-----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, NkaM08n1rKHnyv5uk3cWYXX5Rd3yyt9A340z5QnqcDGDsl0aeW1CO1TfiYfwZ8qL Jq6fmP0zJOQxicLLJqU/Xg== 0001140417-03-000006.txt : 20030814 0001140417-03-000006.hdr.sgml : 20030814 20030814134010 ACCESSION NUMBER: 0001140417-03-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIROKARE TECH INC CENTRAL INDEX KEY: 0001065677 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL TRUCKS TRACTORS TRAILERS & STACKERS [3537] IRS NUMBER: 880412549 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26095 FILM NUMBER: 03845702 BUSINESS ADDRESS: STREET 1: 5850 T. G. LEE BLVD STREET 2: SUITE 535 CITY: ORLANDO STATE: FL ZIP: 32822 BUSINESS PHONE: 4078568882 MAIL ADDRESS: STREET 1: 5850 T. G. LEE BLVD STREET 2: SUITE 535 CITY: ORLANDO STATE: FL ZIP: 32822 10QSB 1 envk10q603xxx.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003 -------------- [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 000-26095 ENVIROKARE TECH, INC. --------------------------------------------------------------- Exact name of small business issuer as specified in its charter) Nevada 88-0412549 - ------------------------------- ------------------ State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5850 T.G. Lee Blvd., Suite 535, Orlando, Florida 32822 ------------------------------------------------------ (Address of principal executive offices) (407) 856-8882 -------------------------- (Issuer's telephone number) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] NOT APPLICABLE APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The total number of shares of Common Stock, par value $.001 per share, outstanding as of August 14, 2003, was 31,526,144. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] TABLE OF CONTENTS Part I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets.................................4 Consolidated Statements of Operations.......................5 Consolidated Statements of Cash Flows.......................6 Condensed Notes to the Consolidated Financial Statements....7 Item 2. Management's Discussion and Analysis or Plan of Operations..12 Item 3. Control and Procedures......................................15 Part II - OTHER INFORMATION Item 1. Legal Proceedings.........................................16 Item 2. Changes in Securities.....................................16 Item 3. Defaults Upon Senior Securities...........................16 Item 4. Submission of Matters to a Vote of Security Holders.......16 Item 5 Other Information.........................................16 Item 6. Exhibits and Reports on Form 8-K..........................17 SIGNATURES....................................................................18 CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included in or incorporated by reference into this Form 10QSB which address activities, events or developments which the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements concerning: expectations, anticipations, beliefs, estimations, projections, and other similar matters that are not historical facts, including such matters as future capital and development expenditures and expansion and growth of business operations. These statements are based on certain assumptions and analysis made by the management of Envirokare Tech Inc., ("ENVIROKARE") in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. Envirokare cautions the reader that these forward-looking statements are subject to risks and uncertainties, including those associated with: the financial environment, general economic, market and business conditions, the regulatory environment, business opportunities that may be presented to and pursued by Envirokare, changes in laws or regulations, availability to obtain additional financing on favorable conditions, trend projections, and other factors, many of which are beyond the Company's control that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks and uncertainties identified in the Description of the Business and Management's Discussion and Analysis sections of this document and risk factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. Significant factors that could prevent Envirokare from achieving its stated goals include: the inability of Envirokare to obtain financing for capital expenditures and acquisitions, declines or failure to develop in the market for the Company's products, development of superior products by competition, and adverse changes in the regulatory environment affecting the Company. The cautionary statements contained or referred to in this document should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by Envirokare or persons acting on its or their behalf. Envirokare undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ENVIROKARE TECH INC. Financial Statements June 30, 2003 3
