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, 1999
[ ] 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.)
121 South Norwood Drive
Hurst, Texas 76053
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(Address of Principal Executive Offices) (Zip Code)
(817) 282-0022
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b)
of the Securities Exchange Act of 1934:
Name of Each Exchange
Title of Each Class On Which Registered
NONE
Securities registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, par value $.01 per share
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. XX Yes No ___
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 22, 1999, computed by reference to the price at
which the stock was sold on that date: $18,811,862.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share (the "Common Stock"), as of December 22, 1999, was 5,782,520.
<PAGE>
Documents Incorporated by Reference: None
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 13
4. Submission of Matters to a Vote of Security Holders 13
5. Market for Common Equity and Related Stockholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7a. Quantitative and Qualitative Disclosures About Market Risk 20
8. Financial Statements 21
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 44
10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) Of the Exchange Act 45
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial Owners and
Management 48
13. Certain Relationships and Related Transactions 49
14. Exhibits and Reports on Form 8-K 50
<PAGE>
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." The Company is
currently engaged in the marketing and sale of refrigerants, refrigerant
reclaiming services and the recycling of fluorescent light ballasts and lamps.
Subsequent to September 30, 1999, the Company also entered into an agreement to
purchase an internet marketing firm. The Company also manufactured and
distributed refrigerant recycling and recovery equipment prior to the
discontinuation of such operations in July 1998 (see Notes to the Consolidated
Financial Statements regarding discontinued operations).
The following table sets forth information relating to the approximate dollar
amounts and percentages of revenues derived from the Company's sales of
refrigerants and ballast recycling services:
YEARS ENDED SEPTEMBER 30,
(000'S)
1999 1998 1997
Refrigerants $34,897 90% $34,482 90% $50,606 92%
Ballast Recycling 3,835 10% 4,001 10% 4,491 8%
------ ---- ------ ---- ------ ----
$38,732 100% $38,483 100% $55,097 100%
======= ==== ====== ==== ====== ====
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.
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.
SUPPLIERS
The Company is not dependent on any one source of refrigerant for its supply
of refrigerants. The Company does not maintain long-term supply agreements with
its suppliers. The Company has firm purchase orders with several suppliers to
meet the majority of their refrigerant needs in 2000.
The Company purchases used refrigerant from major HVAC wholesalers,
mechanical contractors, salvage operations, large industrial and institutional
users of refrigerant as well as brokers. The Company uses a network of wholesale
HVAC supply stores that serve as collection stations for used refrigerants.
The Company's operating results are in part dependent on its ability to
obtain sufficient quantities of domestic virgin (pure) and reclaimable
refrigerants from its suppliers. In the event that the Company is unable to
obtain sufficient quantities of refrigerants in the future, or resell reclaimed
refrigerants at a profit, the Company's financial condition and results of
operations would be adversely affected.
MARKETING AND SALES
The Company primarily markets its various reclaimed refrigerants and
reclaiming services directly to HVAC/R wholesalers, mechanical contractors and
large corporate, institutional and governmental users of refrigerants. The
Company also markets refrigerants to wholesale distributors of automotive
suppliers throughout the United States. The Company's distributors resell to
automobile repair shops, service stations and retail automotive supply stores.
Marketing programs are conducted through the efforts of the Company's
executive officers, Company sales personnel and manufacturers sales
representatives. The Company utilizes various marketing methods, including
direct mailings, trade publications, telemarketing, print advertising, in-person
solicitation, participation in trade shows and the internet
(www.fcrefrigerant.com).
No single customer accounted for more than 10% of the Company's revenues
during the years ended September 30, 1999, 1998 or 1997.
The Company typically seeks to fill customer orders within two days of
receipt. Accordingly, at September 30, 1999, 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 which market refrigerants,
many of which possess substantially greater financial, marketing, personnel and
other resources than the Company. Such companies may more effectively compete
for reduced allocations of supplies of refrigerants and the marketing of
refrigerants intended to replace refrigerants containing ozone-depleting CFCs.
The Company believes that it competes on the basis of product availability
and customer service in the marketing and sale of refrigerants. The Company
believes that its refrigerant recovery and reclamation operation is one of the
largest in its industry. The Company believes that its wholesale distributors
market other products that compete with the Company's products.
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."
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 will be
regulated under The Universal Waste Rule on January 6, 2000. 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. Many of the sales persons have significant prior
experience in selling hazardous waste disposal services or selling lighting
products. Sales persons are responsible for sales, marketing and customer
service in their respective territories.
Full Circle has extensive educational and promotional materials, which are
distributed through trade journals, targeted mailing campaigns and conferences.
Full Circle's sales personnel market at over 30 conferences and trade shows each
year. Full Circle also advertises in many magazines targeted at the lighting,
DSM, electric utility, facility management, waste disposal and environmental
remediation industries.
COMPETITION
The market for Full Circle's services is highly competitive. Full Circle
competes with numerous well-established companies which market ballast recycling
services. Full Circle believes that it competes on the basis of price,
reliability and reputation and that it is one of the largest companies in its
industry.
GOVERNMENT REGULATION
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 July 6, 1999, the EPA included fluorescent lamps in the UWR
(the law goes into effect January 6, 2000). 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 thus increasing the total market for
this service.
<PAGE>
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 through operating
cash flow and a working capital revolving line of credit obtained from a bank
(the "Credit Facility"). As of September 30, 1999, $9,742,380 was outstanding
under the Credit Facility. The Credit Facility was due on January 15, 1999. On
April 7, 1999 the Company received a Forbearance Letter and new short term
General Loan and Collateral Agreement from the bank. Under the terms of the
Forbearance Letter and General Loan Agreement, the bank gave the Company until
August 31, 1999 to secure long term financing from a different lender and
provided additional financing up to $1,500,000 subject to the Company meeting
specific pay down obligations, loan covenants and issuance of stock warrants to
the bank. On September 14, 1999 the Company received a letter from the bank
agreeing to extend the term of the note on a month to month basis while the
Company completed its refinancing. At September 30, 1999, the Company was in
negotiations with several lenders to provide the Company with long term
financing. Subsequent to September 30, 1999, the Company secured and closed on a
three-year $12,300,000 Long-Term Revolving Credit Facility agreement with The
CIT Group/Business Credit.
<PAGE>
RESEARCH AND DEVELOPMENT
The Company's management places emphasis on obtaining the technology and
developing the products to achieve superiority in its industry. The Company
employs a full-time chemist to administer such projects. However, research and
development costs to date have not been material.
During the fiscal year ended September 30, 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. At
September 30, 1999, 1998 and 1997, the Company has advanced/invested
approximately $402,604, $547,786 and $669,000, respectively, in LTI, which is
included in other assets in the accompanying consolidated balance sheets. LTI's
operations commenced in January of 1997. LTI is one of the largest refrigerant
separation facilities in the country.
The Company reports the earnings and losses related to the aforementioned
ventures under the equity method of accounting. To date, the income related to
these joint ventures have not been material to the Company's financial
statements.
QUALITY ASSURANCE & ENVIRONMENTAL COMPLIANCE
The Company utilizes in-house quality and regulatory compliance control
procedures. The Company maintains its own in-house analytical testing laboratory
to assure that reclaimed refrigerants comply with ARI purity standards and
employs portable testing equipment when performing on-site services to verify
certain quality specifications. The Company employs two full time employees
dedicated to quality control and regulatory compliance and provides extensive
quality control and regulatory compliance training to all operations personnel.
In addition, management is significantly involved in regulatory compliance
efforts.
PROPRIETARY PROTECTION
The Company principally relies on a combination of trade secret laws and
employee and third party non-disclosure agreements to protect its products and
technology. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop such technologies
or, despite the precautions taken by the Company, obtain access to the Company's
know-how, concepts, ideas and documentation. Since the Company believes that
proprietary information is important to its business, failure to protect its
trade secrets could have a material adverse effect on the Company.
TRADEMARKS
The Company has several registered and/or pending trademarks that it uses to
market its products.
INSURANCE
The Company carries insurance coverage which it considers sufficient to protect
the Company's assets and operations. The Company currently maintains general
commercial liability insurance for claims up to $1,000,000 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.
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.
