $60,000 is classified as current and
the remaining $200,000 is classified as long-term debt.
35
<PAGE>
NOTE PAYABLE - HERITAGE NATIONAL BANK
Effective July 31, 2000, the Company acquired a warehouse facility and
office space in Fort Worth, Texas where it will consolidate operations
and relocate its corporate headquarters. The total purchase price for
the building was approximately $1.6 million, of which $0.3 million was
paid immediately upon closing, the remainder of which was financed
through a note payable to Heritage National Bank. The note bears
interest at the Prime lending rate 1% (10.5% at September 30, 2000)
and is payable in monthly installments of $6,944 plus interest over a
fifteen year period. The note payable is secured by the warehouse
facility and office space.
NOTE PAYABLE - CONCORDE
In connection with the April 1, 2000 acquisition of the remaining
fifty percent interest in Liberty, EVTC assumed an $87,121 note
payable to Concorde. This note payable to Concorde bears interest at
the Prime lending rate (9.5% at September 30, 2000) and is payable in
twelve equal monthly installments, which will conclude on March 1,
2001. The note payable to Concorde is secured by certain fixed assets
acquired through Liberty and is classified as a current liability.
NOTE PAYABLE - NAVISTAR
In connection with the May 1, 2000 RMS acquisition, the Company
assumed a note payable in the amount of $40,575 payable to Navistar.
The note payable to Navistar bears interest at a rate of nine and five
tenths percent (9.5%), and is payable in equal monthly installments
ending November 1, 2002. Two tank service trucks that were purchased
by EVTC when it acquired RMS secure the note payable to Navistar.
CAPITAL LEASE OBLIGATIONS
The Company has several non-cancelable commitments under capital
leases, primarily RMS service trucks. Capital leases are discussed in
detail in Note 11 - Commitments and Contingencies.
The Company's revolving line of credit and other debt obligations
mature as follows during the next five years:
YEAR AMOUNT
---- ------------
2001 $ 8,679,977
2002 $ 188,581
2003 179,560
2004 180,663
2005 143,889
Thereafter 870,903
------------
Total 10,243,573
Less current portion (8,679,977)
------------
Total long-term debt $ 1,563,596
============
(6) CASH FLOWS
Cash paid during fiscal 2000, 1999 and 1998 for interest and income
taxes is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ------------ ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest .............................. $ 834,412 $ 1,014,677 $1,088,241
========== ============ ==========
Income taxes .......................... $ 6,309 $ 25,014 $ 261,097
========== ============ ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital expenditures financed with debt $1,250,000 -- --
========== ============ ==========
Common stock issued in conjunction with
acquisitions (see note 4) ............. $1,054,063 -- --
========== ============ ==========
</TABLE>
During fiscal 1999 the Company recorded a receivable for subscribed
stock totaling $594,600. This amount was received in December 1999.
Also, the Company recorded an unrealized loss of $20,468 in 2000 while
an unrealized gain on stock securities of $54,460 was recorded in
1999.