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS June 30, 2003 December 31, (unaudited) 2002 ----------------- ----------------- ASSETS CURRENT ASSETS Cash $ 23,252 $ 9,506 Deposits and retainers 19,341 53,942 Prepaid expenses 6,537 - Inventory 17,500 - ----------------- ----------------- TOTAL CURRENT ASSETS 66,630 63,448 ----------------- ----------------- PROPERTY AND EQUIPMENT Furniture and fixtures 7,502 8,144 Office equipment 9,749 9,009 Molds 111,336 59,000 Less accumulated depreciation (5,285) (6,884) ----------------- ----------------- TOTAL PROPERTY AND EQUIPMENT 123,302 69,269 ----------------- ----------------- OTHER ASSETS Deposits and retainers 2,476 8,412 License agreement 525,000 525,000 Patent acquisition costs and technology rights 1,958,939 1,958,939 ----------------- ----------------- TOTAL OTHER ASSETS 2,486,415 2,492,351 ----------------- ----------------- TOTAL ASSETS $ 2,676,347 $ 2,625,068 ================= ================= LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 272,171 $ 114,145 Customer deposit 61,215 61,215 Notes payable 61,965 61,965 Accrued interest 31,533 25,337 Notes payable to stockholders 1,115,000 1,025,000 Accrued interest to stockholders 260,150 183,802 ----------------- ----------------- TOTAL CURRENT LIABILITIES 1,802,034 1,471,464 ----------------- ----------------- COMMITMENTS AND CONTINGENCIES - - ----------------- ----------------- Convertible preferred stock, 10,000,000 shares authorized, $.001 par value; 0 shares issued and outstanding - - Common stock, 200,000,000 shares authorized, $.001 par value; 31,526,144 and 30,056,144 shares issued and outstanding, respectively 31,526 30,056 Additional paid-in capital 4,599,551 4,273,090 Stock options and warrants 546,885 646,815 Accumulated deficit during development stage (4,303,649) (3,796,357) ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 874,313 1,153,604 ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,676,347 $ 2,625,068 ================= ================= The accompanying condensed notes are an integral part of these consolidated financial statements. 4
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Period from June 15,1998 Three Months Three Months Six Months Six Months (Inception) to Ended June 30, Ended June 30, Ended June 30, Ended June 30, June 30, 2003 2002 2003 2002 2003 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) -------------- -------------- -------------- -------------- -------------- REVENUES $ - $ - $ 37,150 $ - $ 37,500 COST OF GOODS SOLD - - (17,500) - (17,500) -------------- -------------- -------------- -------------- -------------- GROSS PROFIT - - 19,650 - 19,650 -------------- -------------- -------------- -------------- -------------- EXPENSES Consulting fees - related parties 27,834 18,000 73,334 36,000 867,789 Other consulting fees 10,891 40,000 49,655 211,173 1,095,093 Financing costs - - - - 219,642 Rent 24,060 5,514 40,683 12,068 123,542 General and administrative 38,002 30,875 69,936 53,985 575,356 Depreciation 632 468 1,364 905 8,248 Professional fees 100,732 20,831 137,803 43,049 694,684 Research and development 14,373 18,250 59,373 18,250 286,316 Wages, salaries, and payroll taxes 11,315 - 11,315 - 143,194 -------------- -------------- -------------- -------------- -------------- TOTAL EXPENSES 227,839 133,938 443,463 375,430 4,013,864 -------------- -------------- -------------- -------------- -------------- LOSS FROM OPERATIONS (227,839) (133,938) (423,813) (375,430) (3,994,214) OTHER INCOME (EXPENSE) Gain on sale of assets 577 - 577 - 577 Interest expense (43,479) (40,120) (84,056) (80,886) (310,012) -------------- -------------- -------------- -------------- -------------- TOTAL OTHER INCOME (EXPENSE) (42,902) (40,120) (83,479) (80,886) (309,435) -------------- -------------- -------------- -------------- -------------- LOSS BEFORE PROVISION FOR INCOME TAXES (270,741) (174,058) (507,292) (456,316) (4,303,649) PROVISION FOR INCOME TAXES - - - - - -------------- -------------- -------------- -------------- -------------- NET LOSS $ (270,741) $ (174,058) $ (507,292) (456,316) (4,303,649) ============== ============== ============== ============== ============== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.02) $ (0.02) ============== ============== ============== ============== WEIGHTED AVERAGE NUMBER STOCK SHARES OUTSTANDING 31,387,811 26,583,617 31,029,977 25,666,089 ============== ============== ============== ============== The accompanying condensed notes are an integral part of these consolidated financial statements. 5
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Period from June 15,1998 Six Months Six Months (Inception) to Ended June 30, Ended June 30, June 30, 2003 2002 2003 (unaudited) (unaudited) (unaudited) ------------------ ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (507,292) $ (456,316) $ (4,303,649) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 1,364 905 8,248 Intangible asset expensed - - 9,520 Impairment of molds - - 27,000 Stock options issued for consulting fees - 12,173 889,173 Stock issued for consulting fees - 112,000 112,000 Warrants issued for financing expense - - 219,642 Changes in operating assets and liabilities: Customer deposit - (34,781) 61,215 Prepaid expenses (6,537) - (6,537) Inventory (17,500) - (17,500) Accounts payable 158,026 (52,534) 272,171 Accrued interest payable 82,544 79,316 291,683 ------------------ ------------------ ------------------ Net cash used by operating activities (289,395) (339,237) (2,437,034) ------------------ ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Deposits and retainers 40,537 - (21,817) Purchase