EMPLOYEES
At September 30, 1999, the Company employed approximately 132 persons, including
its executive officers. None of the Company's employees are represented by a
union. The Company believes its employee relations are good.
ACQUISITION
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 will merge into e solutions
marketing, inc., a new wholly owned subsidiary formed by the Company in December
of 1999 ("e solutions") 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 will be accounted for using the
purchase method of accounting.
The consummation of the transactions contemplated by the Agreement is subject to
approval by the Company's stockholders. An annual meeting of the Company's
stockholders will be called for February 28, 2000 for the purpose of seeking
ratification and approval of the Agreement and the transactions contemplated
thereby. Subject to stockholder approval and satisfaction of certain pre-closing
conditions, the Shareholder will be entitled to receive at the closing a number
of shares of the Company's common stock to be agreed upon prior to the closing
and 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 number of shares issued at closing and
Earn-Out Shares exceed 8,000,000.
If the merger is consummated, the Company expects to expand its board of
directors to seven members. The Shareholder will have the right to three seats
on the Company's board so long as the subsidiary meets specified financial
performance objectives. Also, at the closing of the merger, Sakoff will enter
into an employment agreement with e solutions under which he will serve 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.
Pending shareholder action on the merger, the Company is obligated to lend
$1,000,000 to afreegift at times specified in a funding agreement. In exchange,
the Company will receive a note from afreegift secured by all of its assets. The
note is to be repaid in a year and bears interest at 9%.
The Company intends to launch its first permission marketing web site in the
Spring of 2000. The Company expects to formally close on the transaction in the
quarter ending March 31, 2000.
For additional information on this acquisition see the Company's current report
on Form 8K that will be filed with the Securities and Exchange Commission on or
before January 6, 2000.
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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies twelve locations in the United States, all of which,
with one exception, are leased from third parties. The following summarizes the
location, square footage of the building or leased space, and use of each
facility. The Company believes that these facilities are adequate for its
existing and near-term future needs and that its facilities are adequate for its
current and proximate future needs.
Square
Location Footage Use
-------- ------- ---
Lakewood, NJ 21,000 Refrigerant packaging and
distribution center
Bronx, NY 13,500 Ballast recycling
Keller, TX 55,000 Refrigerant, recovery
equipment storage and
distribution center.
Hurst, TX 26,000 Reclamation and refrigerant
storage facility; Executive
offices
Houston, TX 1,500 Recovery, storage and
distribution center
Chicago, IL 15,000 Recovery, storage and
distribution center
Livermore, CA 8,700 Recovery, storage and
distribution center
Orlando, FL 3,540 Recovery, storage and
distribution center
Kapolei, HI 5,000 Recovery, storage and
distribution center
Clearwater, FL, 2,000 Recovery, storage and
distribution center
Louisville, KY 2,000 Recovery, storage and
distribution center
Wheatridge, CO 2,000 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.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or involving the
Company which, if adversely determined, would result in a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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.
<PAGE>
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, 1997, 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, 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
YEAR ENDED SEPTEMBER 30, 1998
First Quarter $ 5/8 $ 6
Second Quarter 7 1/4 5 5/8
Third Quarter 7 3/8 5 1/4
Fourth Quarter 5 5/8 1 1/4
As of September 30, 1999, there were 39 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 is currently processing an application to again be listed on
the Nasdaq National Market System.
The Company has not paid any cash dividends on its Common Stock and does not
currently intend to declare or pay cash dividends in the foreseeable future. The
Company intends to retain any earnings that may be generated to provide funds
for the operation and expansion of its business.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is set forth below as of and for each of the five fiscal
years ended September 30, 1999. 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>
<S> <C> <C> <C> <C> <C>
Years Ended September 30,
-------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net Sales $ 38,732 $ 38, 483 $ 55,097 $ 31,657 $ 32,033
Income (Loss) From
Continuing Operations
470 (5,188) 3,261 2,640 2,337
Income (Loss) From
Continuing Operations Per Share
Basic
.09 (1.04) 0.65 0.51 0.48
Diluted
.09 (1.04) 0.64 0.50 0.47
As of September 30,
------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Working Capital $ 5,656 $ 4,104 14,893 $ 15,538 $ 15,489
Total Assets 21,950 23,561 37,546 31,907 22,164
Total Debt 9,742 11,992 13,500 9,498 1,267
Total Shareholders'
Equity $8,378 $7,110 $18,595 $ 19,064 $ 17,600
</TABLE>
During July 1998, the Company adopted a plan to discontinue its Recycling and
Recovery Equipment Business. See Note 8 of Notes to the Consolidated Financial
Statements. The Statements of Operations Data above have been recast to exclude
such discontinued operations.
<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.
RESULTS OF CONTINUING OPERATIONS
Year ended September 30, 1999 compared to year ended September 30, 1998:
Net sales for continuing operations for the year ended September 30, 1999 were
$38,731,683, an increase of $248,513 or .7%. 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
off set 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
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 for continuing operations for the year ended September 30, 1999
was $32,361,928, a decrease of 9.3% from the $35,669,958 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 and administrative expenses related to continuing operations
for 1999 decreased to $5,263,936, a decrease of $2,594,005 or 33.0% from
$7,857,941 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 it's refrigerant reclaiming subsidiary. Additionally, the Company's reserve
for bad debt as of September 30, 1999 was reduced by $820,000 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 $500,000 and estimated value of $320,000 for
underlying collateral. The recovery included cash payments, common stock shares
assigned to the Company and security interests in real property.
Interest expense in fiscal year 1999 was $1,014,677, 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.
The Company recognized income from continuing operations of $469,608 for 1999,
an increase of $5,657,349 over last years loss of $5,187,741. 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 $820,000, and the recognition of $300,000 in Federal
income tax benefit related to the Company's $7,784,601 federal tax net operating
loss carryforward. The increase in profitability was offset by a $350,691
inventory theft at one of the Company's branch locations and $474,751 in
payments to Colmen, primarily related to the termination of their consulting
contract and $194,091 in fees and charges paid to the Company's former bank to
extend the Credit Facility.
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 $ 1,245,325 and incurred direct costs of $425,366.
Based on the past years operations of the discontinued segment, management has
revised its net realizable values of assets at $1,098,760 with direct costs
estimated at $304,209 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.
Year ended September 30, 1998 compared to year ended September 30, 1997:
Net sales for continuing operations for the year ended September 30, 1998 were
$38,483,170, a decrease of $16,613,784, or 30.2%. The decrease in net sales is
primarily attributed to a 31.8% decrease in sales of refrigerant products,
resulting from weak demand and pricing for refrigerant R-12 and other CFC
refrigerants. The weak demand during fiscal year 1998 is primarily due to the
relatively mild climate in the Western and Northeast portions of the United
States during summer of 1998 and customer inventory carry over from the mild
summer of 1997. The weak demand coupled with the fact that several large
automotive original equipment manufacturers were selling large quantities of
refrigerant R-12 into the market resulted in weak pricing during fiscal year
1998. Additionally, ballast-recycling sales decreased 10.9%, primarily due to a
turnover in sales personnel.
Sales of refrigerant R-12 continue to provide a significant portion of the
Company's revenues although its relative percentage is declining. The decline in
R-12 sales is primarily attributed to the significant increase in the demand for
R-134a, the replacement for R-12, and the Company's increasing emphasis on
refrigerant reclaiming and commercial refrigerant sales. The Company's ability
to maintain its current level of R-12 sales for the foreseeable future will be
dependent, to a large extent, upon the availability of adequate sources of
supply. The Company is not dependent on any one source of refrigerant for its
supply of R-12 or R-134a refrigerant and historically has purchased from a
number of manufacturers and suppliers. The Company's refrigerant reclaiming and
separation activities will continue to serve as an important source of R-12, as
well as other CFC refrigerants.
Cost of sales for continuing operations for the year ended September 30, 1998
was $35,669,958, a decrease of 16.7% from the $42,841,492 reported in fiscal
year 1997. Continuing operations costs of sales were 92.6% of continuing
operations revenues, an increase from 77.8% for fiscal year 1997. The increase
is primarily attributable to sales of refrigerant R-12 below cost during fiscal
year 1998. The Company was forced to sell R-12 below cost to meet market pricing
set by the automotive original equipment manufacturers. In addition, cost of
sales was impacted by a $600,000 lower of cost or market writedown on
refrigerant R-12 inventory at year-end. The Company has substantially enhanced
its access to low cost R-12 through its reclamation and separation, and did not
have a reoccurrence of this problem in 1999.
