-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H5WdIg0H1gSA1G4eZ80QBhoVK+9jhnwuGUbbArwiDuBIJbYRYlVlDFVFwCXWHtNL XS4AqF2TlB2Pf4j6odv7hg== 0000950134-02-000298.txt : 20020413 0000950134-02-000298.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950134-02-000298 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20020115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVTC INC CENTRAL INDEX KEY: 0000888956 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 223005943 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20986 FILM NUMBER: 2509576 BUSINESS ADDRESS: STREET 1: 121 S NORWOOD DR CITY: HURST STATE: TX ZIP: 76053 BUSINESS PHONE: 7323703400 MAIL ADDRESS: STREET 1: 121 S NORWOOD DR CITY: HURST STATE: TX ZIP: 76053 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL TECHNOLOGIES CORP DATE OF NAME CHANGE: 19960515 10-K405 1 d93491e10-k405.txt FORM 10-K FOR FISCAL YEAR END SEPTEMBER 30, 2001 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, 2001 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _________ to _________. Commission File Number 0-20986 ------- EVTC, INC. ---------- (Name of Registrant as Specified in Its Charter) Delaware 22-3005943 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3125 Bolt Street Fort Worth, Texas 76110 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (817) 759-8900 -------------- (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Securities Exchange Act of 1934: Name of Each Exchange Title of Each Class On Which Registered - -------------------------------------------------------------------------------- NONE Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, par value $.01 per share Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 January 4, 2002 computed by reference to the price at which the stock was sold on that date: $3,026,519. The number of shares outstanding of the registrant's Common Stock, par value $.01 per share (the "Common Stock"), as of January 14, 2002, was 7,635,475. 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 14 3. Legal Proceedings 14 4. Submission of Matters to a Vote of Security Holders 14 5. Market for Common Equity and Related Stockholder Matters 15 6. Selected Financial Data 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 7a. Quantitative and Qualitative Disclosures About Market Risk 24 8. Financial Statements 25 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) Of the Exchange Act 49 11. Executive Compensation 51 12. Security Ownership of Certain Beneficial Owners and Management 53 13. Certain Relationships and Related Transactions 53 14. Exhibits and Reports on Form 8-K 54
2 ITEM 1. DESCRIPTION OF BUSINESS EVTC, Inc. (the "Company") was incorporated in 1989 under the name "Environmental Technologies Corporation" under the laws of Delaware. In 1997, the Company changed its corporate name to "EVTC, Inc." but continues to trade and do business as "Environmental Technologies Corporation." EVTC, through its wholly owned subsidiaries, engages in the marketing and sale of refrigerants, refrigerant reclaiming services and recycling of fluorescent light ballasts and lamps. The Company also manufactured and distributed refrigerant recycling and recovery equipment prior to the discontinuation of such operations in July 1998 and the Company marketed interactive marketing and media to consumer services via the Internet until its discontinuation in 2000. The following table sets forth information relating to the approximate dollar amounts and percentages of revenues derived from the Company's sales of refrigerants and ballast recycling: YEARS ENDED SEPTEMBER 30, (000'S)
2001 2000 1999 ---------------- ---------------- ---------------- Refrigerants $29,481 90% $32,474 90% $34,897 90% Ballast Recycling 3,456 10% 3,767 10% 3,835 10% ------- ------- ------- ------- ------- ------- $32,937 100% $36,241 100% $38,732 100% ======= ======= ======= ======= ======= =======
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. 3 In general, working capital levels for the Company and industry-wide reflect the highly seasonal nature of sales for refrigerants that are significantly related to weather conditions. Sales of the Company's products generally precede warm weather and continue through much of the warm weather months. PRODUCTS AND SERVICES REFRIGERANTS Refrigerants are liquid compounds characterized by their ability to absorb heat and vaporize at low temperatures that can be used in air conditioning and refrigeration systems. Compounds such as R-12 and R-134a serve as refrigerants through the principle of heat transfer by absorbing heat while in a liquid state and releasing heat while in a gaseous state. The most widely used commercial refrigerants are R-11, R-12, R-22, R-134a and R-502. R-11 is primarily used in commercial air conditioning systems. R-12 and R134a are the predominant refrigerants used in automobile air conditioning systems. R-12 can also be used as a refrigerant in residential air conditioning and refrigeration systems. R-22 is a refrigerant capable of providing extensive cooling of large areas, making it suitable for use in residential and commercial air conditioning. R-502 is used extensively as a refrigerant in commercial refrigeration systems. The Company's automotive line of refrigerants includes R-12, R-22 and R-134a and is marketed under the Company's "Arctic Air" label to wholesalers and distributors of automobile supplies for use by mechanics and technicians in servicing automobile air conditioning systems. The Company markets a complete line of reclaimed and virgin refrigerants to HVAC/R wholesalers, mechanical contractors and large institutional and government users of refrigerants. The Company markets R-134a in spray cans under its customers' private labels for use on dusting moisture-sensitive equipment, including personal computer screens, cabinets, peripherals and photographic equipment. The Clean Air Act mandated that automobile manufacturers develop new air conditioning systems in vehicles using R-134a, a refrigerant that does not contain ozone depleting CFCs, rather than R-12. The Company commenced marketing R-134a in 1992 as a replacement for R-12 for new automobile air conditioning systems. The Company acquired Refrigerant Reclaim Services, Inc. ("RRSI") in February 1994 and Global Refrigerant Management, Inc. in February 1995 (collectively by their d/b/a, "Full Circle, Inc."). Full Circle, Inc. provides services for the recovery and reclamation of all refrigerants in response to the requirements of the Clean Air Act, which strictly regulates the use and disposal of refrigerants containing certain chemicals. The Company's recovery services consist of removing used refrigerants from air conditioning and refrigeration systems and transferring them into pressurized cylinders for collection. Its reclamation services consist of "cleaning" refrigerants to remove impurities and contaminants and returning them to purity standards set by the Air Conditioning and Refrigerant Institute ("ARI"). Reclaimed refrigerants, unlike recycled refrigerants, meet the same specifications as newly manufactured products. Full Circle, Inc. markets its services to large users of refrigerants such as wholesalers of air conditioning and refrigeration equipment, air conditioning and refrigeration contractors and owners of air conditioned buildings and refrigeration and cold storage facilities. Full Circle, Inc. also purchases used refrigerants for reclamation and resale. Typically, refrigerant is purchased from users choosing to retrofit or replace their CFC bearing equipment for equipment using non-CFC refrigerants. To further broaden the scope of its core business, the Company acquired Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona in May of 2000. RMS is a dominant refrigerant reclaimer and service provider in the Southwestern portion of the United States, having developed and refined a business model which incorporates custom built refrigerant service vehicles that provide enhanced onsite refrigerant recovery and cylinder evacuation services to the Heating, Ventilation, Air Conditioning and Refrigerant (" HVAC/R") industry. This premium onsite service component greatly enhances the Company's ability to offer complete and comprehensive refrigerant solutions programs to customers across the country while mitigating, to a certain extent, pricing pressure resulting from seasonality and commodity pricing. In addition, this local level service will allow the Company's traditional sales force to expand into longer-term, higher volume prospects such as national accounts, institutional, governmental and larger corporate end-users, thus greatly increasing the market share potential within the HVAC/R industry. 4 To further enhance the scope of its core business, the Company acquired the remaining 50% interest of Liberty Technology International, Inc. ("LTI") which resulted in 100% ownership of a refrigeration separation plant that provides a cost effective and environmentally sound alternative to total destruction of mixed refrigerants. LTI is one of the largest separation facilities in the country. SUPPLIERS The Company is not dependent on any one source of refrigerant for its supply of refrigerants. The Company does not maintain long-term supply agreements with its suppliers. The Company purchases used refrigerant from major HVAC wholesalers, mechanical contractors, salvage operations, large industrial and institutional users of refrigerant as well as brokers. The Company uses a network of wholesale HVAC supply stores that serve as collection stations for used refrigerants. Onsite recovery and cylinder evacuation services provide a key source of used refrigerant with the acquisition of RMS. The Company's operating results are in part dependent on its ability to obtain sufficient quantities of domestic virgin (pure) and reclaimable refrigerants from its suppliers. In the event that the Company is unable to obtain sufficient quantities of refrigerants in the future, or resell reclaimed refrigerants at a profit, the Company's financial condition and results of operations would be adversely affected. MARKETING AND SALES Marketing programs are conducted through the efforts of Company sales personnel and manufacturers sales representatives. The Company utilizes various marketing methods, including direct mailings, trade publications, telemarketing, print advertising, in-person solicitation, participation in trade shows and the Internet (www.evtc.com). The Company primarily markets its various reclaimed refrigerants and reclaiming services directly to HVAC/R wholesalers, mechanical contractors and large corporate, institutional and governmental users of refrigerants. The Company also markets refrigerants to wholesale distributors of automotive suppliers throughout the United States utilizing a network of commissioned sales representatives. The Company's distributors then resell to automobile repair shops, service stations and retail automotive supply stores. Autozone, Inc. accounted for 11% of the company's annual net sales during fiscal year 2001 and 10% during fiscal year 2000. No single customer accounted for more than 10% of the Company's revenues during the year ended September 30, 1999. The Company typically seeks to fill customer orders within two days of receipt. Accordingly, at September 30, 2001, the Company had no material backlog for any product line. In order to fill orders within the foregoing time frame, the Company seeks to maintain a significant inventory of refrigerants, raw materials and finished goods and solicits customers to place preseason order commitments for their in season refrigerant needs. COMPETITION The markets for the Company's products are highly competitive. The Company competes with numerous well-established companies that market refrigerants, many of which possess substantially greater financial, marketing, personnel and other resources than the Company. Such companies may more effectively compete for reduced allocations of supplies of refrigerants and the marketing of refrigerants intended to replace refrigerants containing ozone-depleting CFCs. The Company believes that it competes on the basis of product availability and customer service in the marketing and sale of refrigerants. The Company believes that its refrigerant recovery and reclamation operation is one of the largest in its industry. The Company believes that its wholesale distributors market other products that compete with the Company's products. 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 5 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 is prepared, if required, 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." 6 BALLAST & LAMP RECYCLING INDUSTRY BACKGROUND FulCircle Recyclers, Inc. (d/b/a Full Circle) recycles and disposes fluorescent lighting ballasts of the type commonly found in office, industrial and institutional buildings. Prior to 1985, ballasts were manufactured using hazardous compounds, which created a need for special handling and disposal procedures when replacing ballasts or removing them at the end of their useful lives. Polychlorinated biphenyls (commonly known as PCBs) were widely used before 1979 as insulators in electrical equipment such as capacitors, switches and voltage regulators. Virtually all fluorescent light ballasts manufactured before 1979 contain PCBs. PCBs have been shown to cause cancer as well as reproductive and developmental defects in laboratory animals. PCBs do not readily decompose when released into the environment. Instead, they accumulate in plants and animals, working their way up the food chain. Between 1979 and 1985, certain ballasts were manufactured with di (2-ethylhexy) phthalate (DEHP) in place of PCBs. DEHP has since been identified as a probable human carcinogen and is listed as a hazardous substance under the Superfund laws; however, it is not a hazardous waste under the Resource Conservation and Recovery Act (RCRA) when discarded inside a ballast. Its use in ballast manufacturing has been discontinued. Demand for Full Circle's services is triggered when facility owners replace fluorescent light fixtures with more energy-efficient fixtures. In recent years, lighting manufacturers have made dramatic improvements in the energy efficiency of fluorescent lighting fixtures. Using electronic ballasts and new types of fluorescent lamps, the new fixtures are able to achieve comparable illumination with approximately 25 to 50% less electrical energy than required by older fixtures. Consequently, some light fixture replacements have been motivated by utility sponsored "Demand Side Management" (DSM) programs, where facility owners are given economic incentives to install replacements. BALLAST RECYCLING Full Circle recycles and disposes of the hazardous wastes contained in used ballasts. Full Circle has developed a unique "de-manufacturing" process that efficiently separates the ballast into recyclable products and hazardous waste. Both PCBs and DEHP are interchangeably de-manufactured using the same plant and processes. As part of its service, Full Circle subcontracts with transportation companies to pick up ballasts from customers. At the point of receipt, ballasts have already been packaged in sealed drums and are ready for de-manufacturing. The ballasts are transported by truck to the Full Circle facility in New York. At the plant, drums of ballasts are weighed, stored and de-manufactured on its processing lines. The disposal process separates the components, recycles all materials that can be economically recovered and repackages volume reduced hazardous elements for safe destruction. Over 75% of the weight of a ballast is copper, steel and aluminum, which is recovered and sold to scrap metals dealers. Only the PCB contaminated materials are sent off-site to an incinerator of PCB waste or to a chemical waste landfill, depending on the customer's preference. Full Circle has PCB disposal contracts with two major companies, which collectively control four PCB incinerators. The Company also has a PCB disposal contract with two major PCB landfill operators. LAMP RECYCLING Full Circle also manages the disposal of fluorescent lamps, which are regulated under The Universal Waste Rule. Management does not expect any adverse effect from these regulations. Currently the company utilizes a national network of "strategic alliances" for the processing of this material. MARKETING AND SALES In addition to Full Circle's New York operation, it has regional sales offices located across the country. Most of the sales managers have significant prior experience in selling hazardous waste disposal services or selling lighting products. Sales managers are responsible for sales, marketing and customer service in their respective territories. 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. 7 COMPETITION The market for Full Circle's services is highly competitive. Full Circle competes with numerous well-established companies which market ballast recycling services. Full Circle believes that it competes on the basis of price, reliability and reputation and that it is one of the largest companies in its industry. GOVERNMENT REGULATION TSCA The Toxic Substance Control Act, or (TSCA) specifically directs EPA to regulate the marking, disposal, manufacturing, processing, and distribution in commerce, and use of Polychlorinated Biphenyl (PCBs). Since 1978, EPA has promulgated numerous rules addressing all aspects of the lifecycle of PCBs. Recent changes in federal regulations known as, The PCB MEGA Rule makes the disposal of ballasts more stringent than before. The MEGA Rule preamble states that a generator should either test these ballasts for PCB concentration or assume the ballasts contain PCBs at greater than 50 ppm. Ballasts which contain potting material that is contaminated with over 50 ppm (which is the regulatory threshold) must be disposed of at a facility permitted for the Commercial Storage of PCB waste by the Federal EPA. Presently, there are only four facilities in the United States that have this approval including Full Circle. The company believes that this relatively new regulation offers a distinct competitive advantage. CERCLA The Comprehensive Environmental Compliance and Liability Act of 1980, or CERCLA (also known as the Superfund law) also regulates PCB's. Under this law any release or even threat of release of a hazardous substance constitutes a "CERCLA release", and requires immediate cleanup action and notification by all Responsible Parties, as defined. As a result, discarding over 16 ballasts in a landfill, which is equal to an aggregate of over one pound of PCB's, technically creates a Superfund Liability because there is a threat that the ballasts could rupture in the landfill and leak into the soil. UWR The Universal Waste Rule (UWR) was adopted in May 1995 (40 CFR Part 273). At that time, tires, pesticides and certain mercury containing devices were covered under this law. On January 6, 2000, the EPA included fluorescent lamps in the UWR. This rule is designed to reduce the amount of hazardous waste disposed of in municipal solid waste, landfills, and encourages recycling and proper disposal of fluorescent lamps. It also reduces the regulatory burden on businesses that generate these wastes. The company believes this new regulation will significantly increase the number of lamps that are recycled each year, and increase the total market for this service. 