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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 June 30,2001
[ ] 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
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(State or other Jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
3125 Bolt Street
Fort Worth, Texas 76110
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(Address of Principal Executive Offices) (Zip Code)
(817)759-8900
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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. XX Yes No
The number of shares outstanding 9,106,475 August 7, 2001.
PAGE 1 OF 17 PAGES.
THERE ARE NO EXHIBITS.
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EVTC, INC.
TABLE OF CONTENTS
FORM 10-Q ITEM PAGE
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and
September 30, 2000 (audited) 3
Unaudited Interim Consolidated Statement of Operations for the
three and nine months ended June 30, 2001 and 2000 4
Unaudited Interim Consolidated Statements of Cash Flows for the
three and nine months ended June 30, 2001 and 2000 5
Notes to the Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Securities 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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EVTC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
ASSETS (UNAUDITED) (AUDITED)
2001 2000
------------ ------------
Current Assets:
Cash and cash equivalents $ 127,764 $ 262,644
Marketable securities 33,992 33,992
Accounts receivable, net 8,396,743 7,085,873
Deferred income taxes 693,292 300,000
Inventories 8,387,148 7,813,674
Other current assets 796,514 588,608
Assets of discontinued operations 58,225 394,523
------------ ------------
Total current assets 18,493,678 16,479,314
Property and equipment, net 5,438,181 5,013,941
Goodwill, net 2,364,348 2,597,573
Investments and other assets 370,786 810,879
------------ ------------
Total assets $ 26,666,993 $ 24,901,707
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving Credit Line $ 8,681,294 $ 8,387,083
Current portion of long term debt 176,497 292,894
Accounts payable 5,181,815 2,603,059
Liabilities of discontinued
operations 3,295 353,331
Accrued liabilities 2,415,638 2,290,055
------------ ------------
Total current liabilities 16,458,539 13,926,422
Long term debt 1,563,280 1,563,596
------------ ------------
Total Liabilities 18,021,819 15,490,018
Stockholders' Equity
Common stock 76,205 74,443
Paid-in-capital 15,434,644 15,435,375
Accumulated other comprehensive
income 33,992 33,992
Accumulated deficit (6,899,667) (6,132,121)
------------ ------------
Total stockholders' equity 8,645,174 9,411,689
------------ ------------
Total liabilities and
stockholders' equity $ 26,666,993 $ 24,901,707
============ ============
See Accompanying Notes to Consolidated Financial Statements (unaudited)
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EVTC,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30 Nine Months Ended June 30
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 11,254,798 $ 12,265,569 $ 26,371,033 $ 25,949,754
Cost of sales 8,224,813 8,744,267 19,202,526 19,492,370
------------ ------------ ------------ ------------
Gross profit 3,029,985 3,521,302 7,168,507 6,457,384
Selling, general and
administrative expenses 2,779,229 2,454,290 7,843,905 5,496,568
------------ ------------ ------------ ------------
Operating income (loss) 250,756 1,067,012 (675,398) 960,816
Interest expense 232,875 222,548 738,575 616,924
Other income, net (4,757) (33,694) (7,171) (29,259)
------------ ------------ ------------ ------------
INCOME(LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 22,638 878,158 (1,406,802) 373,151
Income tax expense (benefit) 7,697 317,395 (476,920) 145,692
------------ ------------ ------------ ------------
Income (loss) from continuing
operations 14,941 560,763 (929,882) 227,459
Discontinued equipment products
operations:
Gain from discontinued
operations,net of income taxes 162,336 -0- 162,336 -0-
------------ ------------ ------------ ------------
Net income (loss) $ 177,277 $ 560,763 $ (767,546) $ 227,459
============ ============ ============ ============
Income (loss) per share Basic:
Continuing operations $ 0.00 $ 0.08 (0.12) 0.04
Discontinued operations 0.02 0.00 0.02 0.00
------------ ------------ ------------ ------------
0.02 0.08 (0.10) 0.04
Diluted:
Continuing operations $ 0.00 $ 0.07 (0.12) 0.03
Discontinued operations 0.02 0.00 0.02 0.00
------------ ------------ ------------ ------------
0.02 0.07 (0.10) 0.03
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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EVTC,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JUNE 30,
--------------------------