of molds (52,336) (16,000) (138,336) Payments of license agreement - - (525,000) Patent costs - 9,520 (10,128) Purchase of equipment (4,335) - (19,642) Sale of equipment 1,275 - 1,275 ------------------ ------------------ ------------------ Net cash used by investing activities (14,859) (6,480) (713,648) ------------------ ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of preferred stock - - 250,000 Proceeds from sale of common stock 228,000 300,000 1,787,799 Repurchase of common stock - - (7,500) Proceeds from issuance of notes payable to related parties 90,000 - 1,143,635 ------------------ ------------------ ------------------ Net cash provided by financing activities 318,000 300,000 3,173,934 ------------------ ------------------ ------------------ Increase (decrease) in cash 13,746 (45,717) 23,252 Cash, beginning of period 9,506 118,927 - ------------------ ------------------ ------------------ Cash, end of period $ 23,252 $ 73,210 $ 23,252 ================== ================== ================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 1,782 $ 1,571 $ 16,771 ================== ================== ================== Income taxes paid $ - $ - $ - ================== ================== ================== NON-CASH TRANSACTIONS: Common stock issued for acquisition of subsidiary $ - $ - $ 1,925,000 Note issued for purchase of property, equipment, and operating expenses $ - $ - $ 3,635 Note issued for pending patent to related party $ - $ - $ 33,330 Note issued for deposit for stock $ - $ - $ 100,000 Warrants issued for financing activities $ - $ - $ 219,642 Stock options issued for consulting fees $ - $ 12,173 $ 889,173 Common stock issued for consulting fees $ - $ 112,000 $ 112,000 Stockholder's contribution for equipment $ - $ - $ 1,847 The accompanying condensed notes are an integral part of these consolidated financial statements. 6
ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements June 30, 2003 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Envirokare Tech, Inc. (hereinafter, "the Company" or "Envirokare") was incorporated in June 1998 under the laws of the State of Nevada. In December 1998, the Company acquired assets of a business engaged in developing a rubber mold technology and patent rights potentially applicable to future development of a pallet made of recycled materials. The Company believes the early-stage rubber mold technology to be of marginal commercial value. During 2001, the Company acquired, via license agreement, extensive rights to a proprietary thermoplastic processing technology, the Thermoplastic Flowforming process (variously referred to herein as "TPF Process", the "Process" or "TPF technology"). The licensing agreement provides the Company with the ability to utilize the TPF technology to design, develop, manufacture, market, license and sublicense a wide range of large structural parts, including the Company's proprietary pallet. The pallet is now composed of long-fiber reinforced thermoplastic composite and will be manufactured using the acquired TPF technology. The Company's current operating strategy is based on developing products to be manufactured by the TPF Process, as well as marketing the TPF technology to potential sublicensees of the Company. The Company maintains offices in Orlando, Florida. The Company has elected a fiscal year-end of December 31. The Company includes the assets and investment in Electroship Acquisition Corporation and Envirokare Composite Corp., wholly-owned non-operating subsidiaries, in these financial statements. The Company is in the development stage, as of June 30, 2003 and has not realized any significant revenues from planned operations. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation - -------------------- The accompanying interim condensed financial statements are prepared in accordance with rules set forth in Regulation SB of the Securities and Exchange Commission. As said, these statements do not include all disclosures required under generally accepted principles and should be read in conjunction with the audited financial statements for the year ended December 31, 2002. In the opinion of management, all adjustments consisting of normal reoccurring accruals have been made to the financial statements. Going Concern - ------------- The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred an accumulated deficit of $4,303,649, which includes a net loss of $507,292 for the six months ended June 30, 2003, and has a working capital deficit and limited revenues. The Company, being a development stage enterprise, is currently marketing the TPF technology which will, if successful, mitigate these factors which raise substantial doubt about the Company's ability to continue as a going concern. Management plans to fund operations from sales of its debt and equity in the near-term and from product sales, product development agreements and proceeds realized from licensing the TPF technology on an ongoing basis. The Company has historically raised equity capital through the sale of its common and preferred stock. The Company has also raised debt capital through private placement offerings. Management has proceeded as planned in the ongoing development of numerous products, including a proprietary pallet composed of long-fiber reinforced thermoplastic composite. Management is also marketing the TPF technology to various potential clients with the intent of establishing product development agreements, with the agreements to include provisions for manufacturing and marketing successfully developed products. The Company received a deposit for product development during the second half of 2002 and management anticipates that the Company will realize licensing fee revenues in the near future. