SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Transition
Period From ________ to ________.
Commission File Number 0-20986
EVTC, INC.
----------
(Exact name of issuer as specified in its charter)
Delaware 22-3005943
----------------------------------- --------------------------
(State or other Jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
14910 Welcome Lane
Houston, Texas 77014
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(Address of Principal Executive Offices) (Zip Code)
(877) 426-3509
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of May 20, 2002, there were 19,856,475 shares of the Issuer's common stock,
par value $.01 per share, issued and outstanding.
EVTC, Inc.
TABLE OF CONTENTS
Form 10-Q Item Page
-------------- ----
Part 1. Financial Information
Table of Contents 1
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002
(unaudited) and September 30, 2001 (audited) F-1
Consolidated Statement of Operations (unaudited)
for the three and six months ended March 31, 2002
and 2001 F-2
Consolidated Statement of Cash Flows for the six
months ended March 31, 2002 and 2001 F-3
Notes to the Consolidated Financial Statements F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 2
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 4
Part II. Other Information
Item 1. Legal Proceedings 6
Item 2. Changes in Securities and Use of Proceeds 7
Item 3. Defaults Upon Senior Securities 7
Item 6. Exhibits and Reports on Form 8-K 8
Signatures
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, September 30,
2002 2001
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 200,592 $ 192,756
Marketable securities 12,309 12,309
Accounts receivable, net 4,031,296 5,363,638
Inventories, net 1,761,635 6,715,834
Other current assets 440,698 670,782
------------ ------------
Total current assets 6,661,584 12,955,319
Property and equipment, net 3,272,566 5,604,527
Goodwill, net -0- 2,321,744
Investments and other assets 256,333 334,150
------------ ------------
Total assets $ 10,190,483 $ 21,215,740
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 5,488,579 $ 8,645,107
Accounts payable 4,981,943 3,660,207
Accrued liabilities 2,104,827 1,848,143
------------ ------------
Total current liabilities 12,575,349 14,153,457
Long term debt 1,757,280 1,834,322
------------ ------------
Total Liabilities $ 14,332,629 $ 15,987,779
Stockholders' Equity
Common stock 86,065 76,355
Paid-in-capital 16,557,297 15,443,869
Accumulated other compensation income 12,309 12,309
Accumulated deficit (20,797,817) (10,304,572)
------------ ------------
Total stockholders' equity (4,142,146) 5,227,961
------------ ------------
Total liabilities and stockholders' equity $ 10,190,483 $ 21,215,740
============ ============
See Accompanying Notes to Consolidated Financial Statements (unaudited)
F-1
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
Net Sales $ 1,536,851 $ 8,858,022 6,107,524 $ 15,116,235
Cost of sales 3,846,289 6,317,268 7,657,729 10,977,713
------------ ------------ ------------ ------------
Gross profit (2,309,438) 2,540,754 (1,550,205) 4,138,522
Selling, general and administrative
expenses 1,982,453 2,466,427 4,478,341 5,064,676
------------ ------------ ------------ ------------
Impairment of intangibles and
building and equipment 3,112,787 0 4,087,787 0
------------ ------------ ------------ ------------
Operating (loss) income (7,404,678) 74,327 (10,116,333) (926,154)
Interest expense 169,680 254,044 347,030 505,700
Other (income) expense, net (11,429) 171 25,568 (2,414)
------------ ------------ ------------ ------------
(Loss) from continuing operations (7,562,929) (179,888) (10,488,931) (1,429,440)
before income taxes
Income tax benefit 0 (60,909) 0 (484,617)
------------ ------------ ------------ ------------
Loss from operations (7,562,929) (118,979) (10,488,931) (944,823)
Net (loss) $ (7,562,929) $ (118,979) $(10,488,931) $ (944,823)
------------ ------------ ------------ ------------
(Loss) per share
Basic:
Continuing operations $ (0.88) $ (0.02) $ (1.28) $ (0.13)
------------ ------------ ------------ ------------
Diluted:
Continuing operations $ (0.88) $ (0.02) $ (1.28) $ (0.13)
------------ ------------ ------------ ------------
See Accompanying Notes to Consolidated Financial Statements (unaudited)
F-2
EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
2002 2001
Cash Flows From Operating Activities:
Net Loss $(10,488,931) $ (944,823)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,949,729 619,957
Provision for bad debts (232,217) 104,095
Changes in assets & liabilities:
Accounts receivable 1,564,559 (1,386,152)
Deferred Income Taxes 0 (484,617)
Inventory 4,954,199 (897,198)
Other assets (112,516) (310,694)
Accounts payable and accrued liabilities 1,578,420 2,944,673
------------ ------------
Net cash provided by (used in) continuing activities 213,443 (354,759)
Net cash provided by discontinued operations 0 102,489
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Net cash provided by (used in) operating activities 213,443 (252,270)