Selling, general, and administrative expenses related to continuing operations
for 1998 increased to $7,857,941, an increase of $1,960,230 or 33.2% from
$5,897,711 reported in prior year. This increase resulted from reserving
approximately $1,300,000 for potential bad debts, $200,000 in increased legal
fees and $183,000 related to the TTL investment. The Company's reserve for bad
debt was primarily attributed to an allowance placed on a note receivable that
was in default in the amount of $1,236,000 at September 30, 1998. In addition,
the increase is attributed to sales and marketing expenses associated with the
expansion of the Company's reclaiming operations.
Interest expense in fiscal year 1998 was $1,088,241, an increase of $79,133 or
7.8% from prior year. This is primarily attributed to an increased 1998 average
line of credit advance balance from 1997.
The Company recognized a loss from continuing operations of $5,187,741 for 1998.
The loss is primarily attributed to the weak demand and pricing for refrigerant
R-12, the lower cost or market write down of R-12, write off of investment and
bad debts, and increased legal fees, as mentioned above. The Company does not
anticipate any of these items recurring in future years. In 1997, the Company
reported $3,261,384 in continuing operations income.
In July 1998, the Company's Board of Directors adopted a plan to discontinue its
recycling and recovery equipment segment. The Company has initiated a
liquidation program to sell all assets of the segment. Management 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 as discussed
above. The Company recognized a loss from discontinued operations of $1,024,840
in fiscal year 1998. The Company recognized a 1998 loss of $5,273,005 related to
the disposal of the discontinued segment. The disposal loss is composed of an
approximate $4,800,000 write down of inventory to net realizable value and
estimated Phase-Out Period costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $5,656,391 at September 30, 1999 compared to
$4,103,766 at September 30, 1998, an increase of $1,552,625. The increase in
working capital is primarily attributable to the increase in accounts receivable
due to a 32% increase in sales during the fourth quarter of 1999 versus sales
during the fourth quarter of 1998 and the partial recovery of $820,000 related
to the trade receivable discussed above.
The Company relies on its bank debt as a source of funds for operations. The
Company has financed its working capital requirements through operating cash
flow and a working capital revolving line of credit obtained from a bank (the
"Credit Facility"). At September 30, 1999, the amount outstanding under the
Credit Facility was $9,742,380 a decrease of $2,250,000 from the line of credit
advance balance at September 30, 1998. Borrowings outstanding under the Credit
Facility bear interest at the bank's prime rate plus 1.5 %. The Credit Facility
is secured by eligible accounts receivable, eligible inventory and property and
equipment.
The Credit Facility was due on January 15, 1999. On April 7, 1999 the
Company received a Forbearance Letter and new short term General Loan and
Collateral Agreement from the bank. Under the terms of the Forbearance Letter
and General Loan agreement, the bank gave the Company until August 31,1999 to
secure long term financing from a different lender and provided the Company with
additional financing of up to $1,500,000, subject to the Company meeting
specific pay down obligations, loan covenants and issuance of stock warrants to
the bank. On September 14, 1999 the Company received a letter from the bank
agreeing to extend the term of the note on a month to month basis while the
Company completed its refinancing. At September 30, 1999, the Company was in
negotiations with several lenders to provide the Company with long term
financing.
Subsequent to September 30, 1999, the Company secured and closed on a
three-year $12,300,000 long-term Revolving Credit Facility agreement with The
CIT Group/Business Credit. The CIT Credit Facility provides up to $12,300,000 in
financing based upon eligible accounts receivable, inventory and equipment ("CIT
Facility"). Borrowings outstanding under the CIT Facility bear interest at an
effective rate of prime plus .6%.
In connection with obtaining the CIT Facility, the Company incurred deferred
loan costs of $296,929 that will be capitalized and amortized over the life of
the CIT Facility.
As an incentive to the Company's former bank to extend the Credit Facility
and issue a formal forbearance agreement while the Company sought alternative
financing, the Company agreed to pay the bank cash fees of $44,091 and issue the
bank warrants to purchase 300,000 shares of the Company's common stock at a
price of $1.40 per share. The Company has agreed to register such warrants on
Form S-3 with the Securities and Exchange Commission in January of 2000.
On July 28, 1999 the Company signed several stock subscription agreements to
sell and issue restricted Section 144 common stock to several private investors.
Proceeds from the sale of such stock will be used for working capital and to pay
down debt outstanding under the Credit Facility. Subsequent to September 30,
1999 the entire amounts outstanding under such subscription agreements,
$594,600, was collected by the Company in December 1999.
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
afreegift. The sell price of such stock was set at approximately 85% of the
prior five-day average closing price at October 1, 1999 or $1.00 per share. With
the signing of the formal agreement to purchase afreegift, on December 22, 1999.
The Company is currently in the process of selling these shares.
Pending shareholder approval of the afreegift merger discussed above, the
Company is obligated to lend $1,000,000 to afreegift at times specified in a
funding agreement. In exchange, the Company will receive a note from afreegift
secured by all of its assets. The note is to be repaid in a year and bears
interest at 9%.
Net cash used in operating activities related to continuing operations was
$247,270 for 1999 versus net cash provided of $4,846,191 for 1998. Net cash
provided by operating activities related to discontinued operations was $325,710
for 1999 versus net cash used by discontinued operations of $799,412 in 1998.
Net cash used in continuing operations investing activities was $180,201 in
1999 and $331,558 in 1998. Net cash used by discontinued operations investing
activities was $ - 0 - in fiscal year 1999 compared to $17,477 net cash used in
1998.
The net cash used in financing activities in 1999 of $2,250,000 reflects net
payments on the Credit Facility compared to $1,507,620 in payments on the Credit
Facility in 1998.
As of the date of this Report, other than as set forth in this Report, the
Company has no material commitments for capital expenditures, research and
development, or additional employees.
SEASONALITY
The Company's operating results vary from period to period as a result of
weather conditions and the availability and price of refrigerant products
(virgin and reclaimable). The Company's business has historically been seasonal
in nature with peak sales of refrigerants occurring in the second and third
fiscal quarters. Accordingly, the first and fourth fiscal quarters of the
Company's operations have been characterized by inventory build-up and seasonal
operating losses resulting in periodic operating cash flow short falls, which in
the past necessitated loans from the Company's banks.
YEAR 2000
The Company 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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", established standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be recast. The Company adopted this statement in fiscal year 1999.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information". In February 1998 the FASB issued SFAS 132,
"Employers' Disclosures about Pensions and Other Post retirement Benefits." The
Company adopted these statements in 1999. The adoption did not have a
significant impact on the Company's financial statements.
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and short-term investment portfolios. The Company
centrally manages its debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolios consist of cash equivalents and short-term
marketable securities; accordingly, the carrying amounts approximate market
value. The Company's investments are not material to the financial position or
performance of the Company.
Assuming year-end 1999 variable rate debt and investment levels, a one-point
change in interest rates would impact net interest expense by less than
$100,000.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports - BDO Seidman, LLP 22
Independent Auditors' Report - KPMG, LLP 23
Consolidated Balance Sheets - as of
September 30, 1999 and 1998 24
Consolidated Statements of Operations and Comprehensive Income (Loss) -
for each of the years ended September 30, 1999, 1998 and 1997 25
Consolidated Statements of Stockholders' Equity - for each of the
years ended September 30, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows -
for each of the years ended September 30, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
Schedule II - Valuation and Qualifying Accounts 43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EVTC, Inc.
