SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March
31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Transition
Period From ________ to ________.
Commission File Number 0-20986
EVTC, INC.
(Exact name of issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-3005943
- --------------------------------------------------- ------------------------------------------------
(State or other Jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
121 South Norwood Drive
Hurst, Texas 76053
- --------------------------------------------------- ------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(817)282-0022
-------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
</TABLE>
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. XX Yes No
The number of shares outstanding of the registrant's common stock is 7,378,752
(as of May 8, 2000).
Page 1 of 21 pages.
There are no exhibits.
<PAGE>
EVTC,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS (unaudited)
March 31, September 30,
2000 1999
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................... $ 374,870 $ 2,159,434
Marketable securities ............................................... 54,460 54,460
Subscriptions receivable ............................................ -- 594,600
Accounts receivable, net ............................................ 7,857,552 7,475,772
Deferred income taxes ............................................... 471,703 300,000
Income taxes receivable ............................................. -- 58,108
Note receivable ..................................................... -- --
Inventories ......................................................... 10,347,198 6,805,492
Other current assets ................................................ 913,466 681,337
Assets of discontinued operations ................................... 910,869 1,098,760
---------- ----------
Total current assets ......................................... 20,930,118 19,227,963
Property and equipment, net ......................................... 1,442,896 1,401,036
Goodwill, net ....................................................... 1,117,433 511,829
Investments and other assets ........................................ 516,991 437,964
Due from officer .................................................... -- 371,016
Total assets ................................................. $ 24,007,438 $ 21,949,808
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable to bank ................................................ $ 315,833 $ --
Revolving credit line ............................................... 8,075,470 9,742,380
Accounts payable .................................................... 4,005,215 2,387,771
Liabilities of discontinued
operations .......................................................... 169,675 304,209
Accrued liabilities ................................................. 1,282,041 1,137,212
---------- ----------
Total current liabilities ............................................. 13,848,234 13,571,572
Stockholders' Equity
Common stock ........................................................ 71,662 57,825
Paid-in-capital ..................................................... 14,233,639 12,133,204
Accumulated other comprehensive
income .............................................................. 54,460 54,460
Retained deficit .................................................... (4,200,557) (3,867,253)
---------- ----------
Total stockholders' equity ................................... 10,159,204 8,378,236
---------- ----------
Total liabilities and
stockholders' equity ....................................... $ 24,007,438 $ 21,949,808
---------- ----------
---------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements (unaudited)
<PAGE>
EVTC,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31 Six Months Ended March 31
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ......................... $ 8,909,247 $ 10,115,430 $ 13,684,186 $ 14,648,468
Cost of sales ..................... 7,106,330 8,060,984 10,748,104 11,314,842
--------- ---------- ---------- ----------
Gross profit ...................... 1,802,917 2,054,446 2,936,082 3,333,626
Selling, general and
administrative expenses ........ 1,447,827 1,846,531 3,042,278 3,705,834
--------- ---------- ---------- ----------
Operating income (loss) ...... 355,090 207,915 (106,196) (372,208)
Interest expense .................. 172,943 232,350 394,376 472,529
Other (income) expense, net ....... (8,994) (38,554) 4,435 (46,243)
--------- ---------- ---------- ----------
Income(loss) from continuing
operations before income taxes 191,141 14,119 (505,007) (798,494)
Income tax expense (benefit) ...... 64,988 -0- (171,703) -0-
--------- ---------- ---------- ----------
Income (loss) from continuing
operations ................... 126,153 14,119 (333,304) (798,494)
Discontinued equipment products
operations:
Loss from discontinued operations,
net of income taxes .......... -0- -0- -0- -0-
--------- ---------- ---------- ----------
Net income (loss) ................. $ 126,153 $ 14,119 $ (333,304) $ (798,494)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Income (loss) per share
Basic:
Continuing operations ............ $ 0.02 $ 0.00 (0.06) (0.16)
Discontinued operations .......... 0.00 0.00 (0.00) (0.00)
--------- ---------- ---------- ----------
0.02 0.00 (0.06) (0.16)
Diluted:
Continuing operations ............ $ 0.02 $ 0.00 (0.06) (0.16)