36
<PAGE>
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended September 30,
2000, 1999 and 1998 is allocated as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ----------- -----------
<S> <C> <C> <C>
Income from continuing operations ....... $ -- $ (300,000) $(1,005,858)
Discontinued operations - loss from
Discontinued operations ............ -- -- --
------ ----------- -----------
$ -- $ (300,000) $(1,005,858)
====== =========== ===========
</TABLE>
The components of income tax expense (benefit) from continuing
operations for the years ended September 30, 2000, 1999 and 1998 are
as follows:
2000 1999 1998
----------- ----------- -----------
Current:
Federal .... $ -- $ -- $(1,677,451)
State ...... -- -- 60,000
----------- ----------- -----------
-- -- (1,617,451)
----------- ----------- -----------
Deferred:
Federal .... -- (252,000) 587,354
State ...... -- (48,000) 24,239
----------- ----------- -----------
-- (300,000) 611,593
----------- ----------- -----------
$ -- $ (300,000) $(1,005,858)
=========== =========== ===========
Income tax expense (benefit) attributable to continuing operations for
the years ended September 30, 2000, 1999 and 1998 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>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income
Tax expense (benefit) ...... $ 44,220 $ 57,667 $(2,105,823)
State income taxes, net of
Federal benefit ............ -- (31,968) 55,598
Change in deferred tax net asset
Valuation allowance ........ (107,575) (378,532) 935,679
Other .......................... 63,355 52,833 108,688
----------- ----------- -----------
$ -- $ (300,000) $(1,005,858)
=========== =========== ===========
</TABLE>
The temporary differences that give rise to a significant portion of
deferred tax assets and liabilities (continuing and discontinued
operations) as of September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts ............................... $ 381,912 $ 381,912
Net operating loss carryforwards ...................... 2,576,691 2,646,764
Other ................................................. 20,460 11,990
----------- -----------
Gross deferred tax assets ...................... 2,979,063 3,040,666
Valuation allowance ....................................... (2,548,187) (2,655,762)
----------- -----------
Deferred tax assets - net of valuation allowance 430,876 384,904
----------- -----------
Deferred tax liabilities - Plant & Equipment .............. 107,872 61,900
Other .......................... 23,004 23,004
----------- -----------
Gross Deferred Tax Liabilities ............................ 130,876 84,904
----------- -----------
Net deferred tax assets ........................ $ 300,000 $ 300,000
=========== ===========
</TABLE>
The decrease in the valuation allowance for deferred tax assets as of
September 30, 2000 was $107,575. The net change in the total valuation
allowance for the year ended September 30, 1999 was a decrease of
$378,532. In assessing the
37
<PAGE>
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 on the prior year loss and
the unpredictable nature of the markets, the Company operates in,
Management recorded a valuation allowance of $2,548,187 at September
30, 2000 for the portion of the deferred tax asset and Net Operating
Losses not expected to be realized in fiscal 2000.
At September 30, 2000, the Company has net operating loss
carryforwards for federal income tax purposes of $7,578,503 which are
available to offset future federal taxable income through 2020.
(8) DISCONTINUED OPERATIONS
e SOLUTIONS MARKETING, INC. BUSINESS SEGMENT
During December 2000, the Company's Board of Directors adopted a plan
to discontinue the operations of e solutions Marketing, Inc., its
segment that directly marketed business to consumer services via the
Internet. The Company has initiated a plan to liquidate the tangible
assets of this segment as it seeks a strategic alternative for the
business concept. Management intends to complete the disposal of the
segment within ninety days from the adoption of the liquidation plan.
e solutions Marketing, Inc. was acquired in March 2000 and is
discussed in Note 4 - Acquisitions.
The Company has presented the accompanying fiscal year 2000 statement
of operations to report the operating results of the e solutions
Marketing, Inc. segment as discontinued operations. Furthermore, the
consolidated balance sheet at September 30, 2000, has been presented
to segregate the assets and liabilities of the discontinued
operations.
2000
---------
Revenue ......................... $ --
=========
Loss from discontinued operations $(750,576)
Income tax benefit .............. $ --
---------
Loss from discontinued operations $(750,576)
=========
Assets and liabilities of the business to consumer marketing segment
are as follows:
2000
---------
Assets: $ 23,337
=========
Liabilities:
Accounts payable $ 353,331
=========
At September 30, 2000, the remaining non-cash assets of e solutions
Marketing, which were comprised of goodwill, gift inventory, web site
development costs and certain pieces of machinery and equipment were
written down from $1.0 million to $0.0 to reflect the net realizable
value of such assets. Additional costs of approximately $0.2 million
were recorded based on management's estimates of the final dissolution
costs.