Cash Flows From Investing Activities:
Loss on impairment of equipment and building 1,850,000 0
Proceeds from sale of equipment 0 9,208
Loss on retirement of assets 0 (835)
Capital expenditures (22,992) (878,003)
Change in other assets 77,817 263,169
------------ ------------
Net cash used in investing activities 1,904,825 (606,461)
Cash Flows From Financing Activities:
Net borrowing (repayments) on revolving credit
facility (3,124,109) 831,111
Payments of other debt (109,461) (62,392)
Proceeds from sale of common stock and options
exercised 1,123,138 0
------------ ------------
Net cash used in provided financing activities (2,110,432) 768,719
Net increase (decrease in cash and cash equivalents 7,836 (90,012)
Cash and cash equivalents - Beginning of period 192,756 262,644
------------ ------------
Cash and cash equivalents - End of period $ 200,592 $ 172,632
============ ============
See Accompanying Notes to Consolidated Financial Statements (unaudited
F-3
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to those
rules and regulations, although the Company believes the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the condensed financial statements herein.
The consolidated financial statements include the financial statements of evtc
and all of its wholly owned subsidiaries. All significant inter-company balances
and transactions have been eliminated upon consolidation.
The unaudited consolidated financial statements should be read in conjunction
with the more detailed audited financial statements for the year ended September
30, 2001, included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission ("SEC"). Accounting policies used in the
preparation of these consolidated financial statements are consistent in all
material respects with the accounting policies described in the Notes to
Consolidated Financial Statements included in the Company's Form 10-K. The
results of operations for the three (3) and six (6) months ended March 31, 2002
are not necessarily indicative of the results for the fiscal year ending
September 30, 2002. The sale of the Company's services and products are subject
to general economic conditions. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
The financial statements have been prepared by management without a review,
pursuant to Statement on Auditing Standards No. 71, being done by Company's
Independent Accountants.
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
EVTC, Inc. ("EVTC" or 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." 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
F-4
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
discontinuation of such operations in July 1998 and the Company marketed
business to consumer services via the Internet until its discontinuation in
December 2000.
As shown in the accompanying financial statements, the Company incurred a net
loss of $10,488,931 during the six months ended March 31, 2002. As of March 31,
2002 the current liabilities exceeded its current assets by $5,913,765. The
Company is delinquent in connection with various obligations. These factors, as
well as the uncertain conditions that the Company faces with respect to its
ability to pay its debts as they become due, create substantial doubt as to the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. The continuation of the Company as a going concern
is dependent upon the success of future financings and generating sufficient
revenue, either through existing operations or the acquisition of additional
business opportunities. Management is formulating plans to strengthen the
Company's working capital position and to generate sufficient cash to meet its
operating needs through fiscal year end 2002 and beyond. No assurance, however,
can be made that management will be successful in achieving its plans.
Significant additional capital will be required.
The Company has set up a reserve for obsolescence for inventory of $2,500,000
against the operations of Full Circle.
The Company has taken non cash charges of $1,044,310 against the Liberty
operations of Full Circle and $941,807 against the RMS division for the
impairment of intangibles. Additionally, the Company has taken non cash charges
of $1,200,000 against the equipment of Full Circle and $650,000 against the
building owned by EVTC.
NOTE 3. 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 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
F-5
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
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 an
indefinite useful life. As 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 that 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
was $2.3 million. Goodwill amortization expense during the year ended September
30, 2001 was $0.3 million. The Company has written off all $2.3 million of
remaining goodwill as of March 31, 2002.
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. The Company has reduced the
carrying value of certain long-lived assets by $1,850,000.