Discontinued operations .......... 0.00 0.00 (0.00) (0.00)
--------- ---------- ---------- ----------
0.02 0.00 (0.06) (0.16)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements (unaudited)
<PAGE>
EVTC,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended March 31,
----------------------------------
2000 1999
Cash Flows From Operating Activities:
Net loss ..................................... $ (333,304) $ (798,494)
Adjustments to reconcile net
loss to net cash used in operating activities:
Depreciation and amortization .......... 294,866 360,452
Provision for bad debts ................ 106,249 -0-
Changes in assets and liabilities, net
of business acquired:
Accounts receivable .................... (488,029) (1,124,446)
Deferred Income Taxes .................. (171,703) -0-
Due from officer ....................... 371,016 (171,016)
Income taxes receivable ................ 58,108 50,000
Inventory .............................. (3,541,706) (1,261,350)
Other current assets ................... (232,129) (39,164)
Other assets ........................... (79,027) 206,746
Accounts payable and accrued
liabilities .......................... 1,762,273 1,703,930
Assets of discontinued operations ...... 187,891 235,655
Liabilities of discontinued
operations .......................... (134,534) (214,156)
---------- -----------
Net cash used in
operating activities ............... (2,200,029) (1,051,843)
Cash Flows From Investing Activities:
Capital expenditures ......................... (312,158) (131,169)
---------- -----------
Net cash used in investing activities .......... (312,158) (131,169)
Cash Flows From Financing Activities:
Proceeds from note payable to bank ........... 750,000 -0-
Payments on notes payable to bank ............ (434,167) -0-
Net payments on revolving credit line ........ (1,666,910) -0-
Collection of stock subscription ............. 594,600 -0-
Proceeds from sale of common stock
and options exercised ........................ 1,484,100 -0-
---------- -----------
Net cash provided by
Financing activities ......................... 727,623 -0-
---------- -----------
Net decrease in cash and
cash equivalents ............................. (1,784,564) (1,183,012)
---------- -----------
Cash and cash equivalents - Beginning
of period .................................... 2,159,434 4,511,195
---------- -----------
Cash and cash equivalents - End of
period ....................................... $ 374,870 $ 3,328,183
---------- -----------
---------- -----------
See Accompanying Notes to Consolidated Financial Statements (unaudited)
<PAGE>
EVTC,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Nature Of Business And Significant Accounting Policies
EVTC, Inc. (the "Company") was incorporated under the name "Environmental
Technologies Corporation" under the laws of Delaware. In 1997, the Company
changed its corporate name to "EVTC, Inc." but continues to trade and do
business as "Environmental Technologies Corporation." The Company is engaged in
the marketing and sale of refrigerants, refrigerant reclaiming services,
recycling of fluorescent light ballasts and lamps, and internet direct marketing
business to consumer services via the getafreegift!com web site. The Company
also manufactured and distributed refrigerant recycling and recovery equipment
prior to the discontinuation of such operations in July 1998.
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 financial information furnished herein has not been audited by
independent accountants; however in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows of
the Company for the three and six month periods ended March 31,2000 and March
31,1999, respectively, have been made. The results of operations for the
six-month period ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
Note 2. Income Per Share
Net income (loss) per share for the first six months and for the second
quarter of fiscal years 2000 and 1999 is computed on the basis of the weighted
average number of common shares outstanding in the period. The average number of
common shares outstanding for the six-month periods ended March 31, 2000 and
1999 was 6,057,695 and 5,010,719 shares, respectively. The average number of
common shares outstanding for the three-month periods ended March 31, 2000 and
1999 was 6,318,380 and 5,010,719 shares, respectively. The effect of dilutive
options and warrants is immaterial.
Note 3. 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 basis 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, 1999 the Company recorded a deferred tax asset of
approximately $3 million. This asset consisted mainly of reserves relating to
bad debts and inventory reported differently for financial reporting and tax
purposes, as well as net operating loss carryforwards. Operating losses
sustained in the first six months of fiscal 2000 increased the deferred tax
asset to approximately $3.2 million at March 31, 2000. Based on estimates of
recoverability of the deferred tax asset, the Company has recorded valuation
allowances of $2.7 million at September 30, 1999 and March 31, 2000. Due to the
valuation allowance placed on these assets, they are reflected at $300,000 and
$471,703 on the Company's September 30, 1999 and March 31, 2000 consolidated
balance sheets. The Company has available at March 31, 2000 net operating loss
carryforwards, for federal income tax purposes, of $7,784,601 which are
available to offset future federal taxable income, if any, through 2019.