8 THE COMPANY RISK FACTORS Except for the historical information contained herein, the matters discussed in this 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. 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. 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. Due to the average trading price over the prior 30 consecutive trading days, the Company was notified on June 18, 2001 by NASDAQ that the Company would be provided 90 calendar days to comply with the Small Cap Market rule requiring that the bid price of the Company's common stock to be at least $1.00 for a minimum of 10 consecutive trading days. If the Company is unable to comply with the Rule the Company's securities is subject to delisting. NASDAQ suspended enforcing this rule from mid-September until January 2, 2002. The Company has not received written notification that its' securities are subject to delisting. At the time of any notification, the Company may appeal the NASDAQ staff's decision to a NASDAQ Listing Qualifications Panel. 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 finances its working capital requirements with The CIT Group/Business Credit (CIT) through a $12.3 million long-term revolving credit facility (the "Credit Facility"). As of September 30, 2001, $8.3 million was outstanding under the Credit Facility. The Credit Facility is due in December 2002. The Company was notified of a technical default by CIT on November 21, 2001 as the result of an overadvance on the Credit Facility. The Company is currently operating under a Forbearance Agreement, as amended, with CIT dated January 8, 2002. As part of the Forbearance Agreement, CIT agrees to forbear from exercising any of its rights and remedies arising from or as a result of, the default until the Forbearance Termination Date, January 22, 2002. If the Company is in compliance with the terms of the Forbearance Agreement by January 22, 2002 the existing default is deemed waived. The terms of the Forbearance Agreement provide for, among others, the repayment in full of the overadvance by January 23, 2002. The amount of the overadvance is approximately $185,000 as of January 14, 2002. This obligation is expected to be repaid from a $400,000 Subordinated Loan commitment. The Company has a commitment for a $400,000 Subordinated Loan at an interest rate of 10%, payable monthly, that will mature on January 31, 2004. As a condition of the commitment, the Company agrees to issue 500,000 5-year warrants at an exercise price of $1.00, with underlying common stock to be registered by EVTC within 12 months. The funding of the Subordinated Loan will be $200,000 on January 22, 2002 and $200,000 on February 12, 2002. If the Company is not in compliance by the Forbearance Termination Date, the maturity of the debt may be accelerated. If the Company is unable to comply with the Forbearance Agreement and return to profitable operations, it may not be able to continue as a going concern. The Company has approximately one million pounds of mixed refrigerant at its facilities. This mixed refrigerant is expected to be separated by the Liberty operation as part of Full Circle. Liberty is currently in an updating phase and management expects it to be fully operational by March 31, 2002. If Liberty does not become operational there is a potentially large cost to dispose of the mixed refrigerant with third parties. 9 RESEARCH AND DEVELOPMENT The Company's management places emphasis on obtaining the technology and developing the products to achieve superiority in its industry. However, research and development costs to date have not been material. During the fiscal year ended September 30, 1996, the Company entered into a 50% joint venture with an unaffiliated company. The venture's name is Liberty Technology International, Inc. ("LTI"). LTI developed and constructed a refrigeration separation plant that provides a cost effective and environmentally sound alternative to total destruction of mixed refrigerants. On April 1, 2000, the Company acquired the remaining 50% interest in LTI. As a result of this transaction, LTI became a wholly owned subsidiary of EVTC, which changed its method of accounting for LTI from the equity method to the consolidation method. At September 30, 1999, the Company had advanced/invested approximately $0.4 million in LTI, which is included in other assets in the accompanying consolidated balance sheets. LTI's operations commenced in January of 1997. LTI is one of the largest refrigerant separation facilities in the country. LTI is being updated and not currently operating as discussed above in the Risk Factors. During 1999, the Company reported the earnings and losses related to the aforementioned venture under the equity method of accounting. Investment income or loss is included in other income of the consolidated financial statements. To date, the income related to this joint venture has not been material to the Company's financial statements. The Company recorded an $85,392 investment loss for the months prior to the acquisition (October 1999 - March 2000). Since the remaining 50% interest was acquired on April 1, 2000, Liberty is accounted for using the consolidation method in the September 30, 2000 and 2001 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 to assure that reclaimed refrigerants comply with ARI purity standards and employs portable testing equipment when performing on-site services to verify certain quality specifications. The Company is dedicated to quality control and regulatory compliance and provides extensive quality control and regulatory compliance training to all operations personnel. In addition, management is significantly involved in regulatory compliance efforts. PROPRIETARY PROTECTION The Company principally relies on a combination of trade secret laws and employee and third party non-disclosure agreements to protect its products and technology. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such technologies or, despite the precautions taken by the Company, obtain access to the Company's know-how, concepts, ideas and documentation. Since the Company believes that proprietary information is important to its business, failure to protect its trade secrets could have a material adverse effect on the Company. TRADEMARKS The Company has several registered and/or pending trademarks that it uses to market its products. INSURANCE The Company carries insurance coverage that it considers sufficient to protect the Company's assets and operations. The Company currently maintains general commercial liability insurance for claims up to $1.0 million per occurrence and $2,000,000 in the aggregate. There can be no assurance that such insurance will be sufficient to cover potential claims or that an adequate level of coverage will be available in the future at a reasonable cost. The Company is self-insured for product liability in connection with the marketing and sale of its refrigerants and liquidation sales of recycling and recovery equipment. No material losses have occurred. The Company attempts to operate in a professional and prudent manner and to reduce its liability risks through specific risk management efforts, including employee training. Nevertheless, a partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, would have a material adverse effect on the Company. 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, 10 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, 2001, the Company employed approximately 100 persons, including its executive officers. The Company believes its employee relations are good. 11 ACQUISITIONS During the fiscal year ended September 30, 2001, EVTC did not make any acquisitions. On December 28, 2001, EVTC executed a letter of intent with a group from Houston, Texas for a $1 million investment in the common stock of EVTC as well as the acquisition of the assets of Innovative Waste Technologies, Inc. (IWT) by EVTC. The letter of intent is subject to a number of conditions including shareholder approval and the execution of definitive documents. The terms of the letter of intent reflect that the Company agrees to issue fifteen million shares (15,000,000) of its restricted common stock to IWT in exchange for $1,000,000 and certain assets. The Company also agrees to grant an option to IWT for fifteen million shares at the strike price of $1.00 per share. If the transaction is not consummated by January 31, 2002, the agreement is null and void. A change in control will occur if the transaction is consummated. No assurances can be given that the IWT transaction will consumate. IWT is not currently an operating entity. The IWT assets to be acquired consist primarily of technology, land, and marketable securities. Management believes the value of the assets expected to be acquired are approximately $10,000,000; however, no formal appraisal or valuation has been performed on the whole of the assets to be acquired. Any costs and expenses associated with the start-up of IWT's operation, both in the near term and in the future, are expected to be funded by the issuance of additional debt or equity. A timetable for the start-up for IWT has not been established at this time. The technology, when operational will allow the Company to be competitive in the treatment and recycling of marine and industrial waste. Effective March 24, 2000, EVTC, through its wholly owned subsidiary, e-solutions, acquired afreegift.com, Inc. As a result of this transaction, e-solutions directly marketed business to consumer services through its getafreegift.com web site. The total consideration paid for getafreegift.com at the time of acquisition was approximately $1.0 million of which $0.8 million advanced to e-solutions prior to the closing of the transaction and $0.2 million was assumed in liabilities. In December 2000, the Company's Board of Directors adopted a plan to discontinue the operations of e solutions Marketing, Inc. The Company completed the plan to liquidate the tangible assets of this segment. The plan to discontinue this segment is discussed in detail in Note 8 - Discontinued Operations in the Notes to Consolidated Financial Statement section and in the Dispositions section below. On April 1, 2000, the Company acquired the remaining 50% interest in Liberty Technologies International, Inc. ("Liberty") from Concorde Science and Technology, Inc. ("Concorde"), its previous joint venture partner. As a result of this transaction, Liberty became a wholly owned subsidiary of EVTC, which changed its method of accounting for Liberty from the equity method to the consolidation method. The acquisition of Liberty enhances the Company's ability to separate mixed refrigerant, which will facilitate better margin potential and provide additional streams of revenue, which reside outside of the normal refrigerant market. The total consideration paid by EVTC for the remaining fifty percent interest in Liberty was approximately $1.6 million. Of the $1.6 million paid, $0.6 million was paid by issuing EVTC common stock, $0.4 million in loan cash advances to the joint venture (which occurred in prior periods), and approximately $0.6 million in assumed liabilities. Furthermore, the purchase agreement contained a provision whereby the Company would be obligated to issue additional shares to Concorde in the event that EVTC's common stock was trading at a price lower than $5.00 per share at March 31, 2001. This acquisition was considered a below market guarantee, as shares were trading at $12.75 on the day the transaction was consummated. The value of the transaction did not change from the original value assigned at the transaction date, the fair value of shares issued unconditionally at the date of acquisition. Effective May 5, 2000, the Company acquired all the common stock of Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona. By virtue of this acquisition, EVTC acquired the dominant refrigerant reclaimer and service provider in the southwestern portion of the United States. Total consideration for the acquisition of RMS at the date of acquisition was approximately $2.5 million, of which approximately $0.5 million was paid in EVTC's common stock, $1.4 million was paid in cash, and $0.6 million of liabilities were assumed by the Company. The former shareholders of RMS have rights to additional contingent consideration if they achieve certain financial objectives over the three-year period following the closing date of the acquisition. The calculation and settlement of the contingent consideration related to the acquisition of Refrigerant Management Services, Inc. has been completed and no additional consideration is due. EVTC recorded approximately $1.3 million in intangibles as a result of this transaction, which was accounted for as a purchase. 12 DISPOSITIONS RECYCLING AND RECOVERY EQUIPMENT BUSINESS SEGMENT During July 1998, the Company's Board of Directors adopted a plan to discontinue its Recycling and Recovery Equipment business segment. The Company has initiated a liquidation program to sell all assets of the segment. Management intended for the disposal of the segment to be completed by June 30, 1999 (the Phase-Out Period), however during fiscal 1999 those estimates were revised to June 30, 2000. The Company had liquidation revenues of $0.6 and $1.2 million and incurred direct costs of $0.3 million and $0.4 million for fiscal year 2000 and 1999, respectively. During fiscal 2000, in conjunction with the end of the phase-out period, the Company elected to write down the remaining assets of its Recycling and Recovery Equipment segment by approximately $0.4 million. The Company wrote down the remaining assets to reflect the salvage value of such assets to effectively complete the plan to discontinue the Recycling and Recovery Equipment segment, which was adopted in 1998. The Company had liquidation revenues of $0.4 million and incurred direct cost of $0.2 million during fiscal 2001. At September 30, 2001 no assets remained related to these operations. e SOLUTIONS MARKETING, INC. BUSINESS SEGMENT During December 2000, the Company's Board of Directors adopted a plan to discontinue the operations of e solutions Marketing, Inc., its segment that directly marketed business to consumer services via the Internet. The Company initiated a plan to liquidate the tangible assets of this segment and settle outstanding liabilities. Management intended to complete the disposal of the segment within ninety days from the adoption of the liquidation plan. For financial statement purposes, the Company accounted for this segment as discontinued operations in fiscal year 2000. In fiscal year 2000, losses on discontinued operations were $0.8 million. At September 30, 2000, the remaining assets of e Solutions Marketing, which were comprised of goodwill, gift inventory, web site development costs and certain pieces of machinery and equipment were written down from $1.3 million to $0.0 to reflect the estimated net realizable value of such assets. During May and June 2001, e Solutions obtained favorable settlements with vendors included in the "Liabilities of Discontinued Operations" as of September 30, 2000. The pre-settlement liabilities totaling $350,036 were settled for cash payments totaling $109,313, netting a gain of $240,723 pretax in fiscal year 2001. 13 ITEM 2. DESCRIPTION OF PROPERTY During fiscal 2001 the Company occupied nine locations in the United States, which are leased from third parties, with the two exceptions noted below. The following summarizes the location, square footage of the building or leased space, and use of each facility. The Company believes that these facilities are adequate for its existing and near-term future needs and that its facilities are adequate for its current and proximate future needs. The Company terminated operations from the Chicago, IL, Phoenix, AZ, and Holland, MI locations effective as of October 1, 2001 and closed the facilities. The cost associated with terminating these leases and related expenses were accrued as of September 30, 2001.
LOCATION SQUARE FOOTAGE USE -------- -------------- --- Lakewood, NJ 21,000 Refrigerant packaging and Distribution center Bronx, NY 13,500 Ballast recycling Fort Worth, TX 60,000 Reclamation and refrigerant storage facility; Executive offices (Replaced Hurst, TX Facility) Hurst, TX 26,000 Reclamation and refrigerant storage facility; Executive offices (Replaced by Bolt Street facility in November 2000) Chicago, IL 9,375 Recovery, storage and Distribution center (location closed effective 10/01/01) Orlando, FL 3,640 Recovery, storage and Distribution center Kapolei, HI 5,000 Recovery, storage and Distribution center Phoenix, AZ 5,842 Recovery, storage and Distribution center (location closed effective 10/01/01) Holland, MI 4,800 Manufacturing, recovery, storage and Distribution center (location closed effective 10/01/01)
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. Additionally, the Company acquired the 60,000 square foot warehouse facility and office space in Fort Worth, Texas in July 2000. The warehouse replaced the Hurst location as its reclamation and refrigerant storage facility and corporate headquarters. The Hurst lease expired December 31, 2000. This acquisition was financed through a note payable to Heritage National Bank. See Note (5) - Note Payable for details of the loan. ITEM 3. LEGAL PROCEEDINGS The only legal proceeding pending against the Company or involving the Company is a tax levy by the Internal Revenue Service ("IRS"). During fiscal 2000, the IRS imposed an excise tax levy of $0.4 million relating to refrigerant imported by the Company during fiscal year 1994. The Company is still negotiating the settlement of the tax levy. 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. 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq SmallCap Market System under the symbol "EVTC". The following table sets forth, for the period since October 1, 1998, the high and low prices for the Common Stock as reported by NASDAQ. The NASDAQ quotations represent quotations between dealers without adjustments for retail markups, markdowns or commissions and may not necessarily represent actual transactions.