NOTE 4. EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the combination of dilutive common share equivalents and the
weighted average number of common shares outstanding during the period except
where their effect is antidilutive. The average number of common shares
outstanding for the six month period ending March 31, 2002 and 2001 was
8,217,586 and 7,473,398, respectively. The average number of common shares
outstanding for the three-month period ending March 31, 2002 and 2001 was
8,606,475 and 7,502,514, respectively. The effect of dilutive options and
warrants is immaterial.
F-6
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
NOTE 5. INCOME TAXES
Income taxes are accounted in accordance with Statement of Financial Accounting
Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). In accordance with
SFAS 109, the Company uses the asset and liability method for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the carrying amount of existing
assets and liabilities and their respective tax basis and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the
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
of a change in tax rates to the deferred tax asset or liability is recognized in
either income or expense in the period that includes the enactment date.
The Company has available at March 31, 2002 NOL's for federal income tax
purposes, of 17.0 million which are available to offset future federal taxable
income, if any, through 2021.
As a result of the NOL's as discussed above, the Company did not pay cash for
income taxes during either the first six months of fiscal 2002 or the
corresponding period in the prior year.
NOTE 6. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method. A reserve for obsolescence has been set up for
$2,500,000.
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects the supplemental cash flow information for the
three-month period ending:
March 31, 2002 March 31, 2001
-------------- --------------
Supplemental disclosures of cash Flow
information:
Cash paid during the period for:
Interest $ 347,030 $ 505,700
Income taxes $ -- $ --
NOTE 8. SEGMENT INFORMATION
The Company has two reportable operating segments: refrigerant and ballast
recycling. The refrigerant segment engaged in the marketing and sales of
refrigerant related services as well as performing refrigerant reclaiming
services. The ballast recycling segment
F-7
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
engages in the recycling and disposal of fluorescent light ballasts and the
brokering of fluorescent lamps for their ultimate disposal. Amounts under the
Corporate caption are not directly attributable to a segment or items not
allocated to the operating segment in evaluating their performance. There have
been no intersegment sales for the six months ended March 31, 2002, and 2001,
respectively.
The Company's reportable segment information for three months ended March 31,
2002 and 2001 is reported as follows:
Refrigerant
Product Ballast Corporate Consolidated
----------- ---------- ------------- --------------
THREE MONTHS ENDED MARCH 31, 2002:
Revenue from external customers 1,033,229 503,622 -- 1,536,851
Segment (loss) before
Income Taxes (6,413,096) (169,918) (979,915) (7,562,929)
THREE MONTHS ENDED MARCH 31, 2001:
Revenue from external customers 8,029,854 828,168 -- 8,858,022
Segment Income/(loss) before
Income Taxes 122,417 (12,565) (289,740) (179,888)
THE COMPANY'S REPORTABLE SEGMENT INFORMATION FOR SIX MONTHS ENDED MARCH 31, 2002
AND MARCH 31, 2001 IS REPORTED AS FOLLOWS:
Refrigerant
Product Ballast Corporate Consolidated
----------- ---------- ------------- --------------
SIX MONTHS ENDED MARCH 31, 2002:
Revenue from external customers 4,882,489 1,239,435 -- 6,121,924
Segment Income/(loss) before
Income Taxes (8,555,281) (408,070) (1,525,580) (10,488,931)
SIX MONTHS ENDED MARCH 31, 2001:
Revenue from external customers 13,392,435 1,723,800 -- 15,116,235
Segment Income/(loss) before
Income Taxes 84,501 98,568 (688,076) 505,007
F-8
EVTC, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
NOTE 9. SUBSEQUENT EVENTS
On April 2, 2002, Heritage National Bank foreclosed on the Company's
principal office and warehouse facility located at 2125 West Bolt, Fort Worth,
Texas following the Company's default under that July 31, 2000 Promissory Note,
in the aggregate principal amount of $1,250,000, in favor of the bank. The note
was secured by a Deed of Trust on the Fort Worth premises. The premises were
carried on the books prior to the foreclosure at $1.2 million. Following the
foreclosure, the Company entered into a monthly rental arrangement with the bank
for the continued use of the warehouse facility.
On May 10, 2002, the Company completed that transaction contemplated by the
Securities Purchase Agreement dated March 26, 2002 and amended May 10, 2002 (as
amended, the "Purchase Agreement") by and among the Company, Innovative Waste
Technologies, LLC, a Nevada limited liability company ("IWT") and each of Guy L.