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net (Loss) Income $ (767,546) $ 227,459
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 936,396 531,203
Provision for bad debts 105,468 116,664
Gain on sale of assets (12,874) -0-
Changes in assets & liabilities:
Accounts receivable (1,416,338) (1,887,404)
Deferred Income Taxes (393,292) 126,870
Income taxes receivable -0- 58,108
Inventory (573,474) (3,002,947)
Other assets (200,818) (576,163)
Accounts payable and accrued
liabilities 2,704,339 1,969,658
----------- -----------
Net cash provided by (used in)
continuing operations 381,861 (2,436,552)
Net cash provided by (used in)
discontinued operations (13,738) 41,465
----------- -----------
Net cash provided by (used in) operating
activities 368,123 (2,395,087)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of equipment 20,660 -0-
Capital expenditures (1,142,285) (556,614)
Acquisition of RMS -0- (1,419,026)
Advances to Affiliate-Preacquisition -0- (1,021,616)
Change in other assets 440,093 -0-
Due from Officer -0- 371,016
----------- -----------
Net cash used in investing activities (681,532) (2,626,240)
----------- -----------
Cash Flows From Financing Activities:
Net borrowing(repayments) on revolving
credit facility 294,211 (16,003)
Proceeds from other debt -0- 750,000
Payments of other debt (116,713) (550,681)
Collection of subscription receivable -0- 594,600
Proceeds from sale of common stock
and options exercised 1,031 2,259,414
----------- -----------
Net cash provided by financing
activities 178,529 3,037,330
----------- -----------
Net decrease in cash and
cash equivalents (134,880) (1,983,997)
Cash and cash equivalents - Beginning
of period 262,644 2,159,434
----------- -----------
Cash and cash equivalents - End of
period $ 127,764 $ 175,437
=========== ===========
See Accompanying Notes to Consolidated Financial Statements (unaudited)
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EVTC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. 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 discontinuation of such operations in July 1998
and the Company marketed business to consumer services via the Internet until
its discontinuation in December 2000.
The consolidated financial statements include the financial statements of
EVTC and all of its wholly owned subsidiaries. All significant intercompany
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, 2000, included in the Company's Annual Report on Form 10-K
as filed with the Securities and Exchange Commission ("SEC") on December 29,
2000. 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 nine months ended
June 30, 2001 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2001.
NOTE 2. 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 anti dilutive. The average number of common shares
outstanding for the nine-month period ending June 30, 2001, and 2000 was
7,504,436 and 6,420,732, respectively. The average number of common shares
outstanding for the three-month period ending June 30, 2001 and 2000 was
7,582,744 and 7,391,863, respectively. Incremental shares of 496,490 and 448,950
were used in the calculation of diluted earnings per share for the three months
and nine months ended June 30, 2000. The effect of dilutive options for the nine
months is anti dilutive and for the three months has no effect.
NOTE 3. INCOME TAXES
In accordance with SFAS 109, the Company uses the asset and liability method to
account for income taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributed to differences between the carrying
amounts of existing assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using 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.
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EVTC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At September 30, 2000, the Company recorded a deferred tax asset of
approximately $3.0 million. This asset consisted mainly of reserves related to
bad debts and inventory reported differently for financial reporting purposes,
as well as net operating loss carryforwards ("NOL's"). Operating losses
sustained in the first nine months of fiscal year 2001 resulted in an increase
in the company's deferred tax asset to $3.3 million as of June 30, 2001. Due to
the valuation placed on such assets, they are reflected on our balance sheet at
$0.7 million and $0.3 million on the Company's June 30, 2001 and September 30,
2000 consolidated balance sheets, respectively. The Company has available at
June 30, 2001, NOL's, for federal income tax purposes, of $ 9.0 million which
are available to offset future federal taxable income, if any, through 2020.
As a result of the NOL's as discussed above, the Company did not pay cash for
income taxes during either the first nine months of fiscal 2001 or the
corresponding period in the prior year.