RECYCLING AND RECOVERY EQUIPMENT BUSINESS SEGMENT
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 intended for the disposal of the segment to be
completed by June 30, 1999 (the Phase-Out Period), however during
fiscal 1999 those estimates were revised to June 30, 2000. In fiscal
1998, loss on discontinued operations included a $0.5 million charge
for future operating results through the phase-out period and a write
down of $4.8 million to inventory, accounts receivable, leasehold
improvements, and equipment to estimated net realizable values. In
fiscal 1999, the Company had liquidation revenues of $1.2 million and
incurred direct costs of $0.4 million. During July 2000, the Company
wrote down the remaining assets by approximately $0.4 million to
reflect the salvage value of such assets to effectively complete the
plan to discontinue the Recycling and Recovery Equipment segment,
which was adopted in 1998.
38
<PAGE>
2000 1999 1998
----------- ----------- -----------
Revenues ............................ $ 585,411 $ 1,245,325 $ 1,435,350
=========== =========== ===========
Loss before income taxes ............ $ -- $ -- $(1,024,840)
Income tax benefit .................. $ -- $ -- $ --
----------- ----------- -----------
Loss from discontinued operations ... $ -- $ -- $(1,024,840)
=========== =========== ===========
Assets and liabilities of the discontinued Recycling and Recovery
Equipment business segment are as follows:
2000 1999
----------- -----------
Assets:
Accounts receivable ............. $ 116,676 $ 209,122
Inventories ..................... 254,510 877,121
Equipment and other ............. -- 12,517
----------- -----------
$ 371,186 $ 1,098,760
=========== ===========
Liabilities:
Accrued Liabilities ............. 304,209
----------- -----------
$ 304,209
=========== ===========
(9) STOCK OPTIONS
(A) EMPLOYEE
The Company has three stock option plans (the Option Plans). Two of the
plans reserve 500,000 shares each and the third plan reserves 1,000,000
shares of common stock 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, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 436,500 $1.82 283,500 $7.15 316,500 $7.56
Granted .............. 748,500 6.29 380,500 .76 100,000 5.10
Exercised ............ (280,889) .92 -- -- -- --
Forfeited ............ (96,774) 4.31 (227,500) 6.69 (133,000) 6.58
-------- ----- -------- ----- -------- -----
Outstanding at end of
Year ............. 807,337 5.97 436,500 $1.82 283,500 $7.15
======== ===== ======== ===== ======== =====
Options exercisable at
year end ......... 30,464 $3.99 101,000 $5.59 160,500 $8.03
======== ===== ======== ===== ======== =====
Weighted average
fair value of
options granted
during the year .. $6.05 $0.60 $1.52
===== ===== =====
</TABLE>
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 110% in 2000, 70%
39
<PAGE>
in 1999 and 48% in 1998; expected dividend yield of 0%; and risk-free
interest rate of 5.8% in 2000, 5.88% in 1999 and 4.25% in 1998.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
40
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 2000
----------------------------------- ---------------------------------
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> <C>
$ .50 - $2.00 163,837 8.62 $ .98 19,464 $ .68
$5.00 - $6.00 517,500 9.28 5.99 -0- -0-
$7.50 - $13.00 126,000 8.82 12.07 11,000 9.83
------- ------
807,337 9.08 $ 5.97 30,464 $ 3.99
======= ======
</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)
from continuing operations would have been changed to the pro forma
amounts as indicated below (in thousands of dollars, except per share
amounts):
2000 1999 1998
--------- --------- ---------
Net income (loss):
As reported ................ $ 130 $ 470 $ (5,188)
Pro forma .................. (778) 385 (5,284)
Diluted income (loss) per share:
As reported ................ $ .02 $ .09 $ (2.30)
Pro forma .................. (.11) .07 (2.32)
The effects of applying SFAS No. 123 in the pro forma disclosure are
not indicative of future results.