Harrell and Gary A. Tipton, as owners of all of the issued and outstanding
membership interests of IWT. Under the Purchase Agreement the Company purchased
the outstanding membership interests in exchange for the issuance of 10,000,000
shares of the common stock, par value $.01 per share (the "Common Stock") of the
Company and grants of options to purchase up to an aggregate of 15,000,000
shares of Common Stock, resulting in a change in control of the Company. The
option grants are conditioned upon and subject to the subsequent approval by the
stockholders of the Company of an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of Common Stock to
100,000,000 (the "Stock Amendment"). Management intends to obtain stockholder
consent for the Stock Amendment promptly now that the transaction is completed.
Since the completion of the transaction with IWT on May 10, 2002, new
management has engaged in a systematic review and reassessment of the realizable
value attributable to the inventory, accounts receivable, fixed assets and other
properties of the Company.
On May 13, 2002, the 95th District Court of Texas, Dallas County, entered
an Agreed Temporary Injunction against the Company and its subsidiaries in favor
of the Company's senior lender, The CIT Group/Business Credit, Inc. The agreed
form of order continues in force a temporary restraining order entered by the
District Court on April 29, 2002 prohibiting the Company and its subsidiaries
from selling any of their respective assets without obtaining the prior consent
of the senior lender. In addition, the order provides for the appointment of
Corporate Revitalization Partners LLC to sell assets of the Company and its
subsidiaries over the next 60 days toward satisfaction of an agreed upon
settlement amount, in the approximate net sum of $4 million, for past
obligations owing under the Company's credit facility with the senior lender. If
the sale of the assets fails to raise sufficient proceeds to satisfy the
settlement amount, the lender may pursue other remedies available to it under
the credit facility
F-9
Item 2. Management's Discussion And Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations
---------------------
FORWARD LOOKING INFORMATION
---------------------------
All statements, other than historical facts, regarding the Company's business
strategy and plans of management for future operations are "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements, which include, but are not limited to, words such as "expert,"
"anticipate," "plan," estimate," "project," "intend" and "scheduled" are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements involve certain known and unknown
risks, uncertainties and other factors which may cause the Company's actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. A wide variety of factors could cause or contribute
to such differences and could adversely impact revenues, profitability, cash
flows and capital needs. These factors include, among others, the Company's
ability to successfully implement its business plan and integrate any proposed
and future acquisition and business arrangements; potential fluctuations in
financial results; negotiating an amicable resolution with respect to the
Company's default under its financing arrangements; procuring additional
funding; any uncertainties relating to customer plans and commitments; the
timely development and market acceptance of the Company's products and
technologies; possible product defects and product liability, dependence on
intellectual property rights, the competitive environment in which the Company
operates and other risks detailed from time to time in the Company's periodic
reports filed with the United States Securities and Exchange Commission and
other regulatory authorities.
SIX MONTHS ENDED MARCH 31, 2002 AS COMPARED TO THE SIX MONTHS ENDED MARCH 31,
2001
RESULTS OF OPERATIONS
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 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
recovery and reclamation services. The ballast recycling segment engages in the
recycling and disposal of fluorescent light ballasts and the brokering of
fluorescent lamps of their ultimate disposal.
Revenue. Revenue decreased by $9.0 million or 60.0% to $6.1 million for the six
month period ended March 31, 2002 compared to the same period during the prior
fiscal year. Of the $9.0 million decrease in revenue, $8.5 million was related
to the refrigerant segment and the remainder was attributed to the ballast
segment.
Gross Profit. Total gross profit decreased by $5.7 million during the first six
months of 2002. Management has set up a reserve for obsolescence of inventory
for $2.5 million which had a major impact on this decrease. However,
disregarding the reserve, the gross profit decreased by $3.2 million or 77%
during the current six month period compared to the same period one year
2
yearlier.Total gross profit as a percentage of sales decreased to 15.6% during
the first six months of fiscal year 2002 compared to 27.4% during the
corresponding period of fiscal year 2001. This was attributed to the cost
cutting measures required by the Company's senior lender.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses for the six month period of fiscal year 2002 decreased by
11.6% to $4.5 million from $5.1 million of SG&A expenses incurred during the
first six months of fiscal 2001.