Note 4. Discontinued Operations
During July 1998, the Company's Board of Directors adopted a plan to
discontinue its Recycling and Recovery Equipment business segment. The Company
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. The Company has recasted the accompanying consolidated statements
of operations to present the operating results of the Recycling and Recovery
Equipment business segment as discontinued operations. The accompanying
consolidated balance sheets segregate assets and liabilities of the discontinued
segment.
Note 5. Significant Acquisitions and Subsequent Events
On October 15, 1999, the Company announced that it had signed a letter
of intent to acquire afreegift!com, inc., ("afreegift") an Oak Brook, Illinois
based internet direct marketing company.
On December 22, 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with afreegift, a Nevada corporation, Sakoff
Enterprises, Inc., a Delaware corporation (the "Shareholder"), and Scott L.
Sakoff ("Sakoff"). Under the Agreement, afreegift merges into e solutions
marketing, inc., ("e solutions") a new wholly owned subsidiary formed by the
Company in December of 1999 in exchange for common stock of the Company. The
purpose of the merger is to diversify the Company's business segments and to
take advantage of the burgeoning e-commerce industry. The transaction is
intended to qualify as a tax-free reorganization and was accounted for using the
purchase method of accounting. The consummation of the transactions contemplated
by the Agreement was subject to approval by the Company's stockholders. At the
annual meeting of the Company's stockholders on March 24, 2000 the Agreement and
the transactions contemplated were approved. The Shareholder and his designated
affiliates were entitled and received 1,000 shares of the Company's common stock
at the closing. In addition, the Shareholder has the right to receive additional
shares of the Company's common stock (the "Earn-Out Shares") upon satisfaction
of certain financial performance objectives. In no event shall the aggregate
number of shares issued at closing plus the Earn-Out Shares exceed 8,000,000.
With the merger consummated, the Company expanded its board of
directors to seven members. The Shareholder had the right to nominate two
members to the Company's board so long as the subsidiary meet specified
financial performance objectives. In addition to Scott Sakoff's election to the
Board of Directors, Edward Sakoff and Laurie Kahn were appointed as members of
the Board of Directors in compliance with the terms and conditions of the
Agreement and the Plan of Reorganization attended to the afreegift.com
transaction. Also, at the closing of the merger, Scott Sakoff entered into an
employment agreement with e solutions under which he serves as President and
Chief Executive Officer of e solutions. The employment agreement is for a term
of 1 year. The Company is obligated to renew the employment agreement for an
additional one-year term upon e solutions meeting certain performance goals. In
addition, the Company was obligated to lend $1,000,000 to afreegift at times
specified in a funding agreement. In exchange, the Company received a note
receivable from afreegift secured by all of its assets. The obligations of the
parties under the funding agreement and the note terminated upon the closing of
the merger transaction.
The Company intends to launch its first permission marketing web site
in June of 2000 and has announced the signing of major sponsor partnerships for
the June launch of its business to consumer web services. The web site will have
over twenty consumer product and service categories, each anchored by National
brand name sponsors that will provide free gifts to consumers in exchange for
their personal profile data.
On January 26, 2000, the Company announced that Liberty Technology
International,Inc., the Company's refrigerant separation joint venture,
(Liberty) acquired the assets of Refrigerant Recycling Technologies, Inc. (RRT)
located in Red Wing, Minnesota for cash and the assumption of certain
liabilities. In addition, the Company signed a letter of intent with Concorde
Science and Technology, Inc. (Concorde) of Red Bank, New Jersey to acquire their
50% interest in Liberty in exchange for an amount of the Company's common stock.
The acquisition of RRT's technology and assets enhances the capabilities of
Liberty's existing refrigerant separation technology and allows the Company to
expand into new separation markets outside of the refrigerant industry. In
addition, the acquisition of Concorde's 50% interest makes Liberty a wholly
owned subsidiary of EVTC, Inc. which will substantially streamline the
management of day to day operations and improve Liberty's overall profitability.