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost or market and are comprised of the
following:
June 30, 2001 Sept. 30, 2000
--------------- ----------------
Raw Materials $4,616,234 $3,264,126
Finished Goods 3,770,914 4,549,548
---------- ----------
$8,387,148 $7,813,674
========== ==========
NOTE 5. DISCONTINUED OPERATIONS
Recycling and Recovery Equipment Segment
During July of 1998, the Company's board of directors adopted a plan to
discontinue its Recycling and Recovery Equipment business segment. The Company
initiated a liquidation program to sell all assets of the segment which is
scheduled to reach its conclusion during the Company's 4th quarter of fiscal
year 2001.
e-solutions Marketing, Inc. Segment
On December 14, 2000, the company's Board of Directors adopted a plan to
discontinue the operations of e solutions Marketing, Inc., which was acquired in
March 2000. The loss on disposal of this segment was recorded in the September
30, 2000 year-end financial statements. This segment directly marketed business
to consumer services via the Internet. The Company initiated a plan to liquidate
the tangible assets of this segment, which should reach its conclusion during
the fourth quarter of fiscal year 2001. The Company filed a Certificate of
Dissolution of e-solutions Marketing, Inc. in July 2001.
For financial statement purposes, the Company accounted for the above segments
as discontinued operations in the fiscal year 2001 and 2000 statements of
operations. Furthermore, the assets and liabilities of the discontinued
operations discussed above have been segregated as of the June 30, 2001 and
September 30, 2000 balance sheet.
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EVTC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects the supplemental cash flow information for the
nine-month period ending:
June 30, 2001 June 30, 2000
------------- -------------
Supplemental disclosures of cash
Flow information:
Cash paid during the period for:
Interest $ 738,575 $ 616,924
============= =============
Income taxes -- --
============= =============
NOTE 7. SEGMENT INFORMATION
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
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. 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 nine months ended June 30, 2001, and 2000, respectively.
The Company's reportable segment information for three months ended June 30,
2001 and 2000 is reported as follows:
Refrigerant
Product Ballast Corporate Consolidated
------------ ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2001:
Revenue from external customers $ 10,506,518 $ 748,280 $ -- $ 11,254,798
Segment Income/(Loss) before
Income Taxes 371,185 (66,386) (282,161) 22,638
THREE MONTHS ENDED JUNE 30, 2000:
Revenue from external customers 11,405,910 859,659 -- 12,265,569
Segment Income/(loss) before
Income taxes 1,395,089 20,434 (537,365) 878,158
The Company's reportable segment information for nine months ended June 30, 2001
and 2000 is reported as follows:
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Refrigerant
Product Ballast Corporate Consolidated
------------ ------------ ------------ ------------
NINE MONTHS ENDED JUNE 30, 2001:
Revenue from external customers $ 23,898,953 $ 2,472,080 $ -- $ 26,371,033
Segment Income/(Loss) before
Income Taxes (556,426) (71,217) (779,159) (1,406,802)
NINE MONTHS ENDED JUNE 30, 2000:
Revenue from external customers 23,286,033 2,663,721 -- 25,949,754
Segment Income/(loss) before
Income taxes 1,479,590 119,002 (1,225,441) 373,151
NOTE 8. COMMITMENTS & CONTINGENCIES
By virtue of the acquisition of the Company's remaining fifty percent (50%)
interest in Liberty Technologies, Inc. ("Liberty") from Concorde Science and
Technology Corporation ("Concorde"), the Company was obligated, per a provision
in the contract, to issue additional shares to Concorde in the event that the
Company's common stock traded below $5.00 per share on the first year
anniversary of the closing of such transaction. As a result of this provision
the Company issued 174,692 additional shares to Concorde effective March 26,
2001.
In conjunction with the acquisition of Refrigerant Management Services, Inc.
("RMS"), the Company is obligated to offer additional consideration to the
former shareholders of RMS based on achieving certain financial performance
objectives. Although the calculation and settlement of such consideration has
not been completed, management does not believe that such contingent
consideration will have a material impact on the Company's financial statements.
The Company is in preliminary discussions with a company that is a leading
manufacturer and marketer of high quality, innovative cleaning products for
Commercial, Governmental, and Institutional work environments. The potential
acquisition company has maintained a long-term customer relationship with the
Company dating back to the late 1970's. An offer to the acquisition candidate is
contingent upon the Company's Board of Directors approval and would be financed
by the issuance of additional shares of stock.