The Company has taken a non cash charge of $2,237,787 against its earnings for
the impairment of intangibles on it Liberty operation of Full Circle, Inc. and
the assets that were acquired as part of the RMS division.
Management has also chosen to set up a $2.5 million reserve for obsolescence of
its inventory. This decision was based on appraisals that were obtained by
management through outside sources. Similarly, management has taken a non cash
charge of $1.85 million against earnings for the impairment of certain equipment
and building based on outside appraisals.
Interest Expense. Interest expense incurred during the first six months of
fiscal year 2002 was approximately $347,000, a decrease of approximately
$159,000 or 31.3% from the first six months of fiscal year 2001.
Income Tax. The Company's effective income tax rate for the first six months of
fiscal year 2002 was 34%. However, based on its negative working capital, the
default position with its lender and the questionable ability to continue as a
going concern, no recoverability of deferred tax assets were included for the
six month period ended March 31, 2002
THREE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2001
Revenue. Revenue was $1.5 million for the three months ended March 31, 2002
compared to $8.9 million for the three months ended March 31, 2001. This
represents an 83.2% reduction in sales for the current period compared to the
same period last year.
Gross Profit. Gross profit for the quarter ended March 31, 2002 was negative
$2.3 million. Management set up a reserve for obsolescence against inventory
amounting to $2.5 million. disregarding the reserve, the gross profit for the
three months ended March 31, 2002 was $191,000 or 12.4% of sales compared to
28.7% during the same comparable period one year earlier. This decrease was
attributable to the company's interest in just selling product in order to get
in cash.
Selling, general and administrative. Selling, general and administrative
expenses decreased by $484,000 during the current three month period ended March
31, 2002 compared to the three months ended March 31, 2001. This decrease of
19.6% is attributed to the Company's lack of cash and need to lay off most of
its labor.
Interest Expense. Interest expense decrease during the three months ended March
31, 2002 by 33.2% compared to the same period one year earlier. This reduction
is attributed to the reduction
3
in the average balance of the Company's revolving credit agreement with the
Company's lender and the questionable ability for the Company to continue as a
going concern. The Company is in default on this agreement and the Company has
retained, at the request of the lender, Corporate Revitalization Partners, LLC,
to assist in the disposition of certain assets to reduce the outstanding
obligations under the credit facility.
Income Tax. The Company's effective income tax rate for the three months ended
March 31, 2002 was 34%. However, based on its negative working capital, the
default position with its lender and the questionable ability for the Company to
continue as a going concern, no recoverability of deferred tax assets were
included for the three month period ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company had a deficiency in working capital of
approximately $6.3 million compared to available working capital of $1.7 million
as of March 31, 2001. The most significant current assets at March 31, 2002 were
its accounts receivable, which were approximately $4.0 million and inventory
which was approximately $1.8 million. These assets were offset by accounts
payable of $5.0 million and the current portion of the Company's long term debt
of $5.5 million.
The Company was notified of a technical default by The CIT Group/Business
Credit, Inc. ("CIT") on November 21, 2001 as the result of an overadvance on the
Credit Facility. The outstanding obligations under the Facility were accelerated
on February 20, 2002 at which time CIT declared the Company in default.
On May 13, 2002, the 95th District Court of Texas, Dallas County, entered
an Agreed Temporary Injunction against the Company and its subsidiaries in favor
of the senior lender, which agreed upon form of order (1) prohibited the Company
and its subsidiaries from selling any of their assets without obtaining the
prior consent of the senior lender and (2) appointed Corporate Revitalization
Partners LLC to sell assets of the Company and its subsidiaries over the next 60
days toward satisfaction of an agreed upon settlement amount, in the approximate
net sum of $4 million, for past obligations owing under the Company's credit
facility with the senior lender.
On February 20, 2002, the Company was notified of a default for failure to
make installment payments totaling approximately $67,000 due and owing under
that July 31, 2000 Promissory Note, in the aggregate principal amount of
$1,250,000, in favor of Heritage National Bank. The note was secured by a Deed
of Trust on the Company's principal office and warehouse facility located at
2125 West Bolt, Fort Worth, Texas. The bank subsequently accelerated the
payments due under the note, declared the entire principal balance due and owing
and, by that Notice of Trustee's Sale filed in Tarrant County, Texas on March
12, 2002, foreclosed on the Company's Fort Worth premises. Following the
foreclosure sale held on April 2, 2002, the Company entered into a monthly
rental arrangement with the bank for the continued use of the warehouse
facility.