COMMON STOCK HIGH LOW ------------------------------ ---- --- YEAR ENDED SEPTEMBER 30, 2001 First Quarter $ 3.5938 $ .4375 Second Quarter 1.8750 .7188 Third Quarter 1.1000 .6100 Fourth Quarter .8300 .1800 YEAR ENDED SEPTEMBER 30, 2000 First Quarter $ 6.7188 $ 1.0313 Second Quarter 13.8750 2.5000 Third Quarter 15.2500 9.1250 Fourth Quarter 14.8750 2.2813
As of September 30, 2001, there were 48 record holders of the Company's Common Stock. The Company believes that there are in excess of 1,000 beneficial owners of the Company's Common Stock. On May 20,1999, the Company's securities began trading on the Nasdaq SmallCap Market. The Company has not paid any cash dividends on its Common Stock and does not currently intend to declare or pay cash dividends in the foreseeable future. The Company intends to retain any earnings that may be generated to provide funds for the operation and expansion of its business. During fiscal 2000, the Company sold shares of unregistered stock, which is described in detail in Note 12 - Equity in the Notes to the Consolidated Financial Statements section. On July 20, 1999 the Company's board of directors authorized the Company to sell 792,800 shares of restricted Section 144 common stock to several private investors. The Company entered into an agreement to sell the 792,800 shares of its common stock to the private investors on August 9, 1999. In December 1999, the Company received the cash payment for the subscription stock issued. The Company used these funds for working capital and other general corporate purposes. On October 1, 1999 the Company's board of directors voted to sell and issue up to one million shares of restricted Section 144 common stock to several private investors for the sole purpose of providing working capital and short term financing that would be required if the Company was successful in acquiring e solutions Marketing, Inc. See Note 4 - Acquisition for additional information regarding e solutions. The selling price of such stock was set at approximately 85% of the prior 5 days average closing price on October 1, 1999 or $1.00 per share. In conjunction with the execution of the formal agreement to purchase e solutions, the Company issued an aggregate of 750,000 shares for $750,000 (or $1.00 per share). The funding from the stock sale occurred during March 2000. In March 2000, the Company entered into an agreement with several investors to issue 200,000 shares of the Company's unregistered common stock at a price of $4.50 per share. The proceeds from such stock issuance were received in March and April 2000 and used to fund ongoing working capital requirements associated with the acquisitions of afreegift.com, Inc. and RMS. 15 In fiscal 2001, the Company issued an additional 174,690 shares of common stock to Concorde Science and Technology. The shares were contingent shares related to the acquisition of Concorde's 50% interest in Liberty Technologies. Their issuance was contingent on the stock price, so that if the stock was below $5.00 per share then additional shares were issued as additional consideration. This was a below market guarantee, as shares were trading at $12.75 on the day the transaction was consummated. The value of the transaction did not change from the original value assigned at the transaction date, the fair value of shares issued unconditionally at the date of acquisition. In addition, in fiscal 2001 the Company issued 16,500 shares if stock based on employee's exercising options that were granted under the Company's Employee Stock Option Plans. 16 ITEM 6. SELECTED FINANCIAL DATA Selected financial data is set forth below as of and for each of the five fiscal years ended September 30th. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and related notes thereto included elsewhere in this Report.
YEARS ENDED SEPTEMBER 30, ----------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net Sales $ 32,937 $ 36,241 $ 38,732 $ 38,483 $ 55,097 Income (Loss) From Continuing Operations (4,566) 130 470 (5,188) 3,261 Income (Loss) From Continuing Operations Per Share Basic (.61) .02 .09 (1.04) 0.65 Diluted (.61) .02 .09 (1.04) 0.64 Gain(Loss) From Discontinued Operations 393 (2,395) -- (6,298) (2,376) Gain(Loss) From Discontinued Operations Per Share Basic 0.06 (.36) -- (1.26) (.47) Diluted 0.06 (.34) -- (1.26) (.47)
SEPTEMBER 30, ----------------------------------------------------- BALANCE SHEET DATA: 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Working Capital (Deficit) $ (1,198) $ 2,553 $ 5,656 $ 4,104 $ 14,893 Total Assets 21,216 24,902 21,950 23,561 37,546 Total Debt 10,479 10,244 9,742 11,992 13,500 Total Shareholders' Equity 5,228 9,412 8,378 7,110 18,595
During July 1998, the Board of Directors adopted a plan to discontinue its Recycling and Recovery Equipment Business and in December 2000, they approved a plan to discontinue its Internet Marketing business sector. See Note 8 of Notes to the Consolidated Financial Statements for additional information regarding discontinued operations. The Statements of Operations Data above have been recast to exclude such discontinued operations. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained herein which are not historical facts are forward looking statements that involve risks and uncertainties, including but not limited to, changes in the markets for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of, refrigerants), regulatory and economic factors, increased competition, the nature of supplier or customer arrangements which become available to the Company in the future, adverse weather conditions, technological obsolescence and potential environmental liability. The Company's actual results may differ materially from the results discussed in any forward-looking statement. The Company's fiscal year-end is September 30. Management's discussion and analysis of the consolidated results of operations and financial condition should be read in conjunction with the Consolidated Financials and the related Notes. The Company, as a result of the Board of Directors' decision on November 21, 2000, to discontinue the operations of e solutions marketing, Inc. has two reportable operating segments: refrigerant and ballast recycling. The refrigerant segment engages in the marketing and sales of refrigerant and refrigerant related services as well as performing refrigerant reclaiming services. The ballast recycling segment engages in the recycling and disposal of fluorescent light ballasts and the brokering of fluorescent lamps for their ultimate disposal. QUARTERLY FINANCIAL INFORMATION (in thousands, except per share data - unaudited)
DEC. 31 MAR. 31 JUN. 30 SEPT. 30 YEAR ---------- ---------- ---------- ---------- ---------- 2001 Revenue $ 6,258 $ 8,858 $ 11,255 $ 6,566 $ 32,937 Gross Profit 1,598 2,541 3,030 1,015 8,184 Net Income (loss) before discontinued ops (826) (119) 15 (3,636) (4,566) Basic (Loss) Earnings per share (.11) (.02) .00 (.48) (.61) Diluted (Loss) Earnings per share (.11) (.02) .00 (.48) (.61) Net Income (loss) after discontinued ops (826) (119) 177 (3,404) (4,172) Basic (Loss) Earnings per share (.11) (.02) .02 (.44) (.55) Diluted (Loss) Earnings per share (.11) (.02) .02 (.44) (.55) Common stock price per share High 3.59 1.88 1.10 .83 3.59 Low .44 .72 0.61 .18 .18 2000 Revenue 4,774 8,909 12,266 10,292 36,241 Gross Profit 1,133 1,802 3,521 3,083 9,539 Net Income (loss) before discontinued ops (459) 126 56 (98) 130 Basic (Loss) Earnings per share (.08) .02 .08 .00 .02 Diluted (Loss) Earnings per share (.08) .02 .08 .00 .02 Net Income (loss) after discontinued ops (459) 126 561 (2,492) (2,264) Basic (Loss) Earnings per share (.08) .02 .08 (.36) (.34) Diluted (Loss) Earnings per share (.08) .02 .08 (.34) (.32) Common stock per share High 6.72 13.88 15.25 14.88 15.25 Low 1.03 2.50 9.13 2.28 1.03
GOING CONCERN OPINION Our independent certified public accountants' report on our consolidated financial statements for the year ended September 30, 2001 contains an explanatory paragraph regarding our ability to continue as a going concern. Among the factors cited by the accountants that raised substantial doubt to our ability to continue as a going concern are continued recurring losses from operations, negative working capital at September 30, 2001 and the Credit Facility default and Forbearance Agreement currently in place. The accountants state that our ability to continue as a going concern is subject to the attainment of profitable operations and seeking additional funding through various financing arrangements. We have developed a plan to achieve profitability and allay doubts about our ability to continue as a going concern. This plan includes: (1) completion of our reorganization plan that began in fiscal 2001, (2) consummation of the IWT acquisition, as further discussed below, and (3) issuance of additional debt and equity. At this time we have a commitment for $400,000 of additional debt financing as also discussed below. 18 YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO YEAR ENDED SEPTEMBER 30, 2000 RESULTS OF CONTINUING OPERATIONS REVENUE Our Revenue was $32.9 million for the year ended September 30, 2001, a decrease of $3.3 million or 9.1% from $36.2 million generated in fiscal year 2000. Revenues generated from the sale of refrigerant were $29.5 million, a decrease of $3.0 million or 9.2% from $32.5 million generated during the prior year. The decrease in sales occurred primarily as a result of weaker demand and pricing for one of our core refrigerants R-134a. This decrease in sales was offset by incremental revenue of approximately $2.6 million resulting from the inclusion of the operating results of RMS (which was acquired during 2000) combined with increased sales of other refrigerants, particularly R-22. Ballast revenue for the year ended September 30, 2001 was $3.4 million, a decrease of $0.3 million from 2000. GROSS PROFIT Gross profit generated from sales were $8.2 million, a decrease by $1.4 million or 14.7% compared to $9.5 million generated during fiscal year ended 2000. Total gross profit as a percentage of sales decreased to 24.8% for the year ended September 30, 2001 compared to 26.3% generated during the prior year. Of the $1.4 million decrease, gross profits from the sales of refrigerant and refrigerant related services decreased by $1.1 million during fiscal year 2001 to $7.0 million. This $1.1 million decrease in gross profit, resulted from approximately $2.0 million decline from sales of refrigerants through the Company's traditional channels and automotive division, and gross profit and offset by a $.9 million increase in gross profit resulting from incremental gross profit generated from the acquisition of RMS. A substantial portion of the revenue generated from the existing RMS operations was service revenue, which typically generates higher gross profits than traditional sales of refrigerant. The higher than normal demand and price for R-12 offset the lower than normal prices for R-22 and R-134a. The Company's ability to maintain its current level of R-12, R-134a and R-22 sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerant for its supply of these refrigerants and historically has purchased from a number of manufactures and suppliers. The Company's refrigerant reclamation and separation will continue to serve as important sources of R-12, as well as other CFC and non-CFC refrigerants. Gross profit resulting from the processing of lamp ballasts during fiscal 2001 decreased by approximately $.3 million compared to fiscal 2000. The Company's ballast division continues to shift its product mix away from PCB ballasts toward the processing of fluorescent lamps and non-PCB lamp ballasts, both of which, despite having longer life cycles than PCB ballasts, generate lower gross profits. SELLING, GENERAL & ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses for the year ended September 30, 2001 were $11.4 million, an increase of $3.3 million or 40.7% from $8.1 million incurred during the year ended September 30, 2000. Of the $3.3 million increase, $2.1 million resulted from the inclusion of both the RMS and Liberty operations for a full year, as these entities were acquired during the fiscal year 2000. In addition, the Company incurred approximately $0.5 million in incremental SG&A expenses related to the restructuring of the Company's marketing, distribution, and corporate organization and closure of leased facilities. The Company's corporate expenses accounted for $.7 million of the increased SG&A expense increase. In 1999, the Company's SG&A expenses contained a recovery of a receivable which was recorded as a reduction to SG&A expense of $0.8 million. During 2000, the Company recovered $0.2 million from such a receivable. INTEREST EXPENSE Interest expense for the year ended September 30, 2001 was $1.1 million, an increase of $0.3 million or 30% percent from the prior year. The increase in interest expense occurred primarily as a result of the Company incurring additional term debt and entering into capital lease agreements to fund certain capital investments. 19 OTHER (INCOME) EXPENSE, NET Other income and expenses, net was a $0.1 million income for fiscal 2001 primarily consisting of $0.1 million of accrued interest income on other non-current assets. Other income and expenses, net was a $0.5 million expense for fiscal 2000 primarily consisting of a $0.4 million charge levied by the IRS, which related to refrigerant that the Company imported during 1994. The $0.4 million charge was combined with $0.1 million in other miscellaneous non-operating expenses. RESULTS OF DISCONTINUED OPERATIONS During December of 2000, the Company's Board of Directors adopted a plan to discontinue e solutions Marketing, Inc., its business segment which directly marketed business to consumer services via the Internet. The Company initiated a plan to liquidate the tangible assets of this segment and settle the liabilities of this discontinued operation during fiscal 2001. During May and June 2001, e Solutions obtained favorable settlements with vendors included in the "Liabilities of Discontinued Operations" as of September 30, 2000. The pre-settlement liabilities totaling $350,036 were settled for cash payments totaling $109,313, netting a gain of $240,723 pretax in fiscal year 2001. For financial reporting purposes for fiscal 2000, management's decision to discontinue e-solutions after yearend was presented in the fiscal 2000 financial statements. The Company recorded a loss from discontinued operations of $0.8 million and loss on the disposal of the discontinued segment of $1.2 million for fiscal 2000. During July of 1998, the Company's Board of Directors adopted a plan to discontinue its recycling and recovery equipment segment for which the Company initiated a liquidation program to sell all assets of the segment. In July of 2000, the Company recognized a charge of $0.4 million to loss from discontinued operations to write down the segment's remaining assets to its salvage value. The Company had liquidation revenues of $0.4 million and incurred direct cost of $0.2 million during fiscal 2001. At September 30, 2001 no assets remained related to these operations. YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999 RESULTS OF CONTINUING OPERATIONS REVENUE Our Revenue was $36.2 million for the year ended September 30, 2000, a decrease of $2.5 million or 6.5% from $38.7 million generated in fiscal year 1999. Revenues generated from the sale of refrigerant were $32.5 million, a decrease of $2.4 million or 6.9% from $34.9 million generated during the prior year. The decrease in sales occurred primarily as a result in weaker demand and pricing for two of our core refrigerants, R-22 and R-134a. This decrease in sales was offset slightly by incremental revenue resulting from the inclusion of the operating results of both RMS and Liberty (which were acquired during 2000) combined with increased sales of other refrigerants. Ballast revenue for the year ended September 30, 2000 was $3.7 million, a decrease of $0.1 from 1999. GROSS PROFIT Gross profit generated from sales were $9.5 million, an increase by $3.1 million or 48.4% compared to $6.4 million generated during fiscal year ended 1999. Total gross profit as a percentage of sales increased to 26.3% for the year ended September 30, 2000 compared to 16.4% generated during the prior year. Of the $3.1 million increase in gross profit, approximately $1.2 million occurred as a result of the inclusion of RMS and Liberty in the Company's operations. The acquisition of RMS provides an additional channel of distribution of refrigerant, recovery, and reclamation services into the HVAC/R industry. Because the RMS business model provides value added services and complete reclaiming and recovery solutions to its customer base, it realized significantly higher margins than our traditional core refrigerant sales, which in turn mitigates, to a certain extent, some of the Company's exposure to volatile refrigerant pricing conditions. The remaining increase of $1.9 million in gross profit occurred as a result of higher than normal demand and prices for R-12 offset slightly by lower than normal prices of R-22 and R-134a. The Company's ability to maintain its current level of R-12, R-134a and R-22 sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerant for its supply of these refrigerants and historically has purchased from a number of manufactures and suppliers. The Company's refrigerant reclamation and separation will continue to serve as important sources of R-12, as well as other CFC and non-CFC refrigerants. 