The acquisition of Concorde's 50% interest was approved by the Company's Board
of Directors on March 24, 2000 and the acquisition closing was completed in
April.
On March 24, 2000 the Board of Directors of the Company approved the
purchase contract related to the acquisition of a warehouse and office facility
in Fort Worth, Texas to be utilized to consolidate the Company's refrigerant
reclaiming, packaging, separation and warehousing operations, consolidate
Corporate administrative functions, and provide for future growth of the
Company's business. Subsequently, on April 7, 2000 the purchase contract was
executed with a total purchase price of $1.4 million with 90% financing.
Relocation to the new facility is planned to begin in October 2000.
On March 24, 2000 the Board of Directors of the Company authorized the
President of the Company to negotiate an acquisition transaction with
Refrigerant Management Services, Inc.of Phoenix, Arizona ("RMS"). RMS is the
dominant refrigerant reclaimer and service provider in the South Western portion
of the United States with operations in Phoenix, Tucson, Los Angeles, San Diego,
and Western Michigan. Subsequently, on May 5, 2000 the Company announced the
acquisition of RMS. Under the terms of the purchase agreement RMS will receive
an undisclosed amount of cash, stock and notes at closing. The agreement also
provides for a significant contingent earn-out based on actual profits earned
over the next three years.
On April 17, 2000 the Company announced the signing of a formal letter
of intent to acquire Mercury Technologies Inc. ("MTI"). MTI is a national
mercury and lamp recycling company headquartered in Allentown, Pa. with
processing facilities in Allentown, Pa., Melbourne, Fl. And Hayward, Ca. MTI
will be merged with the Company's Ballast Recycling Division, which will allow
the Company to offer full service ballast and lamp recycling nationally by
combining two established industry leaders into the largest ballast and lamp
recycling company in the nation. Under the terms of the letter of intent, MTI
shall receive an undisclosed amount of cash, stock and notes at closing. The
contract also provides for MTI to receive additional consideration under a
contingent earn-out formula that is based on actual revenue for the next 12
months.
Note 6. Operating Segments
The Company has three reportable segments: refrigerant, ballast
recycling and internet direct marketing. 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. The internet direct marketing
segment ("e solutions") is engaged in web site development of Permission
Marketing/Relationship Marketing based business models for internet marketers
seeking to acquire rich data on a pay for performance and measurable basis.
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. There have been no intersegment sales for the six months ended
March 31, 2000 and March 31,1999, respectively.
The Company's reportable segment information for the three months ended
March 31, 2000 and March 31, 1999 is reported below.
<TABLE>
<CAPTION>
REFRIGERANT BALLAST E SOLUTIONS
PRODUCT RECYCLING SERVICES CORPORATE CONSOLIDATED
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Three Months ended March 31, 2000:
Revenues from external ....... $ 7,947,263 $ 961,984 $---------- $---------- $ 8,909,247
customers
Segment income (loss), before
Income taxes .................. 478,882 61,714 (17,598) (331,857) 191,141
Three Months ended March 31, 1999:
Revenues from external ....... 9,133,223 982,207 -- -- 10,115,430
customers
Segment income (loss), before
Income taxes .................... 351,677 82,711 -- (420,269) 14,119
</TABLE>
The Company's reportable segment information for the six months ended
March 31, 2000 and March 31, 1999 is reported below.
<TABLE>
<CAPTION>
REFRIGERANT BALLAST E SOLUTIONS
PRODUCT RECYCLING SERVICES CORPORATE CONSOLIDATED
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Six Months ended March 31, 2000:
Revenues from external ..... $ 11,880,123 $ 1,804,063 $---------- $---------- $ 13,684,186
customers
Segment income (loss), before
Income taxes ................ 84,501 98,568 (17,598) (670,478) (505,007)
Six Months ended March 31, 1999:
Revenues from external ..... 12,768,077 1,880,391 -- -- 14,648,468
customers
Segment income (loss), before
Income taxes .................. (97,688) 157,412 -- (858,218) (798,494)
</TABLE>
Note 7. Cash Flows
With the purchase of afreegift!com, the Company recorded approximately
$630,000 in goodwill and issued 1,000 shares of the Company's common stock
related to the purchase transaction.