(B) NONEMPLOYEE
On September 16, 1998 the Company executed an agreement with Colmen
Capital Advisors, Inc. ("Colmen") to provide certain business
improvement services to the Company over a one-year period ("Colmen
Agreement"). Pursuant to the Colmen Agreement, services included, 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
implementing a strategic acquisitions and mergers program. Pursuant to
the Colmen Agreement the Company paid Colmen $17,500 each month
(subsequently increased in November 1998 to $30,000 each month) for
these services, and was to grant Colmen options to acquire 500,000
shares of common stock. In addition, the Company agreed to issue
options to acquire 500,000 common shares six months and one day from
the Colmen Agreement date. On June 28, 1999 the Company reached an
agreement on the termination of the contract with Colmen. Under the
agreement, the Company paid Colmen a termination fee of $330,000 and
Colmen forfeited all options.
On January 11, 1999 the Board of Directors passed a resolution to issue
all outside Board members options for 5,000 shares of the Company's
common stock for serving on the Company's Board of Directors.
(10) OPERATING SEGMENTS
The Company, as a result of the Board of Directors plan to discontinue
of e solutions marketing, Inc., has two operating reportable segments:
refrigerant and ballast recycling. The refrigerant segment is engaged
in the marketing and sale of refrigerants, as well as performing
refrigerant reclaiming services. The ballast-recycling segment is
engaged in the recycling and disposal of fluorescent lighting ballasts.
Amounts under the Corporate caption are items not directly attributable
to a segment or items not allocated to the operating segment in
evaluating their performance.
The accounting policies of the segment are the same as those described
in the summary of significant accounting policies. The Company
evaluates segment performance based on profit or loss from operations..
41
<PAGE>
There have been no intersegment sales for the years-ended September 30,
2000, 1999 and 1998.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies.
<TABLE>
<CAPTION>
REFRIGERANT BALLAST
PRODUCT RECYCLING CORPORATE CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000:
Revenues from external customers ..... $ 32,473,559 $ 3,767,342 $ -- $ 36,240,901
Interest income ...................... 33,469 2,517 4,742 40,728
Interest expense ..................... 724,243 46,976 63,193 834,412
Depreciation and
amortization expense ............... 752,252 90,231 6,600 849,083
Equity in the income of investees
accounted for by the equity method .. -- -- 85,392 85,392
Segment income (loss), before
income taxes ........................ 749,674 151,487 (771,103) 130,058
Segment assets ....................... 20,621,180 1,464,287 2,421,717 24,507,184
Investment in equity method
Investees .......................... -- -- -- --
Expenditures for segment assets ...... 1,318,881 35,968 352,617 1,707,466
YEAR ENDED SEPTEMBER 30, 1999:
Revenues from external customers ..... $ 34,896,973 $ 3,834,710 $ -- $ 38,731,683
Interest income ...................... 92,841 4,282 30,973 128,096
Interest expense ..................... -- -- 1,014,677 1,014,677
Depreciation and
amortization expense ................ 556,734 111,084 -- 667,818
Equity in the income of investees
accounted for by the equity method .. -- -- 20,687 20,687
Segment income (loss), before
income taxes ........................ 1,857,460 210,042 (1,897,894) 169,608
Segment assets ....................... 17,306,583 1,679,831 1,864,634 20,851,048
Investment in equity method
Investees .......................... -- -- 402,604 402,604
Expenditures for segment assets ...... 316,810 57,307 -- 374,117
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
REFRIGERANT BALLAST
PRODUCT RECYCLING CORPORATE CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998:
Revenues from external customers .... 34,482,160 4,001,010 -- 38,483,170
Interest income ..................... 56,033 -- (1,291) 54,742
Interest expense .................... -- -- 1,088,241 1,088,241
Depreciation and
amortization expense ............... 651,152 134,043 -- 785,195
Segment income (loss), before
income taxes ........................ (4,472,781) 317,962 (2,038,780) (6,193,599)
Segment assets ....................... 16,760,761 1,488,611 3,714,648 21,964,020
Investment in equity method investees -- -- 547,786 547,786
Expenditures for segment assets ...... 207,116 69,836 -- 276,952
</TABLE>
RECONCILIATION OF CONSOLIDATED:
<TABLE>
<CAPTION>
ASSETS 2000 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets for reportable segments $ 24,507,184 $ 20,851,048 $ 21,964,020
Assets of discontinued operations 394,523 1,098,760 1,596,948
------------- ------------- -------------
Consolidated Assets $ 24,901,707 $ 21,949,808 $ 23,560,968
============= ============= =============
</TABLE>
With the exception of the reconciliations shown the above totals
represent consolidated total amounts.