NOTE 9. SUBSEQUENT EVENT
On July 20, 2001 the Company issued 1,450,000 shares of unregistered stock to an
investment company. The restricted stock shares were issued by the Company based
on a price of $.71 per share with a discount of 25% (net price of $.5325 per
share). The terms of the Stock Purchase Agreement includes the investor's
issuance of a promissory note due September 25, 2001 with an interest rate of
6.75%. The Company is currently holding the securities until the promissory note
is paid. The securities will not be registered with the securities and exchange
commission or the securities commission of any state in reliance upon an
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), and accordingly, may not be offered or sold except pursuant
to an available exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and in accordance with
applicable state securities laws as evidenced by a legal opinion of counsel to
the transferor to such effect, the substance of which shall be reasonably
acceptable to the Company. The proceeds from the issuance of the unregistered
stock will be used to execute acquisitions and other working capital
requirements.
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NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests 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 initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141. The
Company will adopt SFAS 141 effective October 1, 2001.
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 an 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 in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. 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 will adopt SFAS
142 effective October 1, 2002.
The Company's previous business combinations were accounted for using
the purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$2,364,348 and other intangible assets are $0. Amortization expense during the
nine-month period ended June 30, 2001 was $233,225. 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.
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EVTC, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
NINE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THE NINE MONTHS ENDED JUNE 30,
2000
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 for their ultimate disposal.
Revenue
Revenue was $26.3 million for the first nine months of fiscal year 2001 an
increase of $0.4 million or 1.6% compared to the same period during the prior
fiscal year. Of the $0.4 million increase in revenue for the first nine months
of fiscal year, $2.4 million occurred as a direct result of the inclusion of the
operations of Refrigerant Management Services, Inc. ("RMS") which the company
acquired during May 2000. The increase resulting from the inclusion of RMS was
offset primarily by a decrease of $1.8 million resulting from decreased
preseason selling combined with depressed market prices of R-134a and R-22, two
of the companies core refrigerants. The remaining decrease of $0.2 million was a
result of a decline in revenue generated from the Company's ballast division.
Gross Margin
Gross Margins from the sales of refrigerant and refrigerant related services
increased by $0.8 million during the first nine months of fiscal year 2001 to
$6.3 million. Of the $0.8 million increase in gross margin, approximately $1.4
million resulted from incremental gross margin generated from the acquisition of
RMS. During the first nine months of fiscal year 2001, a substantial portion of
the revenue generated from the existing RMS operations was service revenue which
typically generates higher gross margins than traditional sales of refrigerant.
Sales of refrigerant through the Company's traditional channels resulted in a
decrease in the Company's gross margin of $0.6 million. Gross margin resulting
from the processing of lamp ballasts during the first nine months of fiscal year
2001 decreased by approximately $0.1 million compared to the corresponding
period in the prior year.
The gross margin as a percent of sales was 27.2% for the nine months ended June
30, 2001 compared to 24.9% from the corresponding period in the prior year. The
increase in gross margin as a percentage of sales occurred, primarily, as a
result of onsite services which were offered through RMS during fiscal year 2001
which were not offered by the Company in the corresponding period in the prior
year. The increase in gross margin as a percentage of sales was offset,
slightly, by a decrease in gross margin from the Company's traditional channels
of refrigerant distribution and because the Company's ballast division continues
to shift its product mix away from PCB ballasts toward the
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processing of fluorescent lamps and non PCB lamp ballasts both of which, despite
having a longer life cycle than PCB ballasts, generate lower margins.
Selling, General & Administrative
Selling, general and administrative ("SG&A") expenses for first nine months of
fiscal year 2001 increased 43% to $7.9 million from $5.5 million of SG&A
expenses incurred during the first nine months of fiscal 2000. Of the $2.4
million increase in the first nine months SG&A expenses, $2.1 million occurred
as a direct result of incremental increased expenses directly related to the
inclusion of Liberty and RMS in our operations. The increase in SG&A expenses
related to RMS operations occurred as a result of the Company's ongoing
investment in infrastructure and personnel as the Company continues to expand
its onsite service model into additional markets.
The Company incurred an additional $0.3 million in SG&A expenses when it
consolidated its operations upon moving to its new facility in Fort Worth,
Texas.