Note 8. 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 has recently been 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". The Company will now adopt SFAS 133 as required for its
first quarterly filing of fiscal year 2001.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The Company's fiscal year-end is September 30.
The following discussion of results of operations for the three-month
and six month periods ended March 31, 2000 and 1999 should be read in
conjunction with the unaudited condensed financial statements, including notes
thereto, included elsewhere in this Report.
Three months ended March 31, 2000 as compared to the three months ended March
31, 1999
Revenues for the three-month period ended March 31, 2000 were approximately
$8.9 million, as compared to revenues of approximately $10.1 million for the
three-month period ended March 31, 1999, a decrease of approximately $1.2
million, or 11%. The decrease in sales is primarily attributed to a decrease in
the amount of R-134a sold by the Company's automotive division as the demand and
price for R-134a was negatively impacted by R-134a producers who were very
aggressive with pricing to this distribution channel for preseason orders. The
decline in automotive refrigerant sales was partially offset by an increase in
refrigerant sales to the Company's HVAC markets. Sales of refrigerant R-12
continue to provide a significant portion of the Company's revenues although its
relative percentage is declining, as the demand for R-134a, the replacement for
R-12, is increasing, and the Company continues its increasing emphasis on
refrigerant reclaiming and commercial HVAC refrigerant sales. The decrease in
pre-season sales of R-22 also contributed to the overall sales decline for the
period. The decline in R-22 sales was primarily attributable to the 14% decline
in market price for the refrigerant based on the industry wide excess supply of
inventory carried over from last year and the decline in pre season demand. The
Company's ability to maintain its current level of R-12, R-22 and R-134a sales
for the foreseeable future will be dependent, to a large extent, upon the
availability of adequate sources of supply. The Company is not dependent on any
one source of refrigerant for its supply of R-12, R-22 or R-134a refrigerant and
historically has purchased from a number of manufacturers and suppliers. The
Company's refrigerant reclaiming and separation activities will continue to
serve as an important source of R-12, as well as other CFC refrigerants.
The costs of sales for the three month period ended March 31, 2000 were
approximately $7.1 million, as compared to $8.1 million for the three-month
period ended March 31, 1999,a decrease of approximately $1.0 million, or 12%.
This decrease is the result of decreased refrigerant sales and change in product
sales mix. Gross margin for the three-month period ended March 31, 2000
represented 20.2% of revenue compared to 20.3% for the three-month period ended
March 31, 1999. The decrease in margins on R-134a and R-22 sales were partially
offset by increased margins for R-12 sales and other HVAC refrigerant sales.
Selling, general, and administrative expenses for the three-month
period ended March 31, 2000 decreased $398,704 from the three-month period ended
March 31, 1999. The decrease is primarily attributable to the Company's
continued cost reduction initiatives started in the first quarter of 1999 in all
of the Company's business segments. The cost reduction efforts resulted in
approximately $304,000 in savings for salaries, marketing, distribution, and
administrative expenses associated with the Company's refrigerant business
segments, $28,000 in salaries and other marketing expenses associated with the
ballast recycling segment, and $82,000 in Corporate administrative expenses.
Management anticipates the benefits of the cost reduction program to have a
continued impact throughout fiscal 2000. Selling, general, and administrative
expenses for the three-month period ended March 31, 2000 include approximately
$18,000 related to e solutions marketing activities.
The Company generated a net income before taxes during the three-month
period ended March 31, 2000 of $191,141 as compared to a net income before taxes
of $14,119 during the three-month period ended March 31, 1999, a $177,000
improvement.
Based on estimates of recoverability of deferred tax assets, the
Company had recorded a tax benefit of $236,691 for the operating loss for the
three month period ended December 31, 1999, and the Company recorded a tax
expense of $64,988 for the operating income for the three month period ended
March 31, 2000(See Note 3- Income taxes in Notes to the Consolidated Financial
Statements).
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. The
Company's results of operations for the three-month period ended March 31, 2000
may not necessarily be indicative of the Company's future operating results.