All revenues and long-lived assets of the Company are attributable to
and reside domestically.
In 2000, one customer accounted for 10% of the Company's total
consolidated revenues. No individual or related group of customers
accounted for more than 10% of the Company's total consolidated
revenues in 1999 or 1998.
(11) COMMITMENTS AND CONTINGENCIES
(A) COMMITMENTS
The Company leases its New Jersey office and warehouse facilities from
its principal shareholder at an annual cost of $120,000 in fiscal
2000, 1999 and 1998. The Company also leases other operating and
office facilities pursuant to operating leases expiring through 2005.
The Company has several non-cancelable commitments under capital
leases, primarily RMS service trucks.
The following is a schedule of future minimum rental payments under
operating and capital leases:
OPERATING CAPITAL
---------- ---------
2001 $ 426,220 $ 45,776
2002 382,863 45,776
2003 307,067 45.776
2004 144,428 45,776
2005 20,489 41,958
---------- ---------
Total minimum lease payments $1,281,067 270,838
==========
Less amount representing interest (57,563)
---------
Present value of net minimum lease payments $ 213,275
=========
Total rental expense was $612,913, $556,865 and $606,708 for the years
ended September 30, 2000, 1999 and 1998, respectively.
43
<PAGE>
(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, 2000,
the Company has fully funded this obligation. The Company does not
expect any significant cleanup costs in connection with the closure of
its facility.
During fiscal 2000, the Internal Revenue Service (IRS) imposed an
excise tax levy in regards to imported refrigerant in fiscal year 1994.
While the Company disagrees with the levy imposed by the IRS, it has
accrued the entire amount of $0.4 million.
(12) EQUITY
COMMON STOCK
In March 2000, the Company entered into an agreement with several
investors to issue 200,000 shares of the Company's unregistered common
stock at a price of $4.50 per share. The proceeds from such stock
issuance were received in March and April 2000.
On October 1, 1999 the Company's board of directors voted to sell and
issue up to one million shares of restricted Section 144 common stock
to several private investors for the sole purpose of providing working
capital and short term financing that would be required if the Company
was successful in acquiring e solutions Marketing, Inc. See Note 4 -
Acquisition for additional information regarding e solutions. The
selling price of such stock was set at approximately 85% of the prior
5 days average closing price on October 1, 1999 or $1.00 per share. In
conjunction with the execution of the formal agreement to purchase e
solutions, the Company issued an aggregate of 750,000 shares for
$750,000 (or $1.00 per share). The funding from the stock sale
occurred during March 2000.
On July 20, 1999 the Company's board of directors authorized the
Company to sell 792,800 shares of restricted Section 144 common stock
to a private investor. The Company entered into an agreement to sell
the 792,800 shares of its common stock to the private investor on
August 9, 1999. In December 1999, the Company received the cash
payment for the subscription stock issued. The Company used these
funds for working capital and other general corporate purposes.