Interest Expense
Interest expense incurred during the first nine months of fiscal year 2001 was
approximately $0.7 million, an increase of approximately $0.1 million or 20%
from the nine months of fiscal year 2000. 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.
Income Tax
Our effective income tax rate for the first nine months of fiscal year 2001 was
34%. Based on estimates of recoverability of deferred tax assets, the Company
recorded a tax benefit of $0.4 million for the operating loss for the nine-month
period ended June 30, 2001. The Company recorded a tax provision of $0.1 million
for the operating income for the nine months ended June 30, 2000. (See Note 3 -
Income Taxes in Notes to the Consolidated Financial Statements)
THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
Revenue
Revenue was $11.3 million for the third quarter of fiscal year 2001 a decrease
of $1.0 million from the third quarter of fiscal year 2000. Despite generating
an incremental increase of $0.8 million as a result of the inclusion of RMS, the
Company experienced weaker pricing for both R22 and R134a, two of the Company's
core refrigerants when compared to the corresponding period in the prior year.
Furthermore, the Company sold a lower volume of R134a into both the stationary
market and automotive aftermarket than it sold during the third quarter of the
prior year. In addition, the Company's ballast division experienced a decrease
of $0.1 million.
Gross Margin
Gross Margin for the third quarter of fiscal year 2001 was $3.0 million, a
decrease of $0.5 million or approximately 14.0%. Gross Margins from the sales of
refrigerant and refrigerant related services decreased by $0.4 million during
the third quarter of fiscal year 2001. Of the $0.4 million decrease in gross
margin, approximately $0.7 million resulted from the sale of refrigerants
through the Company's
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traditional distribution channels, offset by the increased gross margin of $0.3
million generated from RMS refrigerant and service revenues. During the third
quarter and first nine months of fiscal year 2001, a substantial portion of the
revenue generated from the existing RMS operations was service revenue, which
typically generates higher gross margins than traditional sales of refrigerant.
Gross margin resulting from the processing of lamp ballasts during the third
quarter of fiscal year 2001 decreased by approximately $0.1 million compared to
the corresponding period in the prior year.
Total gross margin as a percentage of sales decreased to 26.9% during the third
quarter of fiscal year 2001, compared to 28.7% in gross margin realized during
the corresponding period in the prior year. The decrease in gross margin as a
percentage of sales occurred, primarily, as a result of a decrease in gross
margin from the Company's traditional channels of refrigerant distribution and
because 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 a longer life cycle than PCB ballasts,
generate lower margins.
Selling, General & Administrative
Selling, general and administrative ("SG&A") expenses for the third quarter of
fiscal year 2001 increased 13% to $2.8 million from $2.5 million of SG&A
expenses incurred during the third quarter of fiscal 2000. Of the $0.3 million
increase in the third quarter SG&A expenses, $0.4 million occurred as a direct
result of incremental increased expenses directly related to the inclusion of
Liberty and RMS in our operations. The increase in SG&A expenses occurred
primarily as a result of the Company's ongoing investment in infrastructure and
personnel as the Company continues to expand its onsite service model into
additional markets, offset by SG&A expense reductions associated with the
traditional distribution channels.
Interest Expense
Interest expense incurred during the third quarter of fiscal year 2001 was
approximately $233,000, an increase of approximately $10,000 or 4.6% from the
third quarter of fiscal year 2000. The increase in interest expense occurred
primarily as a result of a higher average balance on the Company's revolving
credit agreement. The average balance of the Company's revolving credit
agreement was higher during the third quarter of fiscal year 2001 than during
the corresponding period in the prior year, primarily, because the Company
received an infusion of approximately $2.0 million in capital during fiscal year
2000. During the third quarter of 2001, the Company has not received any cash as
a result of an equity issuance. Furthermore, the Company has incurred additional
term debt and capital leases to fund capital investments during the third and
forth quarters of fiscal year 2000 and the first and second quarters of fiscal
year 2001 which added incremental interest expense, which was not present during
the corresponding quarter during the prior year.
Income Tax
Our effective income tax rate for the third quarter of fiscal year 2001 was 34%.