Six months ended March 31, 2000 as compared to the six months ended March 31,
1999
Revenues for the six-month period ended March 31, 2000 were approximately
$13.6 million as compared to revenues of approximately $14.6 million for the
six-month period ended March 31, 1999, a decrease of approximately 1.0 million
or 7%. The decrease in revenue was primarily attributed to a decrease in the
amount of R-134a sold by the Company's automotive division as the demand and
price for R-134a was negatively impacted by R-134a producers who were very
aggressive with pricing to this distribution channel for preseason orders. The
decline in automotive refrigerant sales was partially offset by an increase in
refrigerant sales to the Company's HVAC markets. Sales of refrigerant R-12
continue to provide a significant portion of the Company's revenues although its
relative percentage is declining, as the demand for R-134a, the replacement for
R-12, is increasing, and the Company continues its marketing emphasis on
refrigerant reclaiming and commercial HVAC refrigerant sales. The decrease in
sales of R-22 also contributed to the overall sales decline for the period. The
decline in R-22 sales was attributable to the decline in market price of
approximately 13% for the refrigerant based on the industry wide excess supply
of inventory carried over from last year and decline in pre season demand. The
Company's ability to maintain its current level of R-12, R-22 and R-134a sales
for the foreseeable future will be dependent, to a large extent, upon the
availability of adequate sources of supply. The Company is not dependent on any
one source of refrigerant for its supply of R-12, R-22 or R-134a refrigerant and
historically has purchased from a number of manufacturers and suppliers. The
Company's refrigerant reclaiming and separation activities will continue to
serve as an important source of R-12, as well as other CFC refrigerant
In addition to the Company's continued efforts in the refrigerant repackaging,
refrigerant reclaiming and ballast recycling industries, the Company operates
Liberty Technology Inc. (LTI), the nation's largest mixed refrigerant processing
facility. LTI continues to be a major source of both CFC and non-CFC
refrigerants.
The costs of sales for the six-month period ended March 31, 2000 were
approximately $10.7 million as compared to approximately $11.3 million for the
six-month period ended March 31, 1999, a decrease of approximately $600,000 or
5%. This decrease is the result of decreased refrigerant sales and change in
product sales mix. Gross Margin for the six-month period ended March 31, 2000
represented 21.5% of revenue compared to 22.8% for the six-month period ended
March 31, 1999. The decrease in gross margin is primarily attributable to
reduced margins on R-134a and R-22 refrigerant sales, partially offset by
improved gross margins on R-12 refrigerant sales, and the change in refrigerant
reclaiming product sales mix.
Selling and administrative expenses decreased to $3.0 million for the six-month
period ended March 31, 2000 from $3.7 million for the period ended March 31,
1999, a decrease of approximately $700,000 or approximately 19%. The decrease
was attributable primarily to the cost reduction programs implemented by all of
the Company's business segments.
The Company generated a net loss during the six-month period ended March 31,
2000 of approximately $505,000 as compared to a net loss of $798,000 during the
six-month period ended March 31, 1999, a $293,000 or 37% improvement.
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. Due to
the industry shortages and excesses of various refrigerants, the Company's
varied product mix and the seasonality of refrigerant revenues, the Company's
results may not be necessarily an indication of the Company's future operating
results.
Liquidity and Capital Resources
The Company had working capital of approximately $7.1 million at March
31, 2000, as compared to working capital of approximately $5.7 million at
September 30, 1999. Historically, the Company has financed its working capital
requirements through operating cash flow and a working capital revolving line of
credit obtained from a bank (the "Bank Credit Facility"). On December 21, 1999
the Company closed on a three-year $12.3 million long term Revolving Credit
Facility agreement with The CIT Group/Business Credit. The CIT Credit Facility
provides up to $12.3 million in financing based upon eligible accounts
receivable, inventory and equipment ("CIT Facility"). The long term CIT Facility
replaced the Bank Credit Facility, with the bank providing a short-term credit
facility of $750,000 ("Bank Facility"). At March 31, 2000, the line of credit
advance balance from the CIT Facility was approximately $8.08 million and the
balance from the Bank Facility was $315,833. Borrowings outstanding under the
CIT Facility bear interest at the effective rate of prime plus .6% and
borrowings outstanding under the Bank Facility bear interest at the rate of 10%.
As of December 31, 1999, the Company had a $371,016 note receivable from George
Cannan, Sr., the Company's founder, Chairman and principal stockholder. This
note receivable yielded interest at 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 paid the note in full and the proceeds were used to pay
down the Company's short-term bank debt under the Bank Facility.