4
In March 2002, the Company's common stock was delisted from the Nasdaq SmallCap
Market for failure to hold an annual shareholders' meeting or solicit a proxy
statement for such meeting in compliance with the requirements for continued
inclusion. The Company's common stock now trades on the OTC Bulletin Board. In
addition, the common stock is subject to the SEC's penny-stock rules, which
impose additional sales practice requirements on broker-dealers which sell the
stock to persons other than established customers and institutional accredited
investors. These rules may affect the ability of broker-dealers to sell the
Company's common stock and may affect the ability of the stockholders to sell
any common stock they may own.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and short-term investment portfolios. The Company
centrally manages its debt and investment portfolios, considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolios consist of cash equivalents and short-term
marketable securities; accordingly, the carrying amounts approximate market
value. The Company's investments are not material to the financial position or
performance of the Company.
Assuming year-end 2002 variable rate debt and investment levels, a one-point
change in interest rates would impact net interest expense by less than
$100,000.
5
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
The Company or its subsidiaries are named defendants or plaintiffs in the
following litigation matters or proceedings:
1. The CIT Group/Business Credit, Inc. v. EVTC, Inc., Refrigerant Reclaim
Services (d/b/a "Full Circle"), Environmental Materials Corp., Fulcircle
Recyclers, Inc., Refrigerant Management Services of Arizona, Inc. On May 13,
2002, the 95th District Court of Texas, Dallas County, entered an Agreed
Temporary Injunction against the Company and its subsidiaries in favor of the
Company's senior lender, The CIT Group. The agreed form of order continues in
force a temporary restraining order entered by the District Court on April 29,
2002 prohibiting the Company and its subsidiaries from selling any of their
respective assets without obtaining the prior consent of the senior lender. In
addition, the order provides for the appointment of Corporate Revitalization
Partners LLC to sell assets of the Company and its subsidiaries over the next 60
days toward satisfaction of an agreed upon settlement amount, in the approximate
net sum of $4 million, for past obligations owing under the Company's credit
facility with the senior lender. If the sale of the assets fails to raise
sufficient proceeds to satisfy the settlement amount, the lender may pursue
other remedies available to it under the credit facility.
2. Appliance Recycling Centers of America, Inc. v. Full Circle, Inc. et al.
On January 29, 2002, a default judgment was entered in the Fourth Judicial
District Court of the State of Minnesota, County of Hennepin against the Full
Circle, Inc. and other defendants for an aggregate of $203,351.15. The
underlying complaint alleged past due sums owing for CGC gas sold to the
Company's subsidiary, Refrigerant Reclaim Services, Inc. d/b/a Full Circle, Inc.
A Notice of Foreign Judgment was entered in Tarrant County, Texas on February
28, 2002.
3. Refrigerant Reclaim Services, Inc. v. United States of America. On
February 8, 2002, a Stipulation Pertaining to Entry of Judgment was entered into
by the named parties and filed with the U.S. District Court, Northern District
of Texas. The stipulation provided for a settlement of claims for excise taxes,
penalties and interest, in the approximate aggregate sum of $192,000, allegedly
owing by Refrigerant Reclaim Services, Inc., a wholly-owned subsidiary of the
Company, for the tax periods ending March 31, 1995 and September 30, 1994.
Refrigerant Reclaim Services, Inc. failed to make stipulated payments becoming
due on each of February 15, 2002, March 31, 2002, April 15, 2002 and May 15,
2002.
4. Ausimont USA, Inc. v. Environmental Materials Corporation. On February
27, 2002, Ausimont USA, Inc. ("Ausimont") filed a complaint in the Superior
Court of New Jersey, Law Division Gloucester County against Environmental
Materials Corporation ("EMC"), a wholly-owned subsidiary of the Company,
alleging damages arising from the failure by EMC to pay for gas and gas-related
products shipped to EMC by Ausimont. Ausimont seeks damages in the amount of
approximately $1,360,000 in past due invoices plus interest, costs and
reasonable attorney fees and expenses. Although EMC previously sought an
extension of time by which to answer, it has not yet filed an answer.