The Company recorded a tax provision of $7,697 for the operating income and
$83,628 for the gain on discontinued operations for the three-month period ended
June 30, 2001. The Company recorded a tax provision of $317,395 on earnings
generated during the quarter ending June 30, 2000. (See Note 3 - Income Taxes in
Notes to the Consolidated Financial Statements)
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Liquidity and Capital Resources
The Company is able to fund its normal working capital requirements mainly
through operations and utilization of its existing credit facilities.
EVTC's cash and cash equivalents decreased by approximately $135,000 to $0.1
million at June 30, 2001. The decrease occurred primarily as a result of cash
used in investing activities of $0.7 million, offset by cash provided by
operating activities and financing activities of $0.4 million and $0.2 million,
respectively.
Net cash provided by operating activities was comprised of $0.1 million provided
by working capital and other activities, and the net loss adjusted for non-cash
items of $0.3 million. Net cash provided by working capital and other activities
resulted primarily from an increase in accounts payable and accrued liabilities
offset by an increase in receivables and inventories. Accounts receivable were
$8.4 million and $7.1 million at June 30, 2001 and September 30, 2000,
respectively. The increase in the Company's accounts receivable balance was the
result of a higher level of sales at the end of the third quarter of 2001,
relative to the second quarter of 2001 which is a direct result of seasonal
demand of refrigerant and refrigerant services. Inventory levels increased to
$8.4 million at June 30, 2001, compared to $7.8 million at September 30, 2000.
The increase in inventory occurred because of an increase in seasonal demand for
our refrigerant products and because of inventory purchased.
Net cash used in investing activities during the nine months ended June 30, 2001
was approximately $0.7 million. Of the $0.7 million, approximately $0.2 million
were capital improvements to the Company's new facility in Fort Worth, Texas and
$0.9 million related to new onsite service vehicles and other capital projects,
offset by cash provided by the change in other assets of $0.4 million which
included a $250,000 payment on a long term note receivable.
Net cash provided by financing activities during the nine months ended June 30,
2001 was approximately $0.2 million, representing borrowings against the
Company's revolving credit agreement, net of repayments on various notes
payable.
Effective May 14, 2001, the Company's Board of Directors appointed Bob Stephens
Chief Executive Officer, who succeeded George Cannan, Sr., who will remain
Chairman of the Board of Directors and President of Environmental Materials
Corporation, a wholly-owned subsidiary of the Company. As a result of this
change in Senior Management, the Company is in technical violation of one of the
loan covenants on its revolving loan agreement with CIT. The Company notified
CIT of the aforementioned change of management and expects a formal resolution
to this technical issue within 60 days.
The Company is in preliminary discussions with a company that is a leading
manufacturer and marketer of high quality, innovative cleaning products for
Commercial, Governmental, and Institutional work environments. The potential
acquisition company has maintained a long-term customer relationship with the
Company dating back to the late 1970's. A offer to the acquisition candidate is
contingent upon the Company's Board of Directors approval and would be financed
by the issuance of additional shares of stock.
Due to the average trading price over the past 30 consecutive trading days the
Company was notified on June 18th by NASDAQ that the Company will be provided 90
calendar days to comply with the Small Cap Market rule requiring 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, which the Company can appeal to
the Nasdaq Listing Qualifications Panel.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks (i.e., the risk of loss arising from 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 short-term investment portfolios considering
investment opportunities and risks, tax consequences and overall financing
strategies. The Company's investment portfolios consist of cash equivalents and
short-term marketable securities; accordingly, the carrying amounts approximate
market value. The Company's investments are not material to the financial
position or performance of the Company.
Assuming the current variable rate debt and investment levels, a one-point
change in interest rates would impact interest expense by approximately $89,000.
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EVTC, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Change in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
On June 1, 2001 the Company filed Form 8-K reporting the
resignation of its President, David A. Keener, and its Chief
Financial Officer, Timothy Hinkhouse. Chief Executive Officer
Bobby G. Stephens assumed Mr. Keener's responsibilities and it
was reported that Richard Dykstra replaced Mr. Keener as
President of Refrigerant Reclaim Services, Inc. dba: Full
Circle, Inc., a wholly-owned subsidiary of the Company.
There are no exhibits.
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EVTC, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVTC, Inc.
Date: August 14, 2001 By: /s/ George Cannan
Chairman of the Board
/s/ Bobby G. Stephens
Chief Executive Officer and President
/s/ Darrell E. Brown
Corporate Controller
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