Hurst, Texas
We have audited the accompanying consolidated balance sheet of EVTC, Inc. and
subsidiaries as of September 30, 1999, and the related consolidated statements
of operations and comprehensive income (loss), stockholders' equity, and cash
flows for the year ended September 30, 1999. In connection with our audit 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EVTC, Inc. and
subsidiaries as of September 30, 1999, and the results of their operations and
their cash flows for the year ended September 30, 1999 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Dallas, Texas
December 8, 1999, except for
Notes 5 and 13, as to which the
date is December 23, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EVTC, Inc.:
We have audited the accompanying consolidated balance sheet of EVTC, Inc. and
subsidiaries as of September 30, 1998, and the related consolidated statements
of operations and comprehensive income (loss), stockholders' equity, and cash
flows for each of the years in the two-year period ended September 30, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the 1998 and 1997 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EVTC, Inc. and
subsidiaries as of September 30, 1998, and the results of their operations and
their cash flows for each of the years in the two-year period ended September
30, 1998 in conformity with generally accepted accounting principles. Also in
our opinion, the 1998 and 1997 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
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS 1999 1998
------ ---- ----
Current assets:
Cash and cash equivalents $2,159,434 $ 4,511,195
Marketable securities 54,460 -----
Accounts receivable, net of allowance of $820,425 in 1999 and
$1,512,868 in 1998 7,475,772 5,144,724
Income taxes receivable 58,108 1,423,659
Subscriptions Receivable 594,600 -----
Due from officer ---- 200,000
Inventories 6,805,492 7,236,440
Prepaid expenses and other current assets 681,337 442,200
Deferred income taxes 300,000 -----
Assets of discontinued operations 1,098,760 1,596,948
----------- ------------
Total current assets 19,227,963 20,555,166
Property and equipment, net 1,401,036 1,646,941
Goodwill, less accumulated amortization 511,829 560,965
Investment in joint ventures and other assets 437,964 797,896
Due from officer 371,016 -----
------------ -----------
$21,949,808 $ 23,560,968
=========== =============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable to bank $9,742,380 $ 11,992,380
Accounts payable - trade 2,387,771 2,338,740
Accrued liabilities 1,137,212 1,643,593
Liabilities of discontinued operations 304,209 476,687
------------- -------------
Total current liabilities 13,571,572 16,451,400
---------- -------------
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
10,000,000 shares; 4,989,719 shares issued
and outstanding (includes 792,801 shares of
subscribed stock at September 30, 1999) 57,825 49,897
Additional paid-in capital 12,133,204 11,396,532
Accumulated other comprehensive income 54,460 ---
Deficit (3,867,253) (4,336,861)
------------ ------------
Total stockholders' equity 8,378,236 7,109,568
------------- -----------
$21,949,808 $23,560,968
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended September 30, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $38,731,683 $38,483.170 $55,096,954
Cost of sales 32,361,928 35,669,958 42,841,492
----------- ----------- -----------
Gross profit 6,369,755 2,813,212 12,255,462
Selling, general and administrative
Expenses, including recovery of credit loss
of $820,000 in 1999 5,263,936 7,857,941 5,897,711
----------- ----------- -----------
Operating income (loss) 1,105,819 (5,044,729) 6,357,751
Interest expense 1,014,677 1,088,241 1,009,108
Other (income) expense, net (78,466) 60,629 (28,741)
----------- ----------- -----------
Income (loss) from continuing operations
Before income taxes 169,608 (6,193,599) 5,377,384
Income tax expense (benefit) (300,000) (1,005,858) 2,116,000
----------- ---------- ----------
Income (loss) from continuing operations 469,608 (5,187,741) 3,261,384
Discontinued equipment products operations:
Loss from discontinued operations, net of
income taxes ------ (1,024,840) (2,375,994)
Loss on disposal of discontinued
Operations ------ (5,273,005) ----
----------- ----------- ----------
Net income (loss) $469,608 $(11,485,586) $ 885,390
----------- ---------- ----------
Other comprehensive income, net of tax;
Unrealized gain on securities 54,460 ---- ----
----------- ---------- ----------
Comprehensive income (loss) $ 524,068 $(11,485,586) $ 885,390
=========== ============= ==========
Income (loss) per share
Basic
Continuing operations $ .09 $ (1.04) $ 0.65
Discontinued operations ---- (1.26) (0.47)
----------- ---------- ----------
$ .09 $ (2.30) $ 0.18
Diluted
Continuing operations $ .09 $ (1.04) $ 0.64
Discontinued operations ---- (1.26) (0.47)
----------- ---------- ----------
$ .09 $ (2.30) $ 0.17
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1999, 1998, and 1997
ACCUMULATED
ADDITIONAL RETAINED OTHER
COMMON STOCK COMPREHENSIVE
-----------------
PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) -------INCOME TOTAL
------ ------ ------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 5,153,411 51,534 12,749,053 $6,263,335 $----------- $19,063,922
Proceeds from options exercised 47,833 478 373,970 -- ----------- 374,448
Proceeds from warrants
exercised 61,500 615 458,760 -- ----------- 459,375
Stock repurchase and
retirement (273,025) (2,730) (2,185,251) -- ----------- (2,187,981)
Net income ---------- -------- ----------- 885,390 ----------- 885,390
========== ======== =========== --------- =========== -----------
Balance at September 30, 1997 4,989,719 49,897 11,396,532 7,148,725 ---- 18,595,154
Net loss --------- -------- ----------- (11,485,586) ---- (11,485,586)
--------- -------- ----------- ----------- ------------
Balance at September 30, 1998 4,989,719 49,897 11,396,532 4,336,861 ---- 7,109,568
--------- -------- ----------- ----------- ------------ ------------
Warrants issued to lender ----- ----- 150,000 ----- ---- 150,000
Subscription stock 792,801 7,928 586,672 ----- ---- 594,600
Unrealized gain on securities
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
========= ======== =========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EVTC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing
Operations $ 469,608 $(5,187,741) $3,261,384
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
Operating activities:
Depreciation and amortization 667,818 785,195 788,327
Deferred income taxes (300,000) 611,593 (439,300)
Provision for bad debts (692,443) 1,335,438 6,345
Write-off of investment in joint venture --- 183,096 --
(Gain) loss on sale of assets (3,660) (40,692) (15,003)
Issuance of stock warrants 150,000 --- --
Changes in assets and liabilities:
Accounts receivable (1,638,605) (1,210,740) (1,907,056)
Income taxes receivable 1,365,551 (1,423,659) --
Inventories 430,948 10,057,035 1,595,136)
Prepaid expenses and other current
Assets (239,137) 40,036 (185,041)
Accounts payable and accrued liabilities (457,350) (303,370) 1,159,638
------------ ------------ -----------
Net cash provided by (used in)
Continuing operations (247,270) 4,846,191 1,074,158
Net cash provided by (used in) discontinued
operations ------
(799,412)
---------
325,710 (1,092,915)
------------ -----------
Net cash provided by (used in)
Operating activities 78,440 4,046,779 (18,757)
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sale of equipment 5,000 ---- 52,485
Capital expenditures (374,117) (276,952) (875,724)
Due from officer (171,016) (100,000) (100,000)
Capital expenditures of discontinued operations -- (17,477) (51,684)
Change in investment in joint ventures and other
assets 359,932 45,394 (276,281)
------------ ------------ -----------
Net cash used in investing activities (180,201) (349,035) (1,251,204)
------------ ------------ -----------
Cash flows from financing activities:
Net change in current note payable to bank (2,250,000) (1,507,620) 4,002,481
Common stock repurchase and retirement ---- ---- 2,187,981)
Proceeds from exercise of common stock warrants ---- ---- 459,375
Proceeds from common stock options exercised
Net cash provided by (used in) ---- ---- 374,448
Financing activities (2,250,000) (1,507,620) 2,648,323
---------- ----------- ---------
Net increase (decrease) in cash and cash equivalents (2,351,761) 2,190,124 1,378,362
Cash and cash equivalents at beginning of year 4,511,195 2,321,071 942,709
--------- ---------- ---------
Cash and cash equivalents at end of year $ 2,159,434 $4,511,195 $2,321,071
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<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 1998, the
Company discontinued its segment in the manufacture and distribution of
refrigerant recycling and recovery equipment for automotive and
commercial use (see note 8).
The Company's sales are highly seasonal in nature, as industry-wide
refrigerant sales are related to weather temperatures, primarily in the
warmer months. The Company's historical refrigerant sales have primarily
come from the sale of R-12, a refrigerant that is a chlorofluorocarbon
(CFC). As of January 1, 1996, however, CFC-based refrigerants can no
longer be manufactured 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 2000. However, beyond fiscal 2000 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.