WARRANTS
In fiscal 1999, the Company issued warrants to Chase Bank to purchase
300,000 shares of the Company's common stock at a price of $1.40 per
share. The Company registered the warrants on Form S-3 in January
2000. The Company received cash payment for the stock in March 2000.
44
<PAGE>
SCHEDULE II
EVTC, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
ADDITIONS OTHER
BEGINNING CHARGED TO ADDITIONS OR ENDING
BALANCE EXPENSE (DEDUCTIONS) BALANCE
----------- ----------- ----------- -----------
Allowance for doubtful
accounts:
Continuing Operations:
2000 $ 1,210,723 $ 77,080 $ (257,796) $ 1,030,007
1999 1,512,868 250,975 (553,120) 1,210,723
1998 177,430 1,524,723 (189,285) 1,512,868
Discontinued Operations:
2000 $ 417,895 $ -- $ 100,235 $ 518,130
1999 418,695 -- (800) $ 417,895
1998 140,000 278,695 -- 418,695
Reserve for inventory
obsolescence:
Continuing Operations:
2000 $ -- $ -- $ -- $ --
1999 -- -- -- --
1998 -- -- -- --
Discontinued Operations:
2000 $ 3,760,861 $ -- $ 288,557 $ 4,049,418
1999 5,876,344 -- (2,115,483) 3,760,861
1998 1,185,000 4,796,005 104,661 5,876,344
Valuation allowance for
deferred tax asset:
2000 $ 2,655,762 $ -- $ (107,575) $ 2,548,187
1999 3,034,294 -- (378,532) 2,655,762
1998 -- -- 3,034,294 3,034,294
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
46
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company as of September 30, 2000
were:
NAME AGE POSITION
George Cannan, Sr. 57 Chairman, Chief Executive
Officer and Director
David A. Keener 36 President
Timothy J. Hinkhouse 31 Chief Financial Officer
Jason S. McCann 31 Executive Vice President
Caroline Costante 38 Secretary
John Stefiuk 49 Director
John D. Mazzuto 52 Director
Robert J. Casper 57 Director
Laurie G. Kahn 46 Director
Scott L. Sakoff 40 Director
Edward A. Sakoff 69 Director
GEORGE CANNAN, SR. founded Environmental Materials Corp. ("EMC") a wholly-owned
subsidiary of the Company in 1975 and has been President, Chief Executive
Officer and a director of EMC since that time. Mr. Cannan founded the Company in
1989; was President and Chief Executive Officer until December 31, 1995; has
been Chairman of the Board and a director of the Company since 1989; and was
reappointed Chief Executive Officer in 1999. 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.
DAVID A. KEENER joined the Company in 1998 as its Chief Financial Office and
became President in 2000. Mr. Keener is a Certified Public Accountant. Prior to
joining the Company, Mr. Keener was President of Dual-Heat LTD from April 1996
to January of 1998; Business Control Manager of Sensormatic Electronics
Corporation from June 1994 to April 1996; and Audit Manager with Deloitte &
Touche, LLP from January 1988 to May 1994.
TIMOTHY J. HINKHOUSE joined the Company in 2000 as the Chief Financial Officer.
He most recently served as Chief Financial Officer of Gemmy Industries
Corporation privately held international corporation. In addition, he has over
five years of experience with the accounting firm of Deloitte & Touche, LLP.,
where his experience related primarily to larger Security and Exchange
Commission engagements and public offerings.
JASON S. MCCANN joined the Company in 2000 as its Executive Vice President. Mr.
McCann is responsible for EVTC's strategic planning. Mr. McCann has a diverse
background and experience that includes Internet start-up, business development,
marketing and management. He most recently served as President of a privately
held business to consumer retailer of seasonal merchandise and home decor. Prior
to Mr. McCann's e-commerce endeavors, Mr. McCann served as Director of Marketing
for DSI Toys, a publicly traded toy marketing company.
CAROLINE COSTANTE has been Secretary of the Company since its inception. 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.
JOHN D. MAZZUTO is the President of Platinum Holdings, a private investment
company. Mr. Mazzuto has held prior positions with Asian Oceanic Group, an
international merchant bank where he served as President of the bank's New York
47
<PAGE>
subsidiary and Group Managing Director of the parent company. Prior to this, he
held the position of Managing Director of Corporate Finance for Chemical Bank.
ROBERT J. CASPER is the President and Chief Executive Officer of R.J. Casper &
Associates. Mr. Casper has held prior positions as Chairman, Midwestern National
Life Insurance Company, President of MC Equities, President/Chief Operating
Officer of U.S. Life Corporation and Executive Vice President of Home Life
Insurance Company. Mr. Casper's background encompasses over 30 years of
experience in the life insurance industry, with 25 years of executive level,
hands on management experience.