20 SELLING, GENERAL & ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses for the year ended September 30, 2000 were $8.1 million, an increase of $2.8 million or 52.8% from $5.3 million incurred during the year ended September 30, 1999. Of the $2.8 million increase, $1.7 million resulted from the inclusion of both the RMS and Liberty operations, which were acquired during the fiscal year 2000. In addition, the Company incurred approximately $0.3 million in incremental SG&A expenses related to the due diligence and various capital raising efforts which were performed in conjunction with the Company's proposed acquisitions of both Mercury Technology International, L.P. and Mercury Waste Solutions, Inc. In 1999, the Company's SG&A expenses contained a recovery of a receivable which was recorded as a reduction to SG&A expense of $0.8 million. During 2000, the Company recovered $0.2 million from such a receivable. INTEREST EXPENSE Interest expense for the year ended September 30, 2000 was $0.8 million, a decrease of $0.2 million or 20% percent from the prior year. The decrease occurred primarily as a result of a decrease in the average balance of the Company's revolving credit agreement offset slightly by an increase in interest rates over the prior year and the assumption of certain debt associated with the acquisitions of RMS and Liberty. OTHER EXPENSE, NET Other expense, net increased $0.6 million in 2000, to $0.5 million compared to income of $0.1 million generated during the prior year. The increase during 2000 occurred primarily as a result of a $0.4 million charge levied by the IRS, which related to refrigerant that the Company imported during 1994. The $0.4 million charge is combined with $0.2 million in other miscellaneous non-operating expenses. The prior year amount contained $0.1 million in interest income which was not generated during fiscal year 2000 primarily because the Company changed its cash management policy to encourage a quicker repayment of its revolving credit facility. RESULTS OF DISCONTINUED OPERATIONS During December of 2000, the Company's Board of Directors adopted a plan to discontinue e solutions Marketing, Inc., its business segment which directly marketed business to consumer services via the Internet. The Company initiated a plan to liquidate the tangible assets of this segment as it sought a strategic alternative for the business concept. Management intended for the disposal of the segment to be completed within ninety days from the adoption of the liquidation plan. The Company recorded a loss from discontinued operations of $0.8 million and loss on the disposal of the discontinued segment of $1.2 million. For financial reporting purposes, management's decision to discontinue e-solutions after yearend was presented in the fiscal 2000 financial statements. During July of 1998, the Company's Board of Directors adopted a plan to discontinue its recycling and recovery equipment segment for which the Company initiated a liquidation program to sell all assets of the segment. In July of 2000, the Company recognized a charge of $0.4 million to loss from discontinued operations to write down the segment's remaining assets to its salvage value. LIQUIDITY AND CAPITAL RESOURCES The Company is able to fund its normal working capital requirements mainly through operations or, when necessary, through utilization of its existing credit facilities, and equity and debt transactions. During December 1999, the Company entered into a three-year loan agreement with CIT, which provides for borrowings under a $12.3 million credit facility. Under the terms of the CIT Credit Facility, the credit facility bears an interest rate of the Prime lending rate plus six tenths of one percent and is payable when the CIT Credit Facility's three year term expires. The CIT Credit Facility is subject to certain financial covenants based on the existing calculated borrowing base and is secured by certain accounts receivable, inventory and property and equipment. The Company was notified of a technical default by CIT on November 21, 2001 as the result of an overadvance on the Credit Facility. The Company is currently operating under a Forbearance Agreement with CIT dated January 8, 2002. As part of the Forbearance Agreement, CIT agrees to forbear from exercising any of its rights and remedies arising from or as a result of, the default until the Forbearance Termination Date, January 22, 2002. If the Company is in compliance with the terms of the Forbearance by January 22, 2002 the existing default is deemed waived. The terms of the Forbearance Agreement provide for, among others, the repayment in full of the overadvance by January 23, 2002. The amount of the overadvance is approximately $185,000 as of January 14, 2002. This obligation is expected to be repaid from a $400,000 Subordinated Loan commitment, as described in the following paragraph. If the Company is not in compliance by the Forbearance Termination Date, the maturity of the debt may be accelerated. 21 The Company has a commitment for a $400,000 Subordinated Loan at an interest rate of 10%, payable monthly, that will mature on January 31, 2004. As a condition of the commitment, the Company agrees to issue 500,000 5-year warrants at an exercise price of $1.00, with underlying common stock to be registered by EVTC within 12 months. The funding of the Subordinated Loan is expected to be $200,000 on January 22, 2002 and $200,000 on February 12, 2002. EVTC's cash and cash equivalents decreased by $0.1 million to $0.2 million at September 30, 2001. The decrease occurred primarily as a result of cash used in investing activities of $1.1 million offset by cash provided by financing activities of $0.2 million and cash provided by operating activities of $0.8 million. Net cash provided by operating activities from continuing operations of $0.4 million was comprised of $3.3 million provided by fluctuations in the working capital accounts. The working capital accounts, accounts receivable and inventory, declined by $1.7 million and $1.1 million, respectively, while accounts payable and prepaid expenses increased by $0.6 million and $0.1 million, respectively. The $3.3 million provided by the fluctuations in the working capital accounts was offset by the $4.6 million operating loss adjusted by non-cash items of $1.7 million. Net cash provided by discontinued operations was approximately $0.4 million and related to the discontinued operations of the Company's business segment which directly marketed business to consumer services via the internet of $0.2 million and $0.2 million which related to discontinued operations of the Company's recovery and recycling equipment business. Net cash used in investing activities for fiscal 2001 was approximately $1.1 million. Of the $1.1 million, approximately $0.3 million were capital improvements to the Company's new facility in Fort Worth, Texas and $1.4 million related to new onsite service vehicles and other capital projects. These expenditures were offset by cash provided by the change in other assets of $0.5 million, which included $0.6 million in payments offset by $0.1 million of expenses on a long-term note receivable. Net cash provided by financing activities for fiscal 2001 was approximately $0.2 million that primarily consisted of $0.5 million related to capital leases and equipment financing offset by payments of $0.3 million on the other debt of the Company. On December 28, 2001, EVTC executed a letter of intent with a group from Houston, Texas for a $1 million investment in the common stock of EVTC as well as the acquisition of the assets of Innovative Waste Technologies, Inc. (IWT) by EVTC. The letter of intent is subject to a number of conditions including shareholder approval and the execution of definitive documents. The terms of the letter of intent reflect that the Company agrees to issue fifteen million shares (15,000,000) of its restricted common stock to IWT in exchange for $1,000,000 and certain assets. The Company also agrees to grant an option to IWT for fifteen million shares at the strike price of $1.00 per share. If the transaction is not consummated by January 31, 2002, the agreement is null and void. A change in control will occur if the transaction is consummated. No assurances can be given that the IWT transaction will consumate. IWT is not currently an operating entity. The IWT assets to be acquired consist primarily of technology, land, and marketable securities. Management believes the value of the assets expected to be acquired are approximately $10,000,000; however, no formal appraisal or valuation has been performed on the whole of the assets to be acquired. Any costs and expenses associated with the start-up of IWT's operation, both in the near term and in the future, are expected to be funded by the issuance of additional debt or equity. A timetable for the start-up for IWT has not been established at this time. The technology, when operational will allow the Company to be competitive in the treatment and recycling of marine and industrial waste. Assets to be acquired from Innovative Waste Technologies, Inc., are estimated at $10 million (unaudited) by management, including but not limited to the following: (UNAUDITED) a. Process patent for use of Electro-Coagulation process, and its specific patent on cell design. b. Assignment of "non exclusive" Chemical Fixation and Encapsulation process. c. Assignment of "non exclusive" license for Vapex System which is used to recover rising vapors from underground storage tanks. d. Marketable securities valued at $250,000. During December 2001, the Company entered into a consulting agreement in exchange for consideration of options on 1,000,000 shares at an exercise price of $0.11 per share. Effective March 24, 2000, EVTC, through its wholly owned subsidiary, e-solutions, acquired afreegift.com, Inc. As a result of this transaction, e-solutions directly marketed business to consumer services through its getafreegift!com web site. The web site hosted over twelve consumer brand and service categories, each of which were anchored by national name brand sponsors. In this permission based marketing initiative, each brand name sponsor provided free gifts in exchange for their personal data profile. The total consideration paid for getafreegift.com at the time of acquisition was approximately $0.9 million of which $0.8 million was paid in cash advances during fiscal year 2000 prior to closing and approximately $0.1 million in liabilities were assumed. In addition, the former shareholders of afreegift.com, Inc. had an opportunity to receive up to 8 million shares 22 of EVTC's common stock if they satisfy certain financial performance objectives by April 2001. During December 2000, the Company's Board of Directors, citing the notable increase in the cost of capital necessary to fund the ongoing operations of this business segment adopted a plan to formally discontinue the operations of e solutions marketing, Inc. On April 1, 2000, the Company acquired the remaining 50% interest in Liberty from Concorde Science and Technology, Inc. ("Concorde"), its previous joint venture partner. As a result of this transaction, Liberty became a wholly owned subsidiary of EVTC. The acquisition of Liberty enhances the Company's ability separate refrigerant, which will facilitate better margin potential and additional streams of revenue, which reside outside of the normal refrigerant market. The total consideration paid by EVTC for the remaining fifty percent interest in Liberty was approximately $1.6 million of which $0.6 million was paid by issuing EVTC common stock, $0.4 million in cash advances to the joint venture which occurred in prior periods, and approximately $0.6 million in liabilities were assumed. Furthermore, the purchase agreement contained a provision whereby the Company would be obligated to issue additional shares to Concorde in the event that EVTC's common stock was trading at a price lower than $5.00 per share at March 31, 2001. This was a below market guarantee, as shares were trading at $12.75 on the day the transaction was consummated. The value of the transaction did not change from the original value assigned at the transaction date, the fair value of shares issued unconditionally at the date of acquisition. The Liberty operation is being updated at this time. Management expects the operations to be fully operational by March 31, 2002. Effective May 5, 2000, the Company acquired all the common stock of Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona. By virtue of this acquisition, EVTC acquired the dominant refrigerant reclaimer and service provider in the southwestern portion of the United States. Total consideration for the acquisition of RMS at the date of acquisition was approximately $2.5 million of which approximately $0.5 million was paid in EVTC's common stock, $1.4 million was paid in cash, and $0.6 million of liabilities were assumed by the Company. The former shareholders of RMS have rights to additional contingent consideration if they achieve certain financial objectives over the three-year period following the closing date of the acquisition. The calculation and settlement of the contingent consideration related to the acquisition of Refrigerant Management Services, Inc. has been completed and no additional consideration is due. As of September 30, 2001 the Company closed four full-service warehouse operations. This action reflected a realignment in strategy for its distribution and reclaim network by integrating its on-site service business model, utilizing a fleet of refrigerant recovery trucks and public warehouse facilities, for all its Full Circle subsidiary refrigerant operations. This was consistent with the business strategy adopted with the acquisition of its RMS subsidiary made in fiscal 2000. The warehouse operation closures will contain costs and expenses and integrate a more efficient business-operating model. Each warehouse closure was designed to eliminate duplicate operating activities that were more efficiently preformed at its Fort Worth facility. This move was also designed to take advantage of the under-utilized capacity of its warehouse and refrigerant reclaim operations in Fort Worth. These closures and realignments will enhance the Company's customer service and competitiveness. SEASONALITY The Company's operating results vary from period to period as a result of weather conditions and the availability and price of refrigerant products (virgin and reclaimable). The Company's business has historically been seasonal in nature with peak sales of refrigerants occurring in the second and third fiscal quarters. Accordingly, the first and fourth fiscal quarters of the Company's operations have been characterized by inventory build-up and seasonal operating losses resulting in periodic operating cash flow short falls, which in the past necessitated loans from the Company's banks. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), No. 142, Goodwill and Other Intangible Assets (SFAS 142), No. 143, Accounting for Asset Retirement Obligations (SFAS 143) and No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassifies the carrying amounts of certain intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with in indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied by the Company in the fiscal year beginning December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. Early application of SFAS 142 is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not been issued previously. 23 SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of September 30, 2001, the net carrying amount of goodwill is $2.3 million. Goodwill amortization expense during the year ended September 30, 2001 was $276 thousand. The Company intends to complete the transitional goodwill impairment test within six months from the date of adoption. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. SFAS 143 requires that the fair value for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the carrying amount of the asset, including capitalized asset retirement costs, be tested for impairment. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe this statement will have a material effect on the Company's financial position or results of operations. SFAS 144 prescribes financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, and specifies when to test a long-lived asset for recoverability. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe this statement will have a material effect on the Company's financial position or results of operations. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks (i.e., the risk of loss arising from the adverse changes in market rates and prices) to which the Company is exposed are interest rates on the Company's debt and short-term investment portfolios. The Company centrally manages its debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. The Company's investment portfolios consist of cash equivalents and short-term marketable securities; accordingly, the carrying amounts approximate market value. The Company's investments are not material to the financial position or performance of the Company. Assuming year-end 2001 variable rate debt and investment levels, a one-point change in interest rates would impact net interest expense by less than $100,000. 24 ITEM 8. FINANCIAL STATEMENTS. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Reports - BDO Seidman, LLP 26 Consolidated Balance Sheets - as of September 30, 2001 and 2000 27 Consolidated Statements of Operations and Comprehensive Income (Loss) - for each of the years ended September 30, 2001, 2000 and 1999 28 Consolidated Statements of Stockholders' Equity - for each of the years ended September 30, 2001, 2000 and 1999 29 Consolidated Statements of Cash Flows - for each of the years ended September 30, 2001, 2000 and 1999 30 Notes to Consolidated Financial Statements 31 Schedule II - Valuation and Qualifying Accounts 47