During 1999 its suppliers placed the Company under a tight allocation of
R-134a. The shortage of R-134a available for sale by the Company was
partially off set by the increase in the average selling price of
R-134a. The shortage of R-134a during the period was a result of several
R-134a plants closing and the strong worldwide demand for the product.
The Company believes that world wide production of R-134a in the future
will be sufficient to fulfill demand and prevent significant future
shortages of the product. 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.
The Company's note payable to a bank was $ 9,742,380 at September 30,
1999. On April 7, 1999 the Company received a Forbearance Letter and new
short term General Loan and Collateral Agreement from the bank. Under
the terms of the Forbearance Letter and General Loan agreement, the bank
gave the Company until August 31, 1999 to secure long term financing
from a different lender and provided additional financing up to
$1,500,000 subject to the Company meeting specific pay down obligations,
loan covenants and issuance of stock warrants to the bank. On September
14, 1999 the Company received a letter from the bank agreeing to extend
the term of the note on a month to month basis while the Company
completed its refinancing.
Subsequent to September 30, 1999, the Company has secured a three-year
loan agreement with The CIT Group/Business Credit ("CIT") which provides
a $12,300,000 credit facility at a rate equivalent to the effective
prime rate plus six tenths of one percent per annum. The CIT credit
facility has various compliance covenants such as: the Company shall
keep and maintain its books and records in accordance with generally
accepted accounting principles, consistently applied; the Company will
continue to have good and marketable title to all of the Collateral
free and clear of all liens; the Company will maintain financially
sound and reputable casualty insurance with respect to the Collateral;
etc. The compliance covenants do not include covenants related to
specific financial ratios.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) BASIS OF PRESENTATION
The consolidated financial statements include the financial statements
of EVTC, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Company accounts for its 50% ownership interest in a joint venture
using the equity 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. No single customer
accounted for more than 10% of total net sales in fiscal 1999, 1998 or
1997.
(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 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.
(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 $1,244,649 and $2,015,428 on September 30, 1999 and
1998, 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.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line and declining balance methods over the estimated
useful lives of the assets. Costs of maintenance and repairs are charged
to expense when incurred.
(i)GOODWILL
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 15 years. Accumulated
goodwill amortization was $ 237,285 and $188,070 at September 30, 1999
and 1998, 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.
(j)INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. At September 30, 1999, the
Company has net operating loss carryforwards for federal income tax
purposes of $7,784,601 and recorded a $300,000 net deferred tax asset
(as detailed in Note 7 to the Consolidated Financial Statements).
(k) INCOME PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the reporting period. Diluted earnings per share 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 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.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The denominator for continuing and discontinued operations is computed
as follows:
1999 1998 1997
---- ---- ----
Denominator for basic earnings per share-
Weighted average shares 4,989,719 4,989,719 5,040,398
Effect of dilutive securities:
Employee stock options -- -- 29,973
Warrants 89,150 -- 10,506
Subscription Stock 69,788
---------
Dilutive potential common shares 158,938 -- 40,479
Denominator for diluted earnings per
share -
Weighted-average shares and assumed
Conversions 5,148,657 4,989,719 5,080,877
========= ========= =========
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.
1999 1998 1997
---- ---- ----
Employee stock options 98,000 283,500 62,000
0
Warrants 300,000 -- 33,750
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents, accounts receivable and accounts payable are reflected
in the consolidated financial statements at their respective carrying
values, which approximate fair values due to the short-term nature of
these instruments. The carrying value of the Company's bank borrowings
approximates fair value because such borrowings have variable rates of
interest.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews for impairment long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less the cost to sell.
(n) 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 plus 10% of the market price of the stock at the date, no
compensation expense is recorded. The Company, as required, has provided
pro forma disclosures of compensation expense as determined under the
provisions of SFAS No. 123.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(o) CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines and penalties
and other sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment and/or remediation can be
reasonably estimated.
(p) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", established
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No.
130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS No. 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information
for earlier years to be recast. The Company adopted this statement in
fiscal year 1999.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments
of an Enterprise and Related Information". In February 1998 the FASB
issued SFAS 132, "Employers' Disclosures about Pensions and Other Post
retirement Benefits." The Company adopted these statements in 1999. The
adoption did not have a significant impact on the Company's financial
statements.
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.
(2) INVENTORIES
Inventories at September 30, 1999 and 1998 consist of the following:
1999 1998
---- ----
Raw materials $2,428,007 $3,644,095
Finished goods 4,377,485 3,592,345
Total inventories $6,805,492 $7,236,440
========== ==========
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method. During the fourth quarter of fiscal 1998, the
Company recorded a charge of approximately $600,000 to write down refrigerant
product inventories to estimated net realizable values.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at September 30, 1999 and 1998 is summarized as
follows:
DEPRECIABLE
LIVES 1999 1998
Machinery and
equipment 2-10 years $ 3,776,735 $3,600,437
Office equipment 2-5 years 991,804 851,565
Vehicles 5 years 231,188 183,449
Leasehold
improvements 2-5 years 174,910 170,067
---------- ---------
5,174,637 4,805,518
Accumulated (3,773,601) (3,158,577)
depreciation
$ 1,401,036 $1,646,941
=========== ==========
Leasehold improvements are amortized over the shorter of the estimated
useful life of the assets or the lease term.
(4) INVESTMENTS IN JOINT VENTURES AND LOANS TO OFFICERS
During fiscal 1995, the Company entered into a 50% joint venture
(Transformation Technologies, Ltd. (TTL)) with two unaffiliated
individuals to research the applicability of transforming mixed or
contaminated refrigerants (defined as a hazardous substance) into a
useful by-product. At September 30, 1997, the Company had
advanced/invested approximately $183,000 in the TTL joint venture. The
investment was written-off in the fourth quarter of fiscal 1998 as the
Company determined there was substantial uncertainty regarding the
realization of this investment.
The Company entered into a 50% joint venture (Liberty Technology
International, Inc. (LTI)), with an unaffiliated company. LTI
constructed a refrigeration separation plant that provides an
alternative to total destruction of mixed refrigerants.
At September 30, 1999 and 1998, the Company's investment in LTI was
approximately $403,000 and $548,000, respectively. LTI's operations
commenced in fiscal 1997.
The Company's share of net income (loss) from the joint ventures was not
material to the Company's results from operations for any of the years
presented.
Due from officer at September 30,1999 and 1998 represents advances to an
executive officer of the Company. The non-interest-bearing advance was
converted to an interest-bearing, secured note (7% at September 30,
1999) during fiscal 1999.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NOTE PAYABLE
At September 30, 1999 and 1998, the note payable consists of a secured
line of credit in the aggregate available amount of $13,500,000 with a
bank. The balances outstanding under the line of credit at September 30,
1999 and 1998 were $9,742,380 and $11,992,380, respectively. In fiscal
1999, borrowings bore interest at the bank's prime rate plus 1.5% (9.75%
at September 30, 1999). At September 30, 1999 the balance outstanding
under the line of credit was below eligible security by $1,316,483. In
fiscal 1998, borrowings bore interest at the bank's prime rate or LIBOR
plus 1.75%. Borrowings outstanding at September 30, 1998 were at the
bank's prime rate (8.25%). The line of credit was secured by eligible
accounts receivable, eligible inventory and property and equipment. At
September 30, 1998 the balance outstanding under the line of credit
exceeded eligible security by $192,583. The line of credit was due on
January 15, 1999. The Company received a non-binding verbal agreement
from the bank to extend the due date for 120 days. In April 1999 the
Company received a Forbearance Letter and new General Loan and
Collateral Agreement from the bank, which the Company executed. The loan
agreement provided a limited amount of additional financing up to
$1,500,000 subject to the Company meeting specific pay down obligations,
loan covenants and issuance of stock warrants to the bank. As an
inducement for the bank to extend the Credit Facility and issue the
Company a formal Forbearance Letter while the Company sought alternative
financing, the Company agreed to pay the bank cash fees of $44,091 and
issue the bank warrants to purchase 300,000 shares of the Company's
common stock at a price of $1.40 per share. The Company has agreed to
register such warrants on Form S-3 with the Securities and Exchange
Commission in January of 2000.
Subsequent to September 30, 1999, the Company has secured a three-year
loan agreement with CIT which provides a $12,300,000 credit facility
("CIT credit facility") at a rate equivalent to the effective prime rate
plus six tenths of one percent per annum. The CIT credit facility is
secured by eligible accounts receivable, eligible inventory and property
and equipment.