6
5. During February, 2002, the Company received from the Texas Workforce
Commission an "Employer Response to Wage Claim" with respect to multiple wage
claims for unpaid wages asserted by former employees of the Company's Fort Worth
subsidiary, Refrigerant Reclaim Services, Inc. d/b/a Full Circle, Inc. The
claims totaled approximately $110,000 in unpaid wages, bonuses and severance
payments allegedly due and owing from the subsidiary.
6. Management is aware that a due process hearing previously had been
scheduled with respect to the Company's subsidiary, Refrigerant Reclaim
Services, Inc. d/b/a Full Circle, for the tax periods ended September 30, 1994
and December 31, 1994. However, management has no knowledge of any tax,
penalties, interest or resulting liens subsequently being assessed or asserted
for those tax periods.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
On May 10, 2002, the Company completed that transaction contemplated by the
Securities Purchase Agreement dated March 26, 2002 and amended May 10, 2002 (as
amended, the "Purchase Agreement") by and among the Company, Innovative Waste
Technologies, LLC, a Nevada limited liability company ("IWT") and each of Guy L.
Harrell and Gary A. Tipton, as owners of all of the issued and outstanding
membership interests of IWT. Under the Purchase Agreement the Company purchased
the outstanding membership interests in exchange for the issuance of 10,000,000
shares of the common stock, par value $.01 per share (the "Common Stock") of the
Company and grants of options to purchase up to an aggregate of 15,000,000
shares of Common Stock, resulting in a change in control of the Company. The
option grants are conditioned upon and subject to the subsequent approval by the
stockholders of the Company of an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of Common Stock to
100,000,000 (the "Stock Amendment"). Management intends to obtain stockholder
consent for the Stock Amendment promptly now that the transaction is completed.
In issuing these securities, the Company relied on the exemption afforded by
Section 4(2) of the 1933 Act and Regulation D, as transactions by an issuer not
involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
On November 21, 2001, the Company was notified of a technical default by
The CIT Group/Business Credit, Inc. ("CIT") as the result of an overadvance on
its Credit Facility. By letter dated February 12, 2002, CIT declared the Company
in default under the Facility and accelerated the outstanding obligations owing
thereunder. On May 13, 2002, the 95th District Court of Texas, Dallas County,
entered an Agreed Temporary Injunction against the Company and its subsidiaries
in favor of the senior lender, which agreed upon form of order (1) prohibited
the Company and its subsidiaries from selling any of their assets without
obtaining the prior consent of the senior lender and (2) appointed Corporate
Revitalization Partners LLC to sell assets of the Company and its subsidiaries
over the next 60 days toward satisfaction of an agreed upon settlement amount,
in the approximate net sum of $4 million, for past obligations owing under the
Company's credit facility with the senior lender. If the sale of the assets
fails to raise
7
sufficient proceeds to satisfy the settlement amount, The CIT Group may pursue
other remedies available to it under the credit facility.
On February 20, 2002, the Company was notified of a default for failure to
make installment payments totaling approximately $67,000 due and owing under
that July 31, 2000 Promissory Note, in the aggregate principal amount of
$1,250,000, in favor of Heritage National Bank. The note was secured by a Deed
of Trust on the Company's principal office and warehouse facility located at
2125 West Bolt, Fort Worth, Texas. The bank subsequently accelerated the
payments due under the note, declared the entire principal balance due and owing
and, by that Notice of Trustee's Sale filed in Tarrant County, Texas on March
12, 2002, foreclosed on the Company's Fort Worth premises. Following the
foreclosure sale held on April 2, 2002, the Company entered into a monthly
rental arrangement with the bank for the continued use of the warehouse
facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
None
(b) Form 8-K Filings.
On March 22, 2002, the Company filed a Current Report on Form 8-K
relating to Item 4, Change in Certifying Accountants, in connection with the
resignation of BDO Seidman LLP and appointment of Marcum & Kleigman LLP as the
Company's certified public accountants.
On May 20, 2002, the Company filed a Current Report on Form 8-K
relating to Item 4, Change in Certifying Accountants, in connection with the
cessation of accounting services by Marcum & Kleigman LLP.
8
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EVTC, INC.
May 20, 2002 By: /s/ Guy L. Harrell
-------------------------------------
Name: Guy L. Harrell
Title: Chief Executive Officer
(duly authorized officer)