25 INDEPENDENT AUDITORS' REPORT The Board of Directors EVTC, Inc. Fort Worth, Texas We have audited the accompanying consolidated balance sheets of EVTC, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of EVTC, Inc. and subsidiaries, as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the 2001 and 2000 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. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $4,172,451 during the year ended September 30, 2001, and as of that date, the Company's current liabilities exceeded its current assets by $1,198,138. The Company is also currently operating under a Forbearance Agreement as discussed in Note 1 to the consolidated financial statements. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO Seidman, LLP Dallas, Texas January 11, 2002 26 EVTC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND 2000
2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 192,756 $ 262,644 Marketable securities 12,309 33,992 Accounts receivable, net of allowance of $617,536 in 2001 and $452,007 in 2000 5,363,638 7,085,873 Inventories 6,715,834 7,813,674 Prepaid expenses and other current assets 670,782 588,608 Deferred income taxes -- 300,000 Assets of discontinued operations -- 394,523 ------------ ------------ Total current assets 12,955,319 16,479,314 Property and equipment, net 5,604,527 5,013,941 Intangibles, less accumulated amortization 2,321,744 2,597,573 Other assets 334,150 810,879 ------------ ------------ Total other assets 8,260,421 8,422,393 ------------ ------------ $ 21,215,740 $ 24,901,707 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt $ 8,645,107 $ 8,679,977 Accounts payable - trade 3,660,207 2,603,059 Accrued liabilities 1,848,143 2,290,055 Liabilities of discontinued operations -- 353,331 ------------ ------------ Total current liabilities 14,153,457 13,926,422 Long term debt 1,834,322 -- ------------ ------------ 1,563,596 Total liabilities 15,987,779 15,490,018 ------------ ------------ Commitments and Contingencies Stockholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued or outstanding ------------ ------------ Common stock, $.01 par value. Authorized 25,000,000 shares; 7,635,475 shares issued and outstanding in 2001 and 7,444,283 shares 76,355 74,443 were issued and outstanding in 2000 Additional paid-in capital 15,443,869 15,435,375 Accumulated other comprehensive income 12,309 33,992 Retained deficit (10,304,572) (6,132,121) Total stockholders' equity 5,227,961 9,411,689 ------------ ------------ $ 21,215,740 $ 24,901,707 ============ ============
See accompanying notes to consolidated financial statements. 27 EVTC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
2001 2000 1999 ------------ ------------ ------------ Net sales $ 32,937,231 $ 36,240,901 $ 38,731,683 Cost of sales 24,753,631 26,701,669 32,361,928 ------------ ------------ ------------ Gross profit 8,183,600 9,539,232 6,369,755 Selling, general and administrative Expenses, including recovery of credit loss of $223,000 in 2000 and $820,000 in 1999 11,449,689 8,055,831 5,263,936 ------------ ------------ ------------ Operating income (loss) (3,266,089) 1,483,401 1,105,819 Interest expense 1,085,979 834,412 1,014,677 Other (income)expense, net (86,329) 518,931 (78,466) ------------ ------------ ------------ Income (loss) from continuing operations Before income taxes (4,265,739) 130,058 169,608 Income tax expense (benefit) 300,000 -- (300,000) ------------ ------------ ------------ Income (loss) from continuing operations (4,565,739) 130,058 469,608 Discontinued operations: Loss from discontinued operations, net of Income taxes -- (750,576) -- Estimated gain(loss) on disposal of discontinued operations, net of tax 393,288 (1,644,350) -- ------------ ------------ ------------ 393,288 (2,394,926) -- Net income (loss) $ (4,172,451) $ (2,264,868) $ 469,608 Other comprehensive income (loss), net of tax; Unrealized gain (loss) on securities (21,683) (20,468) 54,460 ------------ ------------ ------------ Comprehensive income (loss) $ (4,194,134) $ (2,285,336) $ 524,068 ============ ============ ============ Income (loss) per share Basic Continuing operations $ (.61) $ .02 $ .09 Discontinued operations .06 (.11) -- Loss on disposal -- (.25) -- ------------ ------------ ------------ (.55) (.34) .09 Diluted Continuing operations (.61) .02 .09 Discontinued operations .06 (.11) -- Loss on disposal -- (.23) -- ------------ ------------ ------------ (.55) (.32) .09
See accompanying notes to consolidated financial statements 28 EVTC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
ACCUMULATED COMMON STOCK ADDITIONAL RETAINED OTHER --------------------------- PAID-IN EARNINGS COMPREHENSIVE SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL ------------ ------------ ------------ ------------ ------------ ------------ Balance at September 30, 1998 4,989,719 $ 49,897 $ 11,396,532 $ (4,336,861) $ -- $ 7,109,568 ------------ ------------ ------------ ------------ ------------ ------------ Warrants issued to lender -- -- 150,000 -- -- 150,000 Subscription stock 792,801 7,928 586,672 -- -- 594,600 Unrealized gain on securities -- -- -- -- 54,460 54,460 Net income -- -- -- 469,608 -- 469,608 ------------ ------------ ------------ ------------ ------------ ------------ Balance at September 30, 1999 5,782,520 57,825 12,133,204 (3,867,253) 54,460 8,378,236 ------------ ------------ ------------ ------------ ------------ ------------ Proceeds from shares issued for cash 950,000 9,500 1,640,500 -- -- 1,650,000 Proceeds from options and warrants exercised 580,916 5,809 608,917 -- -- 614,726 Stock issued in acquisitions 130,847 1,309 1,052,754 -- -- 1,054,063 Unrealized loss on securities -- -- -- -- (20,468) (20,468) Net loss -- -- -- (2,264,868) -- (2,264,868) ------------ ------------ ------------ ------------ ------------ ------------ Balance at September 30, 2000 7,444,283 74,443 15,435,375 (6,132,121) 33,992 9,411,689 ============ ============ ============ ============ ============ ============ Proceeds from options and warrants exercised 16,500 165 10,241 -- -- 10,406 Stock issued in acquisitions 174,692 1,747 (1,747) -- -- -- Unrealized loss on securities -- -- -- -- (21,683) (21,683) Net loss -- -- -- (4,172,451) -- (4,172,451) ------------ ------------ ------------ ------------ ------------ ------------ Balance at September 30, 2001 7,635,475 $ 76,355 $ 15,443,869 $(10,304,572) $ 12,309 $ 5,227,961 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 29 EVTC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
2001 2000 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing Operations $(4,565,739) $ 130,058 $ 469,608 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 1,319,743 849,083 667,818 Deferred income taxes 300,000 -- (300,000) Provision for bad debts 56,442 77,080 (692,443) (Gain) loss on sale of assets 50,936 -- (3,660) Issuance of stock warrants -- -- 150,000 CHANGES IN ASSETS AND LIABILITIES, NET OF BUSINESSES ACQUIRED: Accounts receivable 1,665,793 (235,128) (1,638,605) Income taxes receivable -- 58,108 1,365,551 Inventories 1,097,840 (747,121) 430,948 Prepaid expenses and other Assets (127,339) 194,702 (239,137) Accounts payable and accrued liabilities 615,236 352,878 (457,350) ----------- ----------- ----------- Net cash provided by Continuing operations 412,912 679,660 (247,270) Net cash provided by (used in) discontinued operations 434,480 (672,101) 325,710 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 847,392 7,559 78,440 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 13,708 -- 5,000 Capital expenditures (1,653,979) (1,707,466) (374,117) Business acquisition payments -- (1,424,214) -- Preacquisition advances to affiliates -- (850,000) -- Due from officer -- 371,016 (171,016) Change in investment in joint ventures and other assets 476,729 (114,238) 359,932 ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (1,163,542) (3,724,902) (180, 201) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments on revolving credit facility (32,145) (1,288,964) (2,250,000) Proceeds from other debt 558,311 350,000 -- Payments of other debt (290,310) (99,809) -- Proceeds from subscription stocks -- 594,600 -- Proceeds from common stock and options exercised 10,406 2,264,726 -- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 246,262 1,820,553 (2,250,000) ----------- ----------- ----------- Net decrease in cash and cash equivalents (69,888) (1,896,790) (2,351,761) Cash and cash equivalents at beginning of year 262,644 2,159,434 4,511,195 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 192,756 $ 262,644 $ 2,159,434 =========== =========== ===========
See accompanying notes to consolidated financial statements 30 EVTC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS AND GOING CONCERN 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 and recycling of fluorescent light fixture ballasts and lamps (Ballast Recycling segment). In March 2000, the Company, through its wholly owned subsidiary, e-solutions, acquired afreegift.com, Inc. e solutions marketed business to consumer services through its getafreegift.com web site. However, subsequent to year-end fiscal year 2000, the Board of Directors approved a plan to discontinue this segment of their business and this segment was liquidated in fiscal 2001. The liquidation of the assets and disposition of the liabilities resulted in a pretax gain of $.2 million. This is discussed in detail in Note 8. In 1998, the Company discontinued its segment in the manufacturing and distribution of refrigerant recycling and recovery equipment for automotive and commercial use (see note 8 - Discontinued Operations). The Company's sales are highly seasonal in nature, as industry-wide refrigerant sales are related to weather temperatures, primarily in the warmer months. The Company's historical refrigerant sales have primarily come from the sale of R-12, a refrigerant that is a chlorofluorocarbon (CFC). As of January 1, 1996, however, CFC-based refrigerants can no longer be manufactured in the United States under current regulations. CFC replacement products, such as R-134a, are now readily available to the Company. Notwithstanding the cessation of a predictable manufactured supply of R-12, management believes it will have access to an adequate supply of R-12 through fiscal 2002. However, beyond fiscal 2002 the Company's access to R-12 is much less certain. Management believes R-134a sales will continue to offset the decline of R-12 sales in future periods. The Company's ability to maintain its current level of R-12, R-134a and other refrigerant sales for the foreseeable future will be dependent, to a large extent, upon the availability of adequate sources of supply. The Company is not dependent on any one source of refrigerants and historically has purchased from a number of manufacturers and suppliers. The Company's refrigerant reclaiming and separation activities will continue to serve as an important source of R-12, as well as other CFC and non-CFC refrigerants. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 5, the Company has significant borrowings that require, among other things, compliance with certain borrowing base covenants. In addition, as shown in the consolidated financial statements, the Company incurred net losses of $4,172,451 and has negative working capital of $1,198,138. These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. As a result of over advances on the CIT Credit Facility, the Company is not in compliance with the related debt covenants regarding the CIT Credit Facility. The Company and CIT entered into a Forbearance Agreement, as amended, January 8, 2002. The Forbearance Agreement requires, among other things, repayment in full of the over advance by January 23, 2002, the Termination Date. Management expects to be in compliance with the terms and conditions of the Forbearance Agreement. The Company is exploring strategic opportunities including, but not limited to the IWT transaction discussed in Notes 4 and 13 and certain immediate debt financing as discussed in Note 13. A breach of any of the terms and conditions of the Forbearance Agreement or subsequent breaches of the CIT Credit Facility could result in the acceleration of the indebtedness. The Company's ability to continue as a going concern is dependent on profitable operations, consummation of certain acquisitions and debt and equity transactions, maintaining compliance with the CIT Credit Facility and refinancing of that agreement prior to its maturity in December 2002. 31 (b) BASIS OF PRESENTATION The consolidated financial statements include the financial statements of EVTC, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounted for its 50% ownership interest in a joint venture using the equity method until April 1, 2000 when the Company acquired the remaining 50% interest in Liberty Technologies International, Inc. ("Liberty") from its joint venture partner. As a result of this transaction, Liberty became a wholly owned subsidiary of EVTC, which changed its method of accounting for Liberty from the equity method to the consolidation method. (c) CREDIT CONCENTRATION Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents and trade receivables. The Company considers such risk in placing its cash and cash equivalents in financial institutions and other instruments. Concentration of credit risk with respect to trade receivables is limited because of the large number of customers that make up the Company's customer base and their dispersion in various industries and across different geographies. The Company performs ongoing credit evaluations of its customers' financial condition. In fiscal year 2001, the Company had one customer that accounted for 11% of the total net sales and in fiscal year 2000 the Company had one customer that accounted for 10% of the total net sales. No single customer accounted for more than 10% of total net sales in fiscal 1999. (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 performed. Revenue from sales of recyclable scrap materials is recognized when shipped. Products shipped on consignment to customers are not included in sales. Ballast recycling revenues are recognized by the Company upon the receipt and acceptance of waste material at its recycling facility in the Bronx, New York. Waste material disposal costs are accrued as the related revenues are recognized. During the fourth quarter of fiscal 1999, the Company recorded a recovery of $820,000 to the allowance for bad debts and accounts receivable related to a certain refrigerant product account receivable that was fully reserved for in 1998. Management revised its estimate of the collectibility based on subsequent cash received and estimated value of the underlying collateral. The recovery included cash payments, common stock shares assigned to the Company and security interests in real property. During fiscal year 2000, the Company recorded a $223,000 reduction in Selling, General and Administrative expenses based on management's estimate of future recovery related to the receivable. (f) CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents were $205,065 and $167,527 on September 30, 2001 and 2000, respectively, and consisted of short-term money market accounts. (g) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. (h) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line and declining balance methods over the estimated useful lives of the assets. Costs of maintenance and repairs are charged to expense when incurred. 32 (i) INTANGIBLES Intangibles consist primarily of goodwill, which represents the excess of purchase price over fair value of net assets acquired, and is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. Accumulated goodwill amortization was $600,283 and $324,454 at September 30, 2001 and 2000, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. During fiscal year 2001, the assessment of the recoverability of goodwill based on achieving estimated future operating cash flows did not reflect impairment. During fiscal year 2000, the goodwill associated with the discontinued operations of e-solutions Marketing, Inc. was written down to reflect the net realizable value. See Note 8 - Discontinued Operations for additional information. (j) 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, 2001, the Company has net operating loss carryforwards for federal income tax purposes of $16,131,091 and did not record a deferred tax asset. (k) INCOME PER SHARE Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The computations of basic and diluted earnings (loss) per share from continuing and discontinued operations for each year are based on the following numerators and denominators. The numerator for continuing operations is income (loss) from continuing operations. The numerator for discontinued operations is the aggregate of loss from discontinued operations, net of income taxes, and loss on disposal of discontinued operations. The denominator for continuing and discontinued operations is computed as follows:
2001 2000 1999 --------- --------- --------- Denominator for basic earnings per share- Weighted average shares 7,521,446 6,673,703 4,989,719 Effect of dilutive securities: Employee stock options -- 396,725 -- Warrants -- 42,780 89,150 Subscription Stock -- -- 69,788 --------- --------- --------- Dilutive potential common shares -- 439,505 158,938 Denominator for diluted earnings per share - Weighted-average shares and assumed Conversions 7,521,446 7,113,208 5,148,657 ========= ========= =========
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. No consideration has been given in the above calculation to stock options and warrants outstanding in 2001, totaling approximately 302,000 shares, as their impact is anti-dilutive.