(6) CASH FLOWS
Cash paid during fiscal 1999, 1998 and 1997 for interest and income
taxes is as follows:
1999 1998 1997
---- ---- ----
Interest $1,014,677 $1,088,241 $1,011,233
========== ========== ==========
Income taxes $ 25,014 $ 261,097 $1,045,584
========= =========== ==========
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 gain on stock securities of $54,460 in 1999.
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended September
30, 1999, 1998 and 1997 is allocated as follows:
1999 1998 1997
---- ---- ----
Income from continuing operations $ (300,000) $(1,005,858) $ 2,116,000
Discontinued operations - loss
from Discontinued operations --- --- (1,219,000)
---------- ------------ -----------
(300,000) (1,005,858) 897,000
========== ============ ===========
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of income tax expense (benefit) from continuing operations
for the years ended September 30, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ ------ $ (1,677,451) $2,129,300
State ------ 60,000 426,000
---------- ------------ -----------
------ (1,617,451) 2,555,300
Deferred:
Federal (252,000) 587,354 (434,900)
State (48,000) 24,239 (4,400)
---------- ----------- ----------
$(300,000) 611,593 (439,300)
---------- ----------- ----------
$(300,000) $(1,005,858) 2,116,000
========= =========== =========
Income tax expense (benefit) attributable to continuing operations for the
years ended September 30, 1999, 1998 and 1997 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:
1999 1998 1997
---- ---- ----
Computed "expected" income
Tax expense (benefit) $ 57,667 $(2,105,823) $1,828,311
State income taxes, net of
Federal benefit (31,968) 55,598 278,256
Change in deferred tax net
asset
Valuation allowance (378,532) 935,679 --
Other 52,833 108,688 9,433
---------- ----------- ----------
(300,000) (1,005,858) $2,116,00
========== =========== ==========
<PAGE>
The temporary differences that give rise to a significant portion of
deferred tax assets and liabilities (continuing and discontinued operations) as
of September 30, 1999 and 1998 are as follows:
Deferred tax assets:
Allowance for bad debts $ 381,912 $ 656,731
Inventory reserve --- 1,997,957
Net operating loss carryforwards 2,646,764 272,777
Plant and equipment --- 13,385
Other 11,990 109,415
--------- ---------
Gross deferred tax assets 3,040,666 3,050,265
Valuation allowance (2,655,762) (3,034,294)
----------- ----------
Deferred tax assets - net
of valutaion allowance 384,904 15,971
----------- ----------
Deferred tax liabilities -
Plant & Equipment 61,900
Other 23,004 15,971
----------- ----------
Gross Deferred Tax Liabilities 84,904 ----
----------- ----------
Net deferred tax assets 300,000 ----
=========== ==========
Increase in the valuation allowance for 1998 is allocated $935,679 to
income tax benefit from continuing operations and $2,098,615 to income tax
benefit from discontinued operations.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The increase in the valuation allowance for deferred tax assets as of
September 30, 1999 was $2,655,762. The net change in the total valuation
allowance for the year ended September 30, 1999 was a decrease of
$378,532. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based on
the prior year loss and the unpredictable nature of the markets, the
Company operates in, Management recorded a valuation allowance of
$2,655,762 at September 30, 1999 for the portion of the deferred tax
asset and Net Operating Losses not expected to be realized in fiscal
2000.
At September 30, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of $7,784,601which are available to
offset future federal taxable income through 2019.
(8) DISCONTINUED OPERATIONS
During July 1998, the Company's Board of Directors adopted a plan to
discontinue its Recycling and Recovery Equipment business segment. The
Company has initiated a liquidation program to sell all assets of the
segment. Management 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 $477,000 charge for future
operating results through the phase-out period and a writedown of
$4,796,000 to inventory, accounts receivable, leasehold improvements,
and equipment to estimated net realizable values. In fiscal 1999, the
Company had liquidation revenues of $1,245,325 and incurred direct costs
of $425,366.
The Company revised the estimate for completion of the Phase-Out period
and accordingly, the operating results of the discontinued Recycling and
Recovery Equipment business operations, including provisions for lease
termination costs, employee benefits and expenses during the extended
Phase-Out Period through June 30, 2000 were revised to $304,209 and
inventory, accounts receivable, and equipment estimated at net
realizable values of $1,098,760. These estimates have been segregated
from continuing operations and reported as a separate line item in the
accompanying consolidated statement of operations. As shown below, the
revenues from discontinued operations were completely offset by the cost
of operations and change in estimates resulting in no income or loss
from discontinued operations.
Operating results (exclusive of any corporate charges and interest
expense and the aforementioned provisions) from the discontinued
Recycling and Recovery Equipment segment are as follows:
1999 1998 1997
---- ---- ----
Revenues $1,245,325 $ 1,435,350 $2,352,789
========== =========== ==========
Loss before income
taxes $ --- $(1,024,840) (3,594,994)
Income tax benefit $ --- $ --- (1,219,000)
---------- ------------ -----------
Loss from
discontinued
operations $ --- $(1,024,840) $(2,375,994)
========== =========== ==========
During the fourth quarter of fiscal 1997, the Company recorded a charge
of approximately $1,600,000 to write down recycling and recovery
equipment inventories to estimated net realizable values.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Assets and liabilities of the discontinued Recycling and Recovery
Equipment business segment are as follows:
1999 1998
---- ----
Assets:
Accounts receivable $209,122 $ 130,000
Inventories 877,121 1,436,948
Equipment and other 12,517 30,000
---------- ----------
$1,098,760 $1,596,948
========== ==========
Liabilities:
Accounts Payable $ ---- $ 165,000
Accrued Liabilities 304,209 311,687
---------- ---------
304,209 476,687
========== =========
(9) STOCK OPTIONS
(a) EMPLOYEE
The Company has two stock option plans (the Option Plans) pursuant to
which 500,000 shares of common stock for each plan have been reserved
for issuance upon the exercise of options designated as either (a)
incentive stock options (ISOs) under the Internal Revenue Code of 1986,
as amended, or (b) non-qualified options. ISOs may be granted under the
Option Plans to employees and officers of the Company. Nonqualified
options may be granted to consultants, directors (whether or not they
are employees), employees or officers of the Company. The options are
exercisable for a period that ends five years from the date the options
become exercisable.
Transactions relating to the Option Plans for the years ended September
30, 1999, 1998 and 1997 are summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
WEIGHTED AVERAGE EXCERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 283,500 $ 7.15 316,500 $7.56 370,000 $ 7.90
Granted 380,500 .76 100,000 5.10 76,000 7.63
Exercised -- -- -- -- (47,833) 7.83
Forfeited (227,500) 6.69 (133,000) 6.58 (81,667) 9.25
--------- ------ --------- ----- -------- ------
Outstanding at end of
Year 436,500 1.82 283,500 7.15 316,500 7.56
======== ====== ======== ===== ======= ======
Options exercisable at
year end 101,000 5.59 160,500 8.03 204,668 7.35
======== ====== ======== ===== ======= ======
Weighted average
fair value of
options granted
during the year $ 0.60 1.52 1.70
====== ===== ======
</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 70 % in 1999,
48% in 1998 and 17% in 1997; expected dividend yield of 0%; and risk-free
interest rate of 5.88 % in 1999, 4.25% in 1998 and 6.22% in 1997.
<PAGE>
<TABLE>
<CAPTION>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT SEPTEMBER 30, 1999 AT SEPTEMBER 30, 1999
--------------------- ---------------------
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>
$ 50-$2.00 380,500 9.44 $ .76 45,000 $ 1.33
$6.00 15,000 .53 6.00 15,000 6.00
$7.50-$11.88 41,000 1.40 10.11 41,000 10.11
-------- -------- --------- ------- -------
436,500 8.38 1.82 101,000 5.59
======== ======== ========= ======= =======
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 in
accounting for its plans and, accordingly, has not recognized compensation cost
for stock option plans and stock purchase plans in its consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date consistent with the provisions of SFAS No. 123, the Company's
net income (loss) would have been changed to the pro forma amounts as indicated
below (in thousands of dollars, except per share amounts):
1999 1998 1997
---- ---- ----
Net income (loss):
As reported $ 470 $ (11,485) $885
Pro forma 385 (11,581) 841
Diluted income (loss) per share:
As reported $ .09 $(2.30) $.18
Pro forma .07 (2.32) .17
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 all options were
forfeited by Colmen. 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.