LAURIE G. KAHN is the founder and president of Media Staffing Network, Inc.
Media Staffing Network, Inc. was the first staffing company that caters
exclusively to media sales and associated departments for both temporary and
permanent hiring for the cable, interactive, print, radio and television
industries. Ms. Kahn has more than 20 years experience in media including sales,
management and director/executive roles within the radio industry.
SCOTT L. SAKOFF is the President/CEO of afreegift.com. Prior to forming
afreegift.com, Mr. Sakoff founded and directed the growth of Access Media &
Marketing Services, Inc., a nationally recognized Media Management firm serving
Retail and Direct Response Marketers. Mr. Sakoff has developed
Advertising/Direct Marketing programs and consulted for clients such as Toshiba,
Sony, CBS TV, Telemundo (Spanish TV Network), Nationwide Auto Insurance and
leading National retailers such as Play It Again Sports and USA Baby. He has 20
years of hands on management and account development experience in the
Advertising/Marketing field.
EDWARD A.SAKOFF began his career as a United States Marine. After serving his
country, Mr. Sakoff embarked upon a 40-year career in the television and
marketing industries. Mr. Sakoff produced programs and commercials. He also
developed a direct mail program used in the automotive industry. Mr. Sakoff
served as Vice President of a jewelry manufacturing firm, handling all aspects
of marketing. In addition, Mr. Sakoff has served as a board member for numerous
companies.
48
<PAGE>
INFORMATION CONCERNING BOARD
The Board of Directors met two times during the 2000 fiscal year.
The Board of Directors has an Audit Committee, a Compensation Committee, and
Executive Committee. 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. Members of the Audit
Committee are Messrs. Jack Stefiuk and Robert Casper.
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. Members of the
Compensation Committee are Messrs. Jack Stefiuk and Robert Casper.
The Executive Committee has 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. Members of
the Executive Committee are Messrs. George Cannan and John Mazzuto.
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. Directors receive stock options for 5,000 shares for serving
on the Board of Directors.
Officers of the Company are elected annually by the Board of Directors and hold
office at the discretion of the Board.
SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors, and holders of more than ten percent of
the Company's Common Stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (the "Commission") and NASDAQ. Such
persons are required to furnish the Company with copies of all Section 16(a)
forms they file.
To the best knowledge of the Company, all filing requirements applicable to its
executive officers, directors, and greater than 10% beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, compensation for the Company's Chairman and
Chief Executive Officer ("CEO") and each officer that earned over $100,000
during such years (the "Named Executives"):
STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (SHARES)
-------------------------------- ------ ----------- ----------- --------
George Cannan, Sr.
Chairman/CEO 2000 $ 220,000 (1) 9,000
1999 $ 200,000 (1) - 0 -
1998 $ 200,000 (1) - 0 -
David A. Keener
President 2000 $150,000 125,000
1999 $123,077 (1) 45,000
1998 $ 85,998 (1) -0-
(1) Represents less than 10% of the Executive's compensation.
49
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth stock options granted to the Chairman and Chief
Executive Officer ("CEO") and Named Executives as of September 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS % OF TOTAL OPTIONS
GRANTED IN FISCAL YEAR GRANTED TO EMPLOYEES
SEPTEMBER 30, 2000 IN FISCAL YEAR EXERCISE EXPIRATION GRANT
NAME (#) SEPTEMBER 30, 2000 ($/SHARE) DATE VALUE $
------------------------- ---------------------- -------------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
George Cannan, Sr 9,000 1.2% $ 0.625 02/16/09 $ 5,625
David Keener 25,000 3.3% $ 1.31 09/28/09 $ 30,750
David Keener 100,000 13.4% $ 6.00 01/08/10 $564,000
</TABLE>
OPTION EXERCISES DURING, AND STOCK OPTIONS HELD AT END OF FISCAL 2000
The following table indicates the total number and value of exercisable stock
options held by the Named Executives as of September 30, 2000.