2001 2000 1999 ------- ------- ------- Employee stock options -- 165,000 98,000 Warrants -- -- 300,000
33 (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 or rates that approximate current market rates. (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 greater than 10% of the market price of the stock at the date, no compensation expense is recorded. The Company, as required, has provided pro forma disclosures of compensation expense as determined under the provisions of SFAS No. 123. (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) ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), No. 142, Goodwill and Other Intangible Assets (SFAS 142), No. 143, Accounting for Asset Retirement Obligations (SFAS 143) and No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassifies the carrying amounts of certain intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with in indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied by the Company in the fiscal year beginning December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. Early application of SFAS 142 is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not been issued previously. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. 34 The Company's previous business combinations were accounted for using the purchase method. As of September 30, 2001, the net carrying amount of goodwill is $2.3 million. Goodwill amortization expense during the year ended September 30, 2001 was $0.3 million. The Company intends to complete the transitional goodwill impairment test within six months from the date of adoption. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. SFAS 143 requires that the fair value for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the carrying amount of the asset, including capitalized asset retirement costs, be tested for impairment. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe this statement will have a material effect on the Company's financial position or results of operations. SFAS 144 prescribes financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, and specifies when to test a long-lived asset for recoverability. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe this statement will have a material effect on the Company's financial position or results of operations. (2) INVENTORIES Inventories at September 30, 2001 and 2000 consist of the following:
2001 2000 ---------- ---------- Raw materials $3,519,477 $3,264,126 Finished goods 3,196,357 4,549,548 ---------- ---------- Total inventories $6,715,834 $7,813,674 ========== ==========
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. (3) PROPERTY AND EQUIPMENT, NET Property and equipment at September 30, 2001 and 2000 is summarized as follows:
DEPRECIABLE LIVES 2001 2000 --------------- ------------ ------------ Machinery and equipment 2-10 years $ 5,497,702 $ 5,166,400 Buildings 39 years 1,853,417 1,602,617 Office equipment 2-5 years 1,408,111 1,265,884 Vehicles 5 years 2,120,234 1,257,591 Leasehold improvements 2-5 years 159,276 209,977 ------------ ------------ 11,038,740 9,502,469 Accumulated depreciation (5,434,213) (4,488,528) ------------ ------------ $ 5,604,527 $ 5,013,941 ============ ============
Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or the lease term. (4) ACQUISITIONS During the fiscal year ended September 30, 2001, EVTC did not make any acquisitions. On December 28, 2001, EVTC executed a letter of intent with a group from Houston, Texas for a $1 million investment in the common stock of EVTC as well as the acquisition of the assets of Innovative Waste Technologies, Inc. (IWT). The letter of intent is subject to a number of conditions including shareholder approval and the execution of definitive documents. The terms of the letter of intent reflect that the Company agrees to issue fifteen million shares (15,000,000) of its restricted common stock to IWT in exchange for $1,000,000 and certain assets. The Company also agrees to grant an option to IWT for fifteen million shares at the strike price of $1.00 per share. If the transaction is not consummated by January 31, 2002, the agreement is null and void. A change in control will occur if the transaction is consummated. No assurances can be given that the IWT transaction will consummate. IWT is not currently an operating entity. The IWT assets to be acquired consist primarily of technology, land, and marketable securities. Management believes the value of the assets expected to be acquired are approximately $10,000,000; however, no formal appraisal or valuation has been performed on the whole of the assets to be acquired. 35 Any costs and expenses associated with the start-up of IWT's operation, both in the near term and in the future, are expected to be funded by the issuance of additional debt or equity. A timetable for the start-up for IWT has not been established at this time. The technology, when operational will allow the Company to be competitive in the treatment and recycling of marine and industrial waste. During the year ended September 30, 2000, EVTC made a number of acquisitions that were accounted for using the purchase method of accounting. The consolidated financial statements include the operating results for each business from the date of acquisition. For each acquisition, the purchase price was allocated to the identifiable tangible and intangible assets. Excess amounts were allocated to goodwill and amortized on a straight-line basis over a period not to exceed 15 years. Effective March 24, 2000, EVTC, through its wholly owned subsidiary, e-solutions, acquired afreegift.com, Inc. As a result of this transaction, e-solutions directly marketed business-to-consumer services through its getafreegift.com web site. The total consideration paid for getafreegift.com at the time of acquisition was approximately $0.9 million of which $0.8 million advanced to e-solutions prior to the closing of the transaction and $0.1 million was assumed in liabilities. In December 2000, the Company's Board of Directors adopted a plan to discontinue the operations of e solutions Marketing, Inc. The Company initialed a plan to liquidate the tangible assets of this segment as it seeks a strategic alternative for the business concept. Management intends to complete the disposal of the segment within ninety days from the adoption of the liquidation plan. The plan to discontinue this segment is discussed in detail in Note 8 - Discontinued Operations. On April 1, 2000, the Company acquired the remaining 50% interest in Liberty Technologies International, Inc. ("Liberty") from Concorde Science and Technology, Inc. ("Concorde"), its previous joint venture partner. For the six months ended March 31, 2000, the Company recorded an $0.09 million investment loss in Liberty. As a result of this transaction, Liberty became a wholly owned subsidiary of EVTC, which changed its method of accounting for Liberty from the equity method to the consolidation method. The acquisition of Liberty enhances the Company's ability to separate mixed refrigerant, which will facilitate better margin potential and provide additional streams of revenue, which reside outside of the normal refrigerant market. The total consideration paid by EVTC for the remaining fifty percent interest in Liberty was approximately $1.6 million. Of the $1.6 million paid, $0.6 million was paid by issuing 60,000 shares of EVTC common stock, $0.4 million in loan cash advances to the joint venture (which occurred in prior periods), and approximately $0.6 million in assumed liabilities. Furthermore, the purchase agreement contained a provision whereby the Company would be obligated to issue additional shares to Concorde in the event that EVTC's common stock was trading at a price lower than $5.00 per share at March 31, 2001. This was a below market guarantee, as shares were trading at $12.75 on the day the transaction was consummated. The value of the transaction did not change from the original value assigned at the transaction date, the fair value of shares issued unconditionally at the date of acquisition. Effective May 5, 2000, the Company acquired all the common stock of Refrigerant Management Services, Inc. ("RMS") of Phoenix, Arizona. By virtue of this acquisition, EVTC acquired the dominant refrigerant reclaimer and service provider in the southwestern portion of the United States. Total consideration for the acquisition of RMS at the date of acquisition was approximately $2.5 million, of which approximately $0.5 million was paid by issuing 64,285 shares of EVTC's common stock, $1.4 million was paid in cash, and $0.6 million of liabilities were assumed by the Company. The former shareholders of RMS have rights to additional contingent consideration if they achieve certain financial objectives over the three-year period following the closing date of the acquisition. The calculation and settlement of the contingent consideration related to the acquisition of Refrigerant Management Services, Inc. has been completed and no additional consideration is due. EVTC recorded approximately $1.3 million in intangibles as a result of this transaction. Pro forma results of operations are presented on an aggregate basis because, although pro forma effects are material to the financial statements on an aggregate basis, they do not materially impact the financial statements on an individual basis. Only the Liberty and RMS financial information was included in the pro forma schedule below. Since e-solutions Marketing, Inc. was discontinued, the related financial information was excluded from the schedule below. Pro forma revenue, net loss and loss per share information are presented for the following 12 months ended September 30, assuming these acquisitions occurred on October 1, 2000.
2000 1999 ------------ ------------ Revenue $ 37,691,829 $ 41,126,336 Net Loss (503,564) (301,121) Loss Per Share $ (0.08) $ (0.06)
36 The pro forma financial information does not purport to: (1) indicate what the combined results of operations would have been had the acquisitions occurred at the beginning of the periods presented, or (2) the results of operations that may be obtained in the future. Additionally, the pro forma financial information does not reflect any anticipated cost savings resulting from the integration of the combined companies' operations. (5) LONG TERM DEBT The Company's revolving line of credit and other debt obligations consisted of the following as of:
September 30, 2001 September 30, 2000 ------------------ ------------------ Revolving Credit Agreement - CIT $ 8,294,938 $ 8,327,083 Note Payable - Heritage National Bank 1,192,322 1,247,299 Capital Lease Obligations (Note 11) 591,775 213,275 Equipment Term Note - CIT 205,000 260,000 Note Payable - One Source/CIT 179,811 -- Note Payable - Navistar 15,583 33,551 Note Payable - Chase Bank -- 126,333 Note Payable - Concorde -- 36,032 ------------------ ------------------ Total Notes Payable 10,479,429 10,243,573 Less Current Notes Payable 8,645,107 8,679,977 ------------------ ------------------ Long Term Notes Payable $ 1,834,322 $ 1,563,596 ================== ------------------
Note Payable - One Source / CIT Equipment Financing In December of 2000, the Company entered into a financing agreement with One Source Financial for refrigerant packaging equipment that was acquired. The financing agreement was subsequently assigned to the CIT Group/Equipment Financing, Inc. and collaterialized by the packaging equipment purchased. The original amount financed was $219,209 for 48 months with 15 quarterly payments of $14,841 and a final quarter payment of $9,894 and a final payment of $41,000 on March 28, 2005. The equipment financing bears an interest rate of 9.75%. Note Payable - Chase Bank In December of 1999, the Company entered into an amended and restated promissory note with Chase Bank in the amount of $750,000. Under the terms of the agreement, the first payment of $371,000 was due on January 31, 2000, with subsequent payments of $31,583 payable on a monthly basis beginning February 15, 2000 and ending January 15, 2001. The note was paid and debt retired in January 2001. CIT Credit Facility During December 1999, the Company entered into a three-year loan agreement with CIT, which provides for borrowings under a $12.3 million credit facility. Under the terms of the CIT Credit Facility, $12.0 million of the credit facility bears an interest rate of the Prime lending rate plus six tenths of one percent (7.0% at September 30, 2001) and is payable when the CIT Credit Facility's three year term expires. However, since the Company uses the credit facility to fund its working capital needs, it classifies the CIT Credit Facility, in its entirety as a current liability. The CIT Credit Facility is subject to certain financial covenants based on the existing calculated borrowing base and is secured by certain accounts receivable, inventory and property and equipment. The remaining $0.3 million was secured against certain existing fixed assets, bearing interest at the same rate described above and is payable in equal installments over a sixty month period. Currently, the balance is $205,000, of which $60,000 is classified as current and the remaining $145,000 is classified as long-term debt. The Company was notified of a technical default by CIT on November 21, 2001 as the result of an overadvance on the Credit Facility. The Company is currently operating under a Forbearance Agreement with CIT dated January 8, 2002. As part of the Forbearance Agreement, CIT agrees to forbear from exercising any of its rights and remedies arising from or as a result of, the default until the Forbearance Termination Date, January 22, 2002. If the Company is in compliance with the terms of the Forbearance by January 22, 2002 the existing default is deemed waived. The terms of the Forbearance Agreement provide for, among others, the repayment in full of the overadvance by January 23, 2002. The amount of the overadvance is approximately $185,000 as of January 14, 2002. This obligation is expected to be repaid from a $400,000 Subordinated Loan commitment as described in Note 13. If the Company is not in compliance by the Forbearance Termination Date, the maturity of the debt may be accelerated. 37 Note Payable - Heritage National Bank Effective July 31, 2000, the Company acquired a warehouse facility and office space in Fort Worth, Texas. The total purchase price for the building was approximately $1.6 million, of which $0.3 million was paid immediately upon closing, the remainder of which was financed through a note payable to Heritage National Bank. The note bears interest at the Prime lending rate plus 1% (7.0% at September 30, 2001) and is payable in monthly installments of $6,944 plus interest over a fifteen year period. The note payable is secured by the warehouse facility and office space. Note Payable - Concorde In connection with the April 1, 2000 acquisition of the remaining fifty percent interest in Liberty, EVTC assumed an $87,121 note payable to Concorde. This note payable to Concorde bears interest at the Prime lending rate and was payable in twelve equal monthly installments, which concluded on March 1, 2001. The note payable to Concorde was secured by certain fixed assets acquired through Liberty. The note was paid and the debt retired in fiscal 2001. Note Payable - Navistar In connection with the May 1, 2000 RMS acquisition, the Company assumed a note payable in the amount of $40,575 payable to Navistar. The note payable to Navistar bears interest at a rate of nine and five tenths percent (9.5%), and is payable in equal monthly installments ending November 1, 2002. Two tank service trucks that were purchased by EVTC when it acquired RMS secure the note payable to Navistar. Capital Lease Obligations The Company has several non-cancelable commitments under capital leases, primarily RMS service trucks. Capital leases are discussed in detail in Note 11 - Commitments and Contingencies. The Company's revolving line of credit and other debt obligations mature as follows during the next five years:
YEAR AMOUNT ---- ------ 2002 $ 8,645,107 2003 311,691 2004 307,152 2005 260,827 2006 176,661 Thereafter 777,991 ----------- Total $10,479,429
(6) CASH FLOWS Cash paid during fiscal 2001, 2000 and 1999 for interest and income taxes is as follows:
2001 2000 1999 ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest $1,085,979 $ 834,412 $1,014,677 ========== ========== ========== Income taxes -- $ 6,309 $ 25,014 ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital expenditures financed with debt -- $1,250,000 -- ========== ========== ========== Common stock issued in conjunction with acquisitions (see note 4) -- $1,054,063 -- ========== ========== ==========
During fiscal 1999 the Company recorded a receivable for subscribed stock totaling $594,600. This amount was received in December 1999. Also, the Company recorded an unrealized loss of $21,683 in 2001 and an unrealized loss of $20,468 in 2000 while an unrealized gain on stock securities of $54,460 was recorded in 1999. 38 (7) INCOME TAXES Total income tax expense (benefit) for the years ended September 30, 2001, 2000 and 1999 is allocated as follows:
2001 2000 1999 ---------- ---------- ---------- Loss(Income) from continuing operations $ 300,000 $ -- $ (300,000) Discontinued operations - loss from Discontinued operations -- -- -- ---------- ---------- ---------- $ 300,000 $ -- $ (300,000) ========== ========== ==========
The components of income tax expense (benefit) from continuing operations for the years ended September 30, 2001, 2000 and 1999 are as follows:
2001 2000 1999 --------- --------- ------------ Current: Federal $ -- $ -- $ -- State -- -- -- Deferred: Federal 252,000 -- (252,000) State 48,000 -- (48,000) --------- --------- ------------ -- -- (300,000) --------- --------- ------------ $ 300,000 $ -- $ (300,000) ========= ========= ============
Income tax expense (benefit) attributable to continuing operations for the years ended September 30, 2001, 2000 and 1999 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:
2001 2000 1999 ------------ ------------ ------------ Computed "expected" income Tax expense (benefit) $ (1,450,351) $ 44,220 $ 57,667 State income taxes, net of Federal benefit -- -- (31,968) Change in deferred tax net asset Valuation allowance 3,195,590 (107,575) (378,532) Other (1,445,239) 63,355 52,833 ------------ ------------ ------------ $ 300,000 $ (300,000) $ (1,005,858) ============ ============ ============
The temporary differences that give rise to a significant portion of deferred tax assets and liabilities (continuing and discontinued operations) as of September 30, 2001 and 2000 are as follows:
2001 2000 ------------ ------------ Deferred tax assets: Allowance for bad debts $ 380,409 $ 381,912 Net operating loss carryforwards 5,484,571 2,576,691 Other 62,960 20,460 ------------ ------------ Gross deferred tax assets 5,927,940 2,979,063 Valuation allowance (5,743,777) (2,548,187) ------------ ------------ Deferred tax assets - net of valuation allowance 184,163 430,876 ------------ ------------ Deferred tax liabilities - Plant & Equipment 161,159 107,872 Other 23,004 23,004 ------------ ------------ Gross Deferred Tax Liabilities 184,163 130,876 ------------ ------------ Net deferred tax assets $ -- $ 300,000 ============ ============
The increase in the valuation allowance for deferred tax assets as of September 30, 2001 was $3,195,590. The decrease in the valuation allowance for deferred tax assets as of September 30, 2000 was $107,575. The net change in the total valuation allowance for the year ended September 30, 1999 was a decrease of $378,532. In assessing the 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 39 assessment. Based on the prior year loss and the unpredictable nature of the markets, the Company operates in, Management recorded a valuation allowance of $5,743,777 at September 30, 2001 for the portion of the deferred tax asset and Net Operating Losses not expected to be realized in fiscal 2002. At September 30, 2001, the Company has net operating loss carryforwards for federal income tax purposes of $16,131,091 that are available to offset future federal taxable income through 2021. If the IWT acquisition, as described in Note 4, is consummated it may result in a change in control which would limit the amount of the net operating loss carryforward available annually. (8) DISCONTINUED OPERATIONS e SOLUTIONS MARKETING, INC. BUSINESS SEGMENT During December 2000, the Company's Board of Directors adopted a plan to discontinue the operations of e solutions Marketing, Inc., its segment that directly marketed business to consumer services via the Internet. The Company has initiated a plan to liquidate the tangible assets of this segment as it seeks a strategic alternative for the business concept. Management intends to complete the disposal of the segment within ninety days from the adoption of the liquidation plan. e solutions Marketing, Inc. was acquired in March 2000 and is discussed in Note 4 - Acquisitions. The Company has presented the accompanying fiscal year 2001 and 2000 statements of operations to report the operating results of the e solutions Marketing, Inc. segment as discontinued operations. Furthermore, the consolidated balance sheets at September 30, 2001 and 2000, has been presented to segregate the assets and liabilities of the discontinued operations.