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11)abOPERATING SEGMENTS
The Company has two 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. The Company does not
allocate the majority of interest expense, all corporate overhead and income tax
expense or benefit to individual segments in evaluating performance.
There have been no intersegment sales for the years ended September 30,
1999, 1998 and 1997.
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 PRODUCT CORPORATE CONSOLIDATED
----------- ------- --------- ------------
<S> <C> <C> <C> <C>
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 ------ ------- 20,687 20,687
by the equity method
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>
<PAGE>
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
REFRIGERANT BALLAST
PRODUCT PRODUCT 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 ----- ------ 547,786 547,786
investees
Expenditures for segment assets 207,116 69,836 ------ 276,952
Year ended September 30, 1997:
Revenues from external customers 50,605,971 4,490,983 ------- 55,096,954
Interest income 37,357 ------ ------- 37,357
Interest expense ------- ------ 1,009,108 1,009,108
Depreciation and
Amortization expense 657,287 131,040 ------- 788,327
Segment income (loss), before
taxes 6,283,153 418,050 (1,323,819) 5,377,384
Segment assets 26,739,72 1,485,291 1,554,622 29,779,640
Investment in equity method ------- ------ 668,938 668,938
investees
Expenditures for segment assets 804,046 71,678 ------- 875,724
Reconciliation of Consolidated:
Assets 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Total Assets for reportable segments $20,851,048 $21,964,020 $29,779,640
Assets of discontinued operations 1,098,760 1,596,948 7,766,309
----------- ----------- -----------
Consolidated Assets $21,949,808 $23,560,968 $37,545,949
</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.
No individual or related group of customers accounted for more than 10%
of the Company's total consolidated revenues.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS
The Company leases its New Jersey office and warehouse facilities from its
principal shareholder at an annual cost of $120,000 in fiscal 1999, 1998 and
1997. The Company also leases other operating and office facilities pursuant to
operating leases expiring through 2004.
The following is a schedule of future minimum rental payments under
operating leases:
2000 $551,466
2001 262,968
2002 197,540
2003 192,207
2004 81,294
--------
Total $1,285,475
Total rental expense was $556,865, $606,708 and $534,015 for the years
ended September 30, 1999, 1998 and 1997, respectively.
(b) CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company is self-insured for product liability in connection with the
marketing and sale of its refrigerants. No material losses have occurred during
the periods presented.
Some of the Company's products and services are regulated by the Federal
Clean Air Act (the Clean Air Act) and the regulations promulgated thereunder by
the Environmental Protection Agency (EPA), as well as certain state
environmental regulations. As such, the Company's business is affected by the
requirements of the Clean Air Act, the EPA and other regulations and the degree
of enforcement thereof.
The Company's ballast recycling subsidiary has obtained approval from the
EPA as a qualified recycler of waste materials. In connection therewith, the
Company entered into an agreement with the EPA to set aside in a Closure Trust
Fund, beginning in 1994, approximately $112,500 (annually adjusted for
inflation), which was payable over a three-year period in equal annual
installments of $37,500. The purpose of this fund is to accumulate resources
required to clean up the Company's recycling facility upon closure. As of
September 30, 1999, the Company has fully funded this obligation. The Company
does not expect any significant cleanup costs in connection with the closure of
its facility.
EVTC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) SUBSEQUENT EVENTS
On July 20, 1999 the Company's board of directors authorized the Company to
enter into an agreement 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 intends to use 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
afreegift, as discussed below. The sell 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. With the signing of the formal agreement to purchase
afreegift, on December 22, 1999, the Company is in the process of selling these
shares.
On November 18, 1999, an appraisal was completed of the Lakewood, NJ
property that the Company leases from Mr. George Cannan, CEO and principle
shareholder. The appraisal reported an appraisal value in excess of $800,000.
Mr. Cannan has offered the property for sale to the Company for $871,000. The
Company is currently in the process of obtaining a loan from a local bank in New
Jersey for approximately $500,000. The mortgage loan will be used in conjunction
with the forgiveness of the $371,016 note receivable from Mr. Cannan to purchase
the property.
On December 22, 1999, the Company entered into 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 Agreement, afreegift
will merge into e solutions marketing, inc., a new wholly owned subsidiary
formed by the Company in December of 1999, ("e solutions"), in exchange for
common stock of the Company. Afreegift is an Oak Brook, Illinois based internet
direct marketing company. The transaction is intended to qualify as a tax-free
reorganization and will be accounted for using the purchase method of
accounting.
The consummation of the transactions contemplated by the Agreement is
subject to approval by the Company's stockholders. An annual meeting of the
Company's stockholders will be called for February 28, 2000 for the purpose of
seeking ratification and approval of the Agreement and the transactions
contemplated thereby. Subject to stockholder approval and satisfaction of
certain pre-closing conditions, the Shareholder will be entitled to receive at
the closing a number of shares of the Company's common stock to be agreed upon
prior to the closing and 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 number of shares issued at closing
and Earn-Out Shares exceed 8,000,000.
If the merger is consummated, the Company expects to expand its board of
directors to seven members. The Shareholder will have the right to three seats
on the Company's board so long as the subsidiary meets specified financial
performance objectives. Also, at the closing of the merger, Sakoff will enter
into an employment agreement with e solutions under which he will serve 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 1-year term upon e solutions meeting certain
performance goals.
Pending stockholder action on the merger, the Company is obligated to lend
$1,000,000 to afreegift at times specified in a funding agreement. In exchange,
the Company will receive a note from afreegift secured by all of its assets. The
note is to be repaid in a year and bears interest at 9%.
The Company intends to launch its first Permission Marketing web site in
the Spring of 2000. The Company expects to formally close on the transaction in
the quarter ending March 31, 2000.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
EVTC, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended September 30, 1999, 1998 and 1997
OTHER
BEGINNING CHARGED TO ADDITIONS OR ENDING
BALANCE EXPENSE (DEDUCTIONS) BALANCE
--------- ---------- ------------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Continuing Operations:
1999 $1,512,868 $ 250,975 $ (943,418) $ 820,425
1998 177,430 1,524,723 (189,285) 1,512,868
1997 171,085 170,659 (164,314) 177,430
Discontinued Operations:
1999 $ 418,695 $ -- (800) $417,895
1998 140,000 278,695 -- 418,695
1997 20,000 120,000 -- 140,000
Reserve for inventory obsolescence:
Continuing Operations:
1999 $ -- $ -- $ -- $ --
1998 -- -- -- --
1997 -- -- -- --
Discontinued Operations:
1999 $ 5,876,344 $ -- $ 2,115,483 $3,760,861
1998 1,185,000 4,796,005 104,661 5,876,344
1997 60,000 1,625,000 500,000 1,185,000
Valuation allowance for deferred tax asset:
Continuing operations:
1999 $ 935,679 $ -- $ (378,532) $ 557,147
1998 -- -- 935,679 935,679
1997 -- -- -- --
Discontinued operations:
1999 $ 2,098,615 $ -- $ -- $2,098,615
1998 -- -- 2,098,615 2,098,615
-- -- -- --
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 22, 1999 the Company severed its relationship with its certifying
accountants, KPMG, LLP ("KPMG"). The action was recommended and approved by the
audit committee of the Company.
KPMG's reports on the Company's financial statements for the past two years
contained no adverse opinion or disclaimer of opinion, and was not qualified as
to uncertainty, audit scope or accounting principles.
During the most recent two fiscal years and any of the subsequent interim
periods preceding January 22, 1999, there were no disagreements between the
Company and KPMG on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of KPMG, would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports on the financial statements for such years, except as follows:
There was a disagreement with KPMG concerning the amount of the valuation
allowance for deferred tax assets at September 30, 1998. Discussions took place
between KPMG and the audit committee of the Company. The dispute was resolved to
KPMG's satisfaction and a valuation allowance of one hundred percent was
recorded on the books of the Company. KPMG has stated that if the valuation
allowance had not been recorded, its report on the Company's 1998 consolidated
financial statements would have been modified.