<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. 6,000 3,000 $ 21,000 $ 10,500
David Keener (2) 0 115,000 0 $402,500
</TABLE>
(1) Based on the last sale price for the Company's Common Stock on September
30, 2000 of $3.50 per share, as reported by NASDAQ.
(2) 10,000 shares were exercised during fiscal year 2000.
STOCK OPTION PLANS
The Company maintains stock option plans designated as the 1992 Stock Option
Plan (the "1992 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the
2000 Stock Option Plan (the "2000 Plan"). The 1992 and 1996 Plans each reserve
500,000 shares each for issuance, while the 2000 Plan reserves 1,000,000 shares
of the Company's Common Stock 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. 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.
50
<PAGE>
EMPLOYMENT AGREEMENTS
David Keener, the Company's President, is subject to the terms of an employment
agreement whereby Mr. Keener is entitled to receive a base compensation of
$150,000, bonus and benefits compensatory with other executive officers of the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2000, 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., 3125 Bolt Street, Fort Worth,
Texas, 76110. All shares are owned directly by the named person.
NUMBER OF
NAME SHARES OWNED PERCENT OF CLASS(1)
------------------------------ ---------------- -------------------
George Cannan, Sr. 605,335 (2) 8.1%
Caroline Costante 127,761 1.7%
David Keener 167,800 (3) 2.2%
Timothy J. Hinkhouse 75,000 (4) 1.0%
John Stefiuk 65,000 (5) 0.9%
John Mazzuto 29,115 0.4%
Robert Casper 15,000 0.2%
Jason McCann 1,700 *
Edward A. Sakoff - *
Scott Sakoff - *
Laura G. Kahn - *
All Directors and Officers as
a Group (6 persons) 1,086,711 14.2%
----------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this report upon
the exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date of this report have been
exercised.
(2) Includes 9,000 shares of Common Stock issuable upon the exercise of stock
options (6,000 of which are presently exercisable).
(3) Includes 115,000 shares of Common Stock issuable upon the exercise of stock
options (none are presently exercisable).
(4) Includes 75,000 shares of Common Stock issuable upon the exercise of stock
options (none of which are presently exercisable).
(5) Includes 10,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently Exercisable
51
<PAGE>
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 5-year lease. The Company believes that the terms of such lease are at least
as favorable as those that it could obtain from a non-affiliated third party.
As of September 30, 1999, the Company had a $371,016 note receivable from George
Cannan. This note receivable did bear an interest rate of 7% per annum and was
secured by the 21,000 square foot building located at 550 James Street in
Lakewood New Jersey. In January 2000, Mr. Cannan repaid the Company the note
receivable in full and the Company continues to lease the building at a rate of
$10,000 per month. This lease will expire December 31, 2004.
52
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT DESCRIPTION
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
53
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fort Worth, State of
Texas on the 27th day of December, 2000.
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, Chief Executive Officer and December 29, 2000
------------------------------------ Director
GEORGE CANNAN, SR.
/s/ DAVID KEENER President December 29, 2000
------------------------------------
DAVID KEENER
/s/ TIMOTHY J. HINKHOUSE Chief Financial Officer December 29, 2000
-------------------------------------
TIMOTHY J. HINKHOUSE
/s/ JOHN STEFIUK Director December 29, 2000
------------------------------------
JOHN STEFIUK
/s/ JOHN MAZZUTO Director December 29, 2000
------------------------------------
JOHN MAZZUTO
/s/ ROBERT CASPER Director December 29, 2000
------------------------------------
ROBERT CASPER
/s/ LAURIE G. KAHN Director December 29, 2000
-----------------------------------
LAURIE G. KAHN
/s/ SCOTT L. SAKOFF Director December 29, 2000
-------------------------------------
SCOTT L. SAKOFF
/s/ EDWARD A, SAKOFF Director December 29, 2000
------------------------------------
EDWARD SAKOFF
</TABLE>
54
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
55