2001 2000 ----------- ----------- Revenue $ -- $ -- ----------- ----------- Gain(Loss) from discontinued operations $ -0- $ (750,576) Estimated Gain(Loss) on Disposal of discontinued $ 240,723 $ (1,255,558) Income tax benefit $ -- $ -- ----------- ------------ Gain(Loss) from discontinued operations $ 240,723 $ (2,006,134) =========== ============
Assets and liabilities of the business to consumer marketing segment are as follows:
2001 2000 --------- --------- Assets: $ -- $ 23,337 ========= ========= Liabilities: Accounts payable $ -- $ 353,331 ========= =========
At September 30, 2001 all assets of e solutions Marketing were liquidated and liabilities settled. During May and June 2001, e solutions obtained favorable settlements with vendors included in the "Liabilities of Discontinued Operations" as of September 30, 2000. The pre-settlement liabilities totaling $350,036 were settled for cash payments totaling $109,313, netting a gain of $240,723 pretax in fiscal year 2001. At September 30, 2000, the remaining non-cash assets of e solutions Marketing, which were comprised of goodwill, gift inventory, web site development costs and certain pieces of machinery and equipment were written down from $1.0 million to $0.0 to reflect the net realizable value of such assets. RECYCLING AND RECOVERY EQUIPMENT BUSINESS SEGMENT During July 1998, the Company's Board of Directors adopted a plan to discontinue its Recycling and Recovery Equipment business segment. The Company has initiated a liquidation program to sell all assets of the segment. Management intended for the disposal of the segment to be completed by June 30, 1999 (the Phase-Out Period), however during fiscal 1999 those estimates were revised to June 30, 2000. In fiscal 1998, loss on discontinued operations included a $0.5 million charge for future operating results through the phase-out period and a write down of $4.8 million to inventory, accounts receivable, leasehold improvements, and equipment to estimated net realizable values. In fiscal 1999, the Company had liquidation revenues of $1.2 million and incurred direct costs of $0.4 million. During July 2000, the Company wrote down the remaining assets by approximately $0.4 million to reflect the salvage value of such assets to effectively complete the plan to discontinue the Recycling and Recovery Equipment segment, which was adopted in 1998. 40 During fiscal 2001, the Company had net inventory liquidation revenues of $152,565.
2001 2000 1999 ------------- ------------- ------------- Revenues $ 407,075 $ 585,411 $ 1,245,325 ============= ============= ============= Gain (loss) before income taxes $ -- $ -- $ -- Estimated Gain (Loss) on Disposal of discontinued operations $ 152,565 $ (388,792) Income tax benefit $ -- $ -- $ -- ------------- ------------- ------------- Gain (Loss) from discontinued operations $ 152,565 $ (388,792) $ -- ============= ============= =============
Assets and liabilities of the discontinued Recycling and Recovery Equipment business segment are as follows:
2001 2000 ------------- ------------- Assets: Accounts receivable $ -- $ 116,676 Inventories -- 254,510 Equipment and other -- -- ------------- ------------- $ -- $ 371,186 ============= ============= Liabilities: Accrued Liabilities -- -- ============= =============
(9) STOCK OPTIONS (a) EMPLOYEE The Company has three stock option plans (the Option Plans). Two of the plans reserve 500,000 shares each and the third plan reserves 1,000,000 shares of common stock for issuance upon the exercise of options designated as either (a) incentive stock options (ISOs) under the Internal Revenue Code of 1986, as amended, or (b) non-qualified options. ISOs may be granted under the Option Plans to employees and officers of the Company. Nonqualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. The options are exercisable for a period that ends five years from the date the options become exercisable. Transactions relating to the Option Plans for the years ended September 30, 2001, 2000 and 1999 are summarized as follows:
2001 2000 1999 ----------------------------- ------------------------------ ------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------------- ------------- ------------- ------------- ------------- ------------- Outstanding at beginning of year 918,337 $ 5.33 547,500 $ 1.55 283,500 $ 7.15 Granted -- -- 748,500 6.29 491,500 .73 Exercised (16,500) .63 (280,889) .92 -- -- Forfeited (600,069) 6.62 (96,774) 4.31 (227,500) 6.69 ------------- ------------- ------------- ------------- ------------- ------------- Outstanding at end of Year 301,768 3.02 918,337 $ 5.33 547,500 $ 1.55 ============= ============= ============= ============= ============= ============= Options exercisable at year end 228,534 $ 1.98 201,000 $ 2.32 191,000 $ 3.25 ============= ============= ============= ============= ============= ============= Weighted average fair value of options granted during the year $ -- $ 6.05 $ .60 ============= ============= =============
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions. Expected life of 5.0 years; expected volatility of 110% in 2000 and 70% in 1999; expected dividend yield of 0%; and risk-free interest rate of 5.8% in 2000 and 5.88% in 1999. No options were granted during 2001. 41 EVTC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
OPTIONS OUTSTANDING OPTIONS EXERCISABLE AT SEPTEMBER 30, 2001 AT SEPTEMBER 30, 2001 ----------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF/OR REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------- ----------- ----------- --------- ----------- ------------ $ .50 -- $ 2.00 241,768 7.54 $ .85 201,867 $ .75 $7.50 -- $13.00 60,000 7.75 $ 11.74 26,667 11.25 ------- ------- ----------- 301,768 7.58 3.02 228,534 $ 1.98 ======= =======
The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS No. 123, the Company's net income (loss) from continuing operations would have been changed to the pro forma amounts as indicated below (in thousands of dollars, except per share amounts):
2001 2000 1999 ------------- ------------- ------------- Net income (loss) As reported $ (4,566) $ 130 $ 470 Pro forma (4,711) (778) 385 Diluted income (loss) per share: As reported $ (.61) $ .02 $ .09 Pro forma (.62) (.11) .07
The effects of applying SFAS No. 123 in the pro forma disclosure are not indicative of future results. (B) NONEMPLOYEE On September 16, 1998 the Company executed an agreement with Colmen Capital Advisors, Inc. ("Colmen") to provide certain business improvement services to the Company over a one-year period ("Colmen Agreement"). Pursuant to the Colmen Agreement, services included, among others, establishing a strategic business plan, developing an annual operating plan, implementing day-to-day business and management accountability, formulating a corporate financing structure and implementing a strategic acquisitions and mergers program. Pursuant to the Colmen Agreement the Company paid Colmen $17,500 each month (subsequently increased in November 1998 to $30,000 each month) for these services, and was to grant Colmen options to acquire 500,000 shares of common stock. In addition, the Company agreed to issue options to acquire 500,000 common shares six months and one day from the Colmen Agreement date. On June 28, 1999 the Company reached an agreement on the termination of the contract with Colmen. Under the agreement, the Company paid Colmen a termination fee of $330,000 and Colmen forfeited all options. On January 11, 1999 the Board of Directors passed a resolution to issue all outside Board members options for 5,000 shares of the Company's common stock for serving on the Company's Board of Directors. (10) OPERATING SEGMENTS The Company has two operating reportable segments: refrigerant and ballast recycling. The refrigerant segment is engaged in the marketing and sale of refrigerants, as well as performing refrigerant reclaiming services. The ballast-recycling segment is engaged in the recycling and disposal of fluorescent lighting ballasts. Amounts under the Corporate caption are items not directly attributable to a segment or items not allocated to the operating segment in evaluating their performance. The accounting policies of the segment are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on profit or loss from operations.. There have been no intersegment sales for the years-ended September 30, 2001, 2000 and 1999. 42 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.
REFRIGERANT BALLAST PRODUCT RECYCLING CORPORATE CONSOLIDATED --------------- --------------- --------------- --------------- YEAR ENDED SEPTEMBER 30, 2001: Revenues from external customers $ 29,480,906 $ 3,456,325 $ -- $ 32,937,231 Interest income 74,359 1,802 -- 76,161 Interest expense 845,625 49,659 190,695 1,085,979 Depreciation and amortization expense 1,120,928 17,370 181,445 1,319,743 Segment income (loss), before income taxes (2,481,666) (296,327) (1,487,746) (4,265,739) Segment assets 17,379,671 1,584,527 2,251,542 21,215,740 Expenditures for segment assets 1,403,179 -- 250,800 1,653,979 YEAR ENDED SEPTEMBER 30, 2000: Revenues from external customers $ 32,473,559 $ 3,767,342 $ -- $ 36,240,901 Interest income 33,469 2,517 4,742 40,728 Interest expense 724,243 46,976 63,193 834,412 Depreciation and amortization expense 752,252 90,231 6,600 849,083 Equity in the income of investees -- -- 85,392 85,392 accounted for by the equity method Segment income (loss), before income taxes 749,674 151,487 (771,103) 130,058 Segment assets 20,621,180 1,464,287 2,421,717 24,507,184 Expenditures for segment assets 1,318,881 35,968 352,617 1,707,466
43
REFRIGERANT BALLAST PRODUCT RECYCLING CORPORATE CONSOLIDATED ------------- ------------- ------------- ------------- YEAR ENDED SEPTEMBER 30, 1999: Revenues from external customers $ 34,896,973 $ 3,834,710 $ -- $ 38,731,683 Interest income 92,841 4,282 30,973 128,096 Interest expense -- -- 1,014,677 1,014,677 Depreciation and amortization expense 556,734 111,084 -- 667,818 Equity in the income of investees accounted for by the equity method -- -- 20,687 20,687 Segment income (loss), before income taxes 1,857,460 210,042 (1,897,894) 169,608 Segment assets 17,306,583 1,679,831 1,864,634 20,851,048 Investment in equity method Investees -- -- 402,604 402,604 Expenditures for segment assets 316,810 57,307 -- 374,117
RECONCILIATION OF CONSOLIDATED:
ASSETS 2001 2000 1999 ------------- ------------- ------------- Total Assets for reportable segments $ 21,215,740 $ 24,507,184 $ 20,851,048 Assets of discontinued operations -- 394,523 1,098,760 ------------- ------------- ------------- Consolidated Assets $ 21,215,740 $ 24,901,707 $ 21,949,808 ============= ============= =============
With the exception of the reconciliations shown the above totals represent consolidated total amounts. All revenues and long-lived assets of the Company are attributable to and reside domestically. In 2001, one customer accounted for 11% of the Company's total consolidated revenues. In 2000, one customer accounted for 10% of the Company's total consolidated revenues. No individual or related group of customers accounted for more than 10% of the Company's total consolidated revenues in 1999. (11) COMMITMENTS AND CONTINGENCIES (A) COMMITMENTS The Company leases its New Jersey office and warehouse facilities from its principal shareholder at an annual cost of $120,000 in fiscal 2001, 2000 and 1999. The Company also leases other operating and office facilities pursuant to operating leases expiring through 2006. The Company has several non-cancelable commitments under capital leases, primarily RMS service trucks. The following is a schedule of future minimum rental payments under operating and capital leases:
OPERATING CAPITAL ------------- ------------- 2002 $ 388,263 $ 153,852 2003 326,919 153,852 2004 192,868 153,852 2005 54,232 151,414 2006 32,423 121,026 Thereafter -0- 22,089 ------------- ------------- Total minimum lease payments $ 994,705 756,085 ============= Less amount representing interest (164,310) ------------- Present value of net minimum lease payments $ 591,775 =============
Total rental expense was $766,048, $612,913 and $556,865 for the years ended September 30, 2001, 2000 and 1999, respectively. Rent expense for 2001 includes the accrual of $263,860 for lease facility closures. The above table reflects all scheduled payments, including those for the closed facilities. 44 (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, 2001, the Company has fully funded this obligation. The Company does not expect any significant cleanup costs in connection with the closure of its facility. During fiscal 2000, the Internal Revenue Service (IRS) imposed an excise tax levy in regards to imported refrigerant in fiscal year 1994. While the Company disagrees with the levy imposed by the IRS, it has accrued the entire amount of $0.4 million and is currently negotiating a settlement. The Company has approximately one million pounds of mixed refrigerant at its facilities. This mixed refrigerant is expected to be separated by the Liberty operation as part of Full Circle. Liberty is currently in an updating phase and management expects it to be fully operational by March 31, 2002. If Liberty does not become operational there is a potentially large cost to dispose of the mixed refrigerant with third parties. The Company is operating under a Forbearance Agreement as described in Notes 1 and 5. (12) EQUITY Common Stock In fiscal 2001, the Company issued an additional 174,690 shares of common stock to Concorde Science and Technology. The shares were contingent shares related to the acquisition of Concorde's 50% interest in Liberty Technologies. Their issuance was contingent on the stock price, so that if the stock was below $5.00 per share then additional shares were issued as additional consideration. This was a below market guarantee, as shares were trading at $12.75 on the day the transaction was consummated. The value of the transaction did not change from the original value assigned at the transaction date, the fair value of shares issued unconditionally at the date of acquisition. In addition, the Company issued 16,500 shares of stock base on employee's exercising options that were granted under the Company's Employee Stock Option Plans. In March 2000, the Company entered into an agreement with several investors to issue 200,000 shares of the Company's unregistered common stock at a price of $4.50 per share. The proceeds from such stock issuance were received in March and April 2000. On October 1, 1999 the Company's board of directors voted to sell and issue up to one million shares of restricted Section 144 common stock to several private investors for the sole purpose of providing working capital and short term financing that would be required if the Company was successful in acquiring e solutions Marketing, Inc. See Note 4 - Acquisition for additional information regarding e solutions. The selling price of such stock was set at approximately 85% of the prior 5 days average closing price on October 1, 1999 or $1.00 per share. In conjunction with the execution of the formal agreement to purchase e solutions, the Company issued an aggregate of 750,000 shares for $750,000 (or $1.00 per share). The funding from the stock sale occurred during March 2000. On July 20, 1999 the Company's board of directors authorized the Company to sell 792,800 shares of restricted Section 144 common stock to a private investor. The Company entered into an agreement to sell the 792,800 shares of its common stock to the private investor on August 9, 1999. In December 1999, the Company received the cash payment 45 for the subscription stock