On November 23, 1999, the Company appointed BDO Seidman, LLP as its certifying
accountants. The action was recommended and approved by the audit committee of
the Company.
<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 30,1999
were:
NAME AGE POSITION
---- --- --------
George Cannan, Sr. 56 Chairman, Chief Executive
Officer and Director
David Keener 35 Chief Financial Officer
Caroline Costante 37 Secretary
John Stefiuk 48 Director
John D. Mazzuto 51 Director
Robert J. Casper 56 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 Officer.
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.
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
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.
<PAGE>
INFORMATION CONCERNING BOARD
The Board of Directors met three times during the 1999 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 $100,000 during
such years (the "Named Executives"):
Stock
Option
Name and Principal Position Year Salary Bonus ($) (shares)
--------------------------- ---- ------ --------- --------
George Cannan, Sr. 1999 $200,000 (1) -0-
Chairman/CEO 1998 $200,000 (1) -0-
1997 $200,000 (1) -0-
David A. Keener 1999 $123,077 (1) 45,000
Chief Finncial Officer 1998 $ 85,998 -0-
James Hellauer(2) 1999 $ -0- (1) 45,000
CEO/President
(1) Represents less than 10% of the Executive's compensation.
(2) Mr. Hellauer resigned in 1999. Mr. Hellauer's salary was paid by Colmen
Capital Advisors from the monthly management fees paid by the Company to Colmen.
<PAGE>
<TABLE>
<CAPTION>
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, 1999.
NUMBER OF OPTIONS % OF TOTAL OPTIONS
GRANTED AT FISCAL YEAR END GRANTED TO EMPLOYEES
SEPTEMBER 30, 1999 IN FISCAL YEAR EXERCISE EXPIRATION GRANT
NAME (#) September 30, 1999 ($/SHARE) DATE VALUE $
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
George Cannan, Sr. 0 0.0% $0.000 --- $0.00
David Keener 45,000 11.8% $0625 $28,125.00
James Hellauer 0 0.0% $0.000 $0.00
</TABLE>
Option Exercises During, and Stock Options Held at End of Fiscal 1999
The following table indicates the total number and value of exercisable stock
options held by the Named Executives as of September 30, 1999. No options were
exercised by the Named Executives in the fiscal year ended September 30, 1999:
<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> <C>
George Cannan, Sr. 0 0 $ 0 $ 0
David Keener 0 45,000 0 50,850
James Hellauer 0 0 0 0
</TABLE>
(1) Based on the last sale price for the Company's Common Stock on September 30,
1999 of $1.13 per share, as reported by NASDAQ.
Stock Option Plans
The Company maintains stock option plans designated as the 1992 Stock Option
Plan (the "1992 Plan") and the 1996 Stock Option Plan (the "1996 Plan")
collectively the "Option Plans" pursuant to each of which 500,000 shares of
Common Stock have been reserved for issuance upon the exercise of options
designated as either (i) incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, amended (the "Code") or (ii) non-qualified options.
Nonqualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. In certain
circumstances, the exercise of stock options may have an adverse effect on the
market price of the Company's Common Stock.
The purpose of the Option Plans is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other people
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The Option Plans are administered by the
Board of Directors. The Board, within the limitations of the Option Plans,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights by the
Company are to be imposed on shares subject to options. ISOs granted under the
Option Plans may not be granted at a price less than the fair market value of
the Common Stock on the date of grant. 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.
<PAGE>
EMPLOYMENT AGREEMENTS
David Keener, the Company's Executive VP and CFO, is subject to the terms of
an employment agreement whereby Mr. Keener is entitled to receive a base
compensation of $120,000, 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, 1999, the name and
number of shares of Common Stock held by each person known to the Company to own
beneficially more than five percent (5%) of the Company's Common Stock and the
number of shares owned by each director and executive officer of the Company and
all directors and executive officers as a group. Each of the following has an
address c/o Environmental Technologies Corp., 121 S. Norwood Dr., Hurst, Texas
76053. All shares are owned directly by the named person.
NUMBER OF
NAME SHARES OWNED PERCENT OF CLASS(1)
---- ------------ -------------------
George Cannan, Sr. 1,710,060 29.6%
Caroline Costante 122,761 (2) 2.1%
David Keener 63,000 (3) 1.1%
John Stefiuk 65,000 (4) 1.1%
Robert Casper 31,000 (5) 0.5%
John Mazzuto 35,000 (6) 0.6%
All Directors and Officers
as a Group (6 persons) 2,026,821 35.1%
- ----------
(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 40,000 shares of Common Stock issuable upon the exercise of
stock options (10,000 of which are presently exercisable).
(3) Includes 45,000 shares of Common Stock issuable upon the exercise of stock
options (none are presently exercisable).
(4) Includes 15,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently exercisable. (5)abIncludes 5,000 shares of
Common Stock issuable upon the exercise of stock options, which are
presently exercisable.
(6) Includes 35,000 shares of Common Stock issuable upon the exercise of stock
options, which are presently exercisable.
<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, which 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 bears interest at 7% per annum and is secured by
the 21,000 square foot building located at 550 James Street in Lakewood New
Jersey. The Company plans to purchase the Lakewood, New Jersey facility for a
fair market value of $871,000, financed by a mortgage for approximately $500,000
and forgiveness of the note receivable due from George Cannan.
<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
<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 Hurst, State of Texas on
the 30th day of December, 1999.
EVTC, INC.
BY: /s/George Cannan, Sr.
----------------------------------
GEORGE CANNAN, SR., Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the date
indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/George Cannan, Sr. Chairman, Chief Executive Officer December 30,1999
GEORGE CANNAN, SR. and Director
/s/David Keener Chief Financial Officer December 30,1999
DAVID KEENER
/s/John Stefiuk Director December 30,1999
JOHN STEFIUK
/s/John Mazzuto Director December 30,1999
JOHN MAZZUTO
/s/Robert Casper Director December 30,1999
ROBERT CASPER
<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
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT
Effective December 30, 1999 the subsidiaries of the Company were:
Environmental Materials Corp.
Envirogroup Services, Inc.
Refrigerant Reclaim Services, Inc.
FulCircle Recyclers, Inc.
E.M.C. Export Co., Inc.
e solutions marketing, inc.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
EVTC, Inc.:
We consent to incorporation by reference in the Registration Statement
(No.333-8355) on Form S-8 of EVTC, Inc. of our report, dated January 5, 1999,
relating to the consolidated balance sheet of EVTC, Inc. as of September 30,
1998 and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity, and cash flows for each of the years in the
two-year period ended September 30, 1998, and 1998 and 1997 data in the related
financial statement schedule which report appears in the September 30, 1999
annual report on Form 10K of EVTC, Inc.
KPMG, LLP
Dallas, Texas
December 30, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
EVTC, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
333-8355) on Form S-8 of EVTC, Inc. of our report, dated December 8, 1999 except
for Notes 5 and 13, as to which the date is December 23, 1999, relating to the
consolidated balance sheet of EVTC, Inc. and subsidiaries as of September 30,
1999, and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity, and cash flows for the year ended September
30, 1999, and related financial statement schedule which report appears in the
September 30, 1999 annual report on Form 10-K of EVTC, Inc.
BDO Seidman, LLP
Dallas, Texas
December 30, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,159,434
<SECURITIES> 54,460
<RECEIVABLES> 7,475,772
<ALLOWANCES> 820,425
<INVENTORY> 6,805,492
<CURRENT-ASSETS> 19,227,963
<PP&E> 5,174,637
<DEPRECIATION> 3,773,601
<TOTAL-ASSETS> 21,949,808
<CURRENT-LIABILITIES> 13,571,572
<BONDS> 0
0
0
<COMMON> 57,825
<OTHER-SE> 8,378,236
<TOTAL-LIABILITY-AND-EQUITY> 21,731,683
<SALES> 38,731,683
<TOTAL-REVENUES> 38,731,683
<CGS> 32,361,928
<TOTAL-COSTS> 32,361,928
<OTHER-EXPENSES> 5,263,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,014,677
<INCOME-PRETAX> 169,608
<INCOME-TAX> (300,000)
<INCOME-CONTINUING> 469,608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,608
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