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in its present form. 7 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements June 30, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Accounting Pronouncements - ------------------------- In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has not yet determined the impact of the adoption of this statement. In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149"). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (hereinafter "FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. The provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not have any entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," ("SFAS No. 148"). SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, it also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported results of an entity's accounting policy decisions with respect to stock-based employee compensation. The provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002. Prior to the issuance of SFAS No. 148, the Company adopted the fair value based method of accounting for stock-based employee compensation. Thus, the Company's financial reporting will not be significantly effected by SFAS 148. Revenue Recognition - ------------------- The Company recognizes revenue from product sales upon shipment to the customer. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight line method over the estimated useful lives of the assets, which range from five to seven years. Molds will be depreciated over their estimated useful lives once placed in service. During the quarter ended June 30, 2003, the Company disposed of certain property and equipment that was located in its office in Las Vegas, Nevada, resulting in a gain on sale of assets of $577 8 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements June 30, 2003 NOTE 4 - COMMON STOCK During the quarter ended June 30, 2003, the Company received an additional $30,000 from the private sale of 150,000 shares of its common stock at $0.20 per share. In addition, these purchasers received warrants to purchase one additional share of common stock for each share purchased, exercisable at $0.40 per share for a period of one year. In January 2003, existing warrant holders were offered a reduction in their respective warrant exercise prices to $0.15 per share if exercised on or before February 14, 2003. This offer resulted in the Company raising $198,000 in cash and issuing 1,320,000 shares of common stock. Participants were issued replacement warrants, exercisable over a two year period, for the same number of shares of the Company's common stock as issued on exercise of the amended warrants. Exercise prices for the new warrants are $0.75 per share (as to warrants issued in a 2001 equity private placement) and $0.65 per share (as to warrants issued in a 2002 equity private placement). For subsequent issuances of common stock, see Note 7. NOTE 5 - STOCK OPTIONS AND WARRANTS Accounting for Stock Options and Warrants Granted to Employees and Nonemployees Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of accounting for stock options and other equity instruments. The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. In accordance with SFAS No. 123, the fair value of stock options and warrants granted are estimated using the Black-Scholes Option Price Calculation. The following assumptions were made to value the stock options and warrants for 2003: risk-free interest rate of 4%, volatility of 89%. Warrants - -------- During the quarter ended June 30, 2003, the company received an additional $30,000 from the private sale of 150,000 shares of its common stock at $0.20 per share. In addition, these purchasers received warrants to purchase one additional share of common stock for each on purchased, exercisable at $0.40 per share for a period of one year. In February 2003, the exercise price on 1,320,000 warrants was adjusted from $0.50 to $0.15. All of these warrants were exercised resulting in the issuance of 1,320,000 shares of common stock for $198,000. In addition, the Company issued 1,320,000 warrants to these investors, of which 600,000 have an exercise price of $0.65, and 720,000 have an exercise price of $0.75. These warrants expire on February 14, 2005. For subsequent warrant issuance see Note 7. NOTE 6 - COMMITMENTS AND CONTINGENCIES Merger Agreement with Thermoplastic Composite Designs, Inc. - ----------------------------------------------------------- The Company and Thermoplastic Composite Designs, Inc. ("TCD") entered into a merger agreement dated March 30, 2001, which provides that TCD will merge with Envirokare's wholly-owned subsidiary, Envirokare Composite Corp., upon