On October 1, 1999 the Company's board of directors voted to offer and
sell up to one million restricted shares of 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
afreegift. The offering price of such stock was set at approximately 85% of the
prior five-day average closing price of the common stock at October 1, 1999 or
$1.00 per share. With the signing of the formal agreement to purchase afreegift,
on December 22, 1999 and subsequent stockholder approval of the acquisition on
March 24, 2000, the Company sold 750,000 restricted shares of common stock.
Management expects the proceeds from the sale of these shares to fund the cash
requirements of e solutions marketing, inc.
On January 26, 2000 the Company's refrigerant separation joint venture,
Liberty Technology International, Inc. ("Liberty") acquired the assets of
Refrigerant Recycling Technologies, Inc. ("RRT") located in Red Wing, Minnesota
for cash and the assumption of certain liabilities. In addition, the Company
signed a letter of intent with Concorde Science and Technology, Inc.
("Concorde") of Red Bank, New Jersey to acquire their 50% interest in Liberty in
exchange for a specified number of shares of the Company's common stock. The
acquisition of Concorde's 50% interest in Liberty will make Liberty a wholly
owned subsidiary of the Company. The acquisition received approval from the
Board of Directors of the Company on March 24, 2000 and the acquisition was
completed in April.
On March 24, 2000 the Board of Directors of the Company approved the
purchase contract related to the acquisition of a warehouse and office facility
in Fort Worth, Texas to be utilized to consolidate the Company's refrigerant
reclaiming, packaging, separation and warehousing operations, consolidate
Corporate administrative functions, and provide for future growth of the
Company's refrigerant business segment. Subsequently, on April 7, 2000 the
purchase contract was executed with a total purchase price of $1.4 million with
90% financing. Relocation to the new facility is planned to begin in October
2000.
On March 24, 2000 the Board of Directors of the Company authorized the
President of the Company to negotiate an acquisition transaction with
Refrigerant Management Services, Inc.of Phoenix, Arizona ("RMS"). RMS is the
dominant refrigerant reclaimer and service provider in the South Western portion
of the United States with operations in Phoenix, Tucson, Los Angeles, San Diego,
and Western Michigan. Subsequently, on May 5, 2000 the Company announced the
acquisition of RMS. Under the terms of the purchase agreement RMS will receive
an undisclosed amount of cash, stock and notes at closing. The agreement also
provides for a significant contingent earn-out based on actual profits earned
over the next three years.
On April 17, 2000 the Company announced the signing of a formal letter
of intent to acquire Mercury Technologies Inc. ("MTI"). MTI is a national
mercury and lamp recycling company headquartered in Allentown, Pa. with
processing facilities in Allentown, Pa., Melbourne, Fl. And Hayward, Ca. MTI
will be merged with the Company's Ballast Recycling Division, which will allow
the Company to offer full service ballast and lamp recycling nationally by
combining two established industry leaders into the largest ballast and lamp
recycling company in the nation. Under the terms of the letter of intent, MTI
shall receive an undisclosed amount of cash, stock and notes at closing. The
contract also provides for MTI to receive additional consideration under a
contingent earn-out formula that is based on actual revenue for the next 12
months.
Net cash used in operating activities for the six-month periods ended March
31, 2000 and 1999 was $2,200,029 and $1,051,843 respectively. The primary use of
cash related to the $3.5 million increase in refrigerant inventory to support
sales during the next six months of 2000. The purchase of used refrigerants for
reclaiming was up approximately 68% from the prior year, which attributed to
$1.2 million of the total increase and automotive packaged refrigerants
increased by $2.3 million from year end levels. Net cash used in investing
activities for capital expenditures were $312,158 and $131,169 for the six-month
periods ending March 31, 2000 and 1999, respectively. Net cash provided by
financing activities was $727,623 and $0 for the six-month periods ending March
31, 2000 and 1999, respectively. The collection of $594,600 for subscription
stock and the proceeds from the sale of common stock to private investors and
the exercise of stock options totaling $1,484,100 were used to pay down debt
outstanding under the CIT Facility.
The Company had cash and cash equivalents of $374,870 and $3,328,183 at
March 31, 2000 and March 31, 1999, respectively.