issued. The Company used these funds for working capital and other general corporate purposes. Warrants In fiscal 1999, the Company issued warrants to Chase Bank to purchase 300,000 shares of the Company's common stock at a price of $1.40 per share. The Company registered the warrants on Form S-3 in January 2000. The Company received cash payment for the stock in March 2000. (13) SUBSEQUENT EVENTS On December 28, 2001, EVTC executed a letter of intent with a group from Houston, Texas for a $1 million investment in the common stock of EVTC as well as the acquisition of the assets of Innovative Waste Technologies, Inc. (IWT) by EVTC. The letter of intent is subject to a number of conditions including shareholder approval and the execution of definitive documents. The terms of the letter of intent reflect that the Company agrees to issue fifteen million shares (15,000,000) of its restricted common stock to IWT in exchange for $1,000,000 and certain assets. The Company also agrees to grant an option to IWT for fifteen million shares at the strike price of $1.00 per share. If the transaction is not consummated by January 31, 2002, the agreement is null and void. A change in control will occur if the transaction is consummated. No assurances can be given that the IWT transaction will consummate. IWT is not currently an operating entity. The IWT assets to be acquired consist primarily of technology, land, and marketable securities. Management believes the value of the assets expected to be acquired are approximately $10,000,000; however, no formal appraisal or valuation has been performed on the whole of the assets to be acquired. Any costs and expenses associated with the start-up of IWT's operation, both in the near term and in the future, are expected to be funded by the issuance of additional debt or equity. A timetable for the start-up for IWT has not been established at this time. The technology, when operational will allow the Company to be competitive in the treatment and recycling of marine and industrial waste. Assets to be acquired from Innovative Waste Technologies, Inc., are estimated at $10 million (unaudited) by management, including but not limited to the following: (UNAUDITED) a. Process patent for use of Electro-Coagulation process, and its specific patent on cell design. b. Assignment of "non exclusive" Chemical Fixation and Encapsulation process. c. Assignment of "non exclusive" license for Vapex System which is used to recover rising vapors from underground storage tanks. d. Marketable securities valued at $250,000. The Company has a commitment for a $400,000 Subordinated Loan at an interest rate of 10%, payable monthly, that will mature on January 31, 2004. As a condition of the commitment, the Company agrees to issue 500,000 5-year warrants at an exercise price of $1.00, with underlying common stock to be registered by EVTC within 12 months. The funding of the Subordinated Loan will be $200,000 on January 22, 2002 and $200,000 on February 12, 2002. During December 2001, the Company entered into a consulting agreement in exchange for consideration of options on 1,000,000 shares at an exercise price of $0.11 per share. 46 SCHEDULE II EVTC, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
ADDITIONS OTHER BEGINNING CHARGED TO ADDITIONS OR ENDING BALANCE EXPENSE (DEDUCTIONS) BALANCE --------------- --------------- --------------- --------------- Allowance for doubtful accounts: Continuing Operations: 2001 $ 1,030,007 $ 305,810 $ (140,281) $ 1,195,536 2000 1,210,723 77,080 (257,796) 1,030,007 1999 1,512,868 250,975 (553,120) 1,210,723 Discontinued Operations: 2001 $ 518,130 $ -- $ 518,130 $ -- 2000 417,895 -- 100,235 518,130 1999 418,695 -- (800) 417,895 Reserve for inventory obsolescence: Continuing Operations: 2001 $ -- $ -- $ -- $ -- 2000 -- -- -- -- 1999 -- -- -- -- Discontinued Operations: 2001 $ 4,049,418 $ -- (4,049,418) $ -- 2000 3,760,861 -- 288,557 4,049,418 1999 5,876,344 -- (2,115,483) 3,760,861 Valuation allowance for deferred tax asset: 2001 $ 2,548,147 $ 300,000 $ 2,895,630 $ 5,743,777 2000 2,655,762 -- (107,575) 2,548,187 1999 3,034,294 -- (378,532) 2,655,762
47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 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, 2001 were:
NAME AGE POSITION ------------------ --- -------------- George Cannan, Sr. 58 Chairman and Director Bobby G. Stephens 41 Chief Executive Officer Caroline Costante 39 Secretary John Stefiuk 50 Director Robert J. Casper 58 Director Laurie G. Kahn(1) 47 Director Scott L. Sakoff 41 Director Edward A. Sakoff 70 Director
(1) Resigned from the Board of Directors on December 28,2001. 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 until May 2001. 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. BOBBY G. STEPHENS , a Certified Public Accountant, has been a partner of Null Lairson PC from 1996 to 1999 and most recently a partner of Bob Stephens and Associates from 1999 to 2001. Mr. Stephens also earned the designations of Certified Management Accountant in 1988 and Certified Valuation Analyst in 1998. Mr. Stephens has owned and operated an Environmental Consulting firm that served both the business community and governmental entities from 1995 to 1997. He has also owned and operated a processing plant from 1997 to 1998 with product distribution that covered the United States and overseas markets. Mr. Stephens succeeded Mr. Cannan as the CEO of the Company in May 2001. 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. 48 ROBERT J. CASPER is the President and Chief Executive Officer of R.J. Casper & Associates. Mr. Casper has held prior positions as Chairman, Midwestern National Life Insurance Company, President of MC Equities, President/Chief Operating Officer of U.S. Life Corporation and Executive Vice President of Home Life Insurance Company. Mr. Casper's background encompasses over 30 years of experience in the life insurance industry, with 25 years of executive level, hands on management experience. LAURIE G. KAHN is the founder and president of Media Staffing Network, Inc. Media Staffing Network, Inc. was the first staffing company that caters exclusively to media sales and associated departments for both temporary and permanent hiring for the cable, interactive, print, radio and television industries. Ms. Kahn has more than 20 years experience in media including sales, management and director/executive roles within the radio industry. On December 28,2001 Ms. Kahn resigned from the Company's Board of Directors. SCOTT L. SAKOFF is the President/CEO of afreegift.com. Prior to forming afreegift.com, Mr. Sakoff founded and directed the growth of Access Media & Marketing Services, Inc., a nationally recognized Media Management firm serving Retail and Direct Response Marketers. Mr. Sakoff has developed Advertising/Direct Marketing programs and consulted for clients such as Toshiba, Sony, CBS TV, Telemundo (Spanish TV Network), Nationwide Auto Insurance and leading National retailers such as Play It Again Sports and USA Baby. He has 20 years of hands on management and account development experience in the Advertising/Marketing field. EDWARD A.SAKOFF began his career as a United States Marine. After serving his country, Mr. Sakoff embarked upon a 40-year career in the television and marketing industries. Mr. Sakoff produced programs and commercials. He also developed a direct mail program used in the automotive industry. Mr. Sakoff served as Vice President of a jewelry manufacturing firm, handling all aspects of marketing. In addition, Mr. Sakoff has served as a board member for numerous companies. 49 INFORMATION CONCERNING BOARD The Board of Directors met two times during the 2001 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. Member of the Executive Committee is Mr. George Cannan. 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 $100,000 during such years (the "Named Executives"):
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) STOCK OPTIONS (SHARES) --------------------------- ---- ----------- --------- ---------------------- George Cannan, Sr. Chairman 2001 $200,000 (1) - 0 - 2000 $200,000 (1) - 0 - 1999 $200,000 (1) 90,000 Bobby G. Stephens(3) Chief Executive 2001 $ 57,692 (1) - 0 - David A. Keener(2) President 2001 $181,730 (1) - 0 - 2000 $150,000 (1) 125,000 1999 $123,077 (1) 45,000
(1) Represents less than 10% of the Executive's compensation. (2) Resigned in May 2001. (3) Employment began May 2001. 50 STOCK OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth stock options granted to the Chairman and Chief Executive Officer ("CEO") and Named Executives as of September 30, 2001.
NUMBER OF OPTIONS % OF TOTAL OPTIONS GRANTED IN FISCAL YEAR GRANTED TO EMPLOYEES SEPTEMBER 30, 2001 IN FISCAL YEAR EXERCISE EXPIRATION GRANT NAME (#) SEPTEMBER 30, 2001 ($/SHARE) DATE VALUE $ - ---- ---------------------- --------------------- --------- ---------- ------- None
OPTION EXERCISES DURING, AND STOCK OPTIONS HELD AT END OF FISCAL 2001 The following table indicates the total number and value of exercisable stock options held by the Named Executives as of September 30, 2001.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1) -------------------------- --------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- George Cannan, Sr. 90,000 -0- $12,321 $ -0- David A. Keener (2) -0- -0- -0- -0-
(1) Based on the last sale price for the Company's Common Stock on September 30, 2001 of $.37 per share, as reported by NASDAQ. (2) 15,000 shares were exercised during fiscal 2001. STOCK OPTION PLANS The Company maintains stock option plans designated as the 1992 Stock Option Plan (the "1992 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 2000 Stock Option Plan (the "2000 Plan"). The 1992 and 1996 Plans each reserve 500,000 shares each for issuance, while the 2000 Plan reserves 1,000,000 shares of the Company's Common Stock for issuance upon the exercise of options designated as either (i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, amended (the "Code") or (ii) non-qualified options. Nonqualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. In certain circumstances, the exercise of stock options may have an adverse effect on the market price of the Company's Common Stock. The purpose of the Option Plans is to encourage stock ownership by certain directors, officers and employees of the Company and certain other people instrumental to the success of the Company and give them a greater personal interest in the success of the Company. The Option Plans are administered by the Board of Directors. The Board, within the limitations of the Option Plans, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an option, and whether restrictions such as repurchase rights by the Company are to be imposed on shares subject to options. ISOs granted under the Option Plans may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Non-qualified options granted under the Option Plans may not be granted at a price less than the fair market value of the Common Stock on the date of grant. Options granted under the Option Plans will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). Any options granted under the Option Plans are not transferable during the optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. EMPLOYMENT AGREEMENTS There are no employment agreements with the Company's executives. 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 30, 2001, the name and number of shares of Common Stock held by each person known to the Company to own beneficially more than five percent (5%) of the Company's Common Stock and the number of shares owned by each director and executive officer of the Company and all directors and executive officers as a group. Each of the following has an address c/o Environmental Technologies Corp., 3125 Bolt Street, Fort Worth, Texas, 76110. All shares are owned directly by the named person.
NUMBER OF NAME SHARES OWNED PERCENT OF CLASS(1) ---- ------------ ------------------- George Cannan, Sr. 630,943(2) 8.3% Caroline Costante 127,761 1.6% John Stefiuk 76,000(3) 1.0% Robert Casper 75,173(4) 1.0% Edward A. Sakoff -- * Scott Sakoff -- * Laura G. Kahn -- * Bobby G. Stephens -- * All Directors and Officers as a Group (4 persons) 909,877 11.9%
- ---------- (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this report upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date of this report have been exercised. (2) Includes 90,000 shares of Common Stock issuable upon the exercise of stock options (90,000 of which are presently exercisable). (3) Includes 5,000 shares of Common Stock issuable upon the exercise of stock options, which are presently exercisable. (4) Includes 58,673 shares of Common Stock issued to Concorde Science and Technology, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company's automotive refrigerant packaging and distribution operations are located in a 21,000 square foot building situated at 550 James Street, Lakewood, New Jersey 08701. The building is leased at a rental of $10,000 per month from George Cannan, Sr., the Company's founder, Chairman and principal stockholder, pursuant to 5-year lease. The Company believes that the terms of such lease are at least as favorable as those that it could obtain from a non-affiliated third party. This lease will expire December 31, 2004. As of September 30, 1999, the Company had a $371,016 note receivable from George Cannan. This note receivable did bear an interest rate of 7% per annum and was secured by the 21,000 square foot building located at 550 James Street in Lakewood New Jersey. In January 2000, Mr. Cannan repaid the Company the note receivable in full. 52 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT DESCRIPTION 21.1 Subsidiaries of Registrant 23.2 Consent of BDO Seidman, LLP 53 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Fort Worth, State of Texas on the 14th day of January, 2002. 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 and ----------------------------------------- Director January 14, 2002 GEORGE CANNAN, SR. /s/ Bobby G. Stephens Chief Executive Officer January 14, 2002 ----------------------------------------- BOBBY G. STEPHENS /s/ John Stefiuk Director January 14, 2002 ----------------------------------------- JOHN STEFIUK /s/ Robert Casper Director January 14, 2002 ----------------------------------------- ROBERT CASPER /s/ Scott L. Sakoff Director January 14, 2002 ----------------------------------------- SCOTT L. SAKOFF /s/ Edward A, Sakoff Director January 14, 2002 ----------------------------------------- EDWARD SAKOFF
54 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 21.1 Subsidiaries of Registrant 23.2 Consent of BDO Seidman, LLP
EX-21.1 3 d93491ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Effective December 31, 2001 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. Liberty Technologies International, Inc. Refrigerant Management Services, Inc. EX-23.2 4 d93491ex23-2.txt CONSENT OF BDO SEIDMAN, LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors EVTC, Inc.: We consent to the incorporation by reference in the Registration Statement (No. 333-8355) on Form S-8 of EVTC, Inc. of our report, dated January 11, 2002 relating to the consolidated balance sheets of EVTC, Inc. and subsidiaries as of September 30, 2001, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the years then ended, and related financial statement schedule, which report appears in the September 30, 2001 annual report on Form 10-K of EVTC, Inc. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going conern. BDO Seidman, LLP Dallas, Texas January 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----