As of the date of this report, other than as set forth in this report,
the Company has no material commitments for capital expenditures, including in
connection with research and development, acquisition of plant and equipment,
additional employees or increases to inventory.
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 has recently been 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". The Company will now adopt SFAS 133 as required for its
first quarterly filing of fiscal year 2001.
Year 2000
The Company has assessed the potential issues and costs associated with the
year 2000 and believe that it has addressed such issues. The Company has
implemented revisions to effect year 2000 compliance of all its accounting and
operations systems. The Company has reviewed year 2000 compliance issues with
its vendors, suppliers, and customers. At the present time, the Company believes
that costs or consequences of unforeseen issues would not result in the
occurrence of a material event or uncertainty reasonably likely to have a
material adverse effect on the Company. Subsequent to December 31, 1999 the
Company has not experienced any year 2000 issues that would require a Year 2000
remediation plan. If such issues develop the Company has the ability to commit
the necessary resources to complete a Year 2000 remediation plan on a timely
basis.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and short-term investment portfolios. The Company
centrally manages its debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolios consist of cash equivalents and short-term
marketable securities; accordingly, the carrying amounts approximate market
value. The Company's investments are not material to the financial position or
performance of the Company.
Assuming the current variable rate debt and investment levels, a one-point
change in interest rates would impact net interest expense by approximately
$80,000.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On March 24, 2000 the Company's Annual Meeting of
Stockholders was held and the Board of Directors
submitted the following proposals for approval:
<PAGE>
1. To approve the Agreement and Plan of Reorganization, dated December 21,
1999, by and among afreegift.com, Inc., a Nevada corporation, Sakoff
Enterprises, Inc., a Delaware corporation, Scott L. Sakoff and the Company, and
the transactions contemplated therein. The number of votes cast were 2,565,336
for; 29,800 against; 430 abstained.
2.To elect five (5) members to the Board of Directors to serve until the
fiscal 2001 Annual Meeting of Stockholders or until their successors are duly
elected and qualified. The following nominees were elected to the Board of
Directors, George Cannan, Sr., John Stefiuk, John D. Mazzuto, Robert J. Casper,
Scott Sakoff. The number of votes cast for Cannan, Stefiuk, Mazzuto, and Casper
was 5,205,299 for; 0 against; 289,230 abstained. The number of votes cast for
Sakoff was 5,204,949 for; 0 against; 289,580 abstained.
3.To approve an amendment to the company's Certificate of Incorporation to
increase the number of authorized shares of common stock, par value .01 per
share from 10,000,000 to 25,000,000 shares. The number of votes cast were
5,171,399 for; 322,700 against; 430 abstained.
4.To approve the EVTC, Inc. 2000 Incentive and Non-Qualified Stock Option
Plan. The number of votes cast were 2,260,842 for; 332,294 against; 2430
abstained.
5.To approve the appointment of BDO Seidman, LLP as independent public
accountants of the Company. The number of votes cast were 5,488,199 for; 2,300
against; 430 abstained.
The stockholders approved all proposals. In addition, Edward Sakoff and
Laurie Kahn were appointed as members of the Board of Directors in compliance
with the terms and conditions of the Agreement and the Plan of Reorganization
attended to the afreegift.com transaction as approved in Proposal 1 above.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
On January 7, 2000 the Company filed on Form 8-K reporting an Agreement and
Plan of Reorganization (the "Agreement") with afreegift.com, Inc. a Nevada
corporation ("afreegift"), Sakoff Enterprises, Inc., a Delaware corporation (the
"Shareholder"), and Scott L. Sakoff ("Sakoff"). Under the terms of the
Agreement, afreegift will merge into the company's newly formed subsidiary, e
solutions marketing, inc. ("e solutions") in exchange for common stock of the
Company. Afreegift is an Oak Brook, Illinois based Internet direct marketing
company. The purpose of the merger is to diversify the Company's business
segments and to take advantage of the burgeoning e-commerce industry. The
transaction is intended to qualify as a tax-free reorganization.
There are no exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVTC,Inc.
Date: May 12, 2000 By: /s/ George Cannan
------------------------------------
Chief Executive Officer
/s/ David A. Keener
------------------------------------
President and CFO
<PAGE>
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