certain specific terms and conditions. This merger, if consummated, will require the Company to issue 3,000,000 shares of common stock in exchange for all of the outstanding stock of TCD, if the Company's common stock trades in a nationally recognized securities market, such as the NYSE, NASDAQ (or OTCBB), or AMEX, at a minimum five dollar ($5.00) value for thirty days during the thirty month period immediately following March 30, 2001. At the end of the thirty month period following March 30, 2001, if the market value for 3,000,000 shares of the Company's common stock is less than $15,000,000, the Company may elect to provide additional shares of common stock or cash to the TCD stockholders to meet the required $15,000,000 purchase price. Any payment of cash in connection with the transaction purchase price shall not exceed $7,500,000. The Company has the sole authority to determine the amounts of additional stock or cash that would be paid. 9 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements June 30, 2003 NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued) Letter Agreement with New Age Shelters Ltd. - ------------------------------------------- The Company and New Age Shelters Ltd. ("New Age") entered into a non-binding letter of agreement, dated March 20, 2003 replacing an earlier agreement dated October 1, 2002, expressing the intent of the parties to combine their businesses through a merger of New Age into EnviroDome LLC ("Envirodome"), a wholly-owned subsidiary of the Company. New Age is a building systems manufacturing company. This transaction was cancelled after the end of the reported period, an action the Company believes to be in the best interests of both the Company and New Age Shelters Ltd. Agreement with Schaefer Systems International, Inc. - --------------------------------------------------- On March 28, 2003, the Company entered into a product development and purchase agreement with Schaefer Systems International, Inc., "SSI" replacing a earlier agreement dated August 6, 2002. Under the terms of this agreement and pursuant to performance and dimensional criteria provided by SSI, the Company will design and develop and produce a quantity of prototypes for field testing, field trials and related approvals. Payments to the Company for successful completion of product development will aggregate $185,500, with an additional $300,000 to be payable if SSI elects to develop an additional, similar product with different dimensions. The initial term of the contract is 26 weeks. A payment of $61,215 was made by SSI to the Company (at the time of the August 6, 2002 agreement) to facilitate the development of the proprietary product. The balance of the development fee is payable: 47% upon completion of first parts off of the product and verification of performance and 20% within 30 days after development completion. SSI continued its right to order additional development for an additional payment of $300,000 and 20% within 30 days after development completion. SSI continued its right to order additional development for an additional payment of $300,000. This agreement provides for 26 weeks from the effective date within which to complete successful development or for the initial payment to be returned. The initial payment, in the amount of $61,215, was made by SSI to the Company to facilitate development of the part. The Company currently recognizes the value of the initial payment made by SSI to the Company as a deposit for product development. The Company will recognize the deposited amount as revenue upon approval by SSI of initial product prototypes, which is expected to occur during the fiscal year ended 2003. Consulting Agreement - -------------------- In July 2001, the Company entered into a consulting agreement with Mr. Erwin Pruefer who performs marketing and sales services for the Company and is compensated on a commission basis. Upon reaching certain sales targets, the consultant may receive stock options in lieu of additional commissions payable, with a maximum of 500,000 options so available. Lease Agreements - --------------- The Company entered into a lease for office space in Orlando, Florida on September 16, 2002 for a period of 36 months. Lease payments are currently $2,595 per month, with additional charges for common area. A security deposit was paid in the amount of $2,600. Total payments for the quarters ended June 30, 2003 and 2002 were $8,670 and $0, respectively. The Company entered into a lease for office space in Boca Raton, Florida on February 7, 2001 for sixty months. Lease payments are currently $3,023 per month, with additional charges for common area of $1,472. This amount totals $4,495. A security deposit and last month's rent were paid in the amount of $8,412. A portion of this office space was being subleased with the sublessee reimbursing the Company $3,495. The subleasees moved out of the space June 1, 2003. Total payments for quarter ended June 30, 2003 and 2002 were $2,000 and $3,000, respectively. 10 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements June 30, 2003 NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued) Litigation - ---------- The Company is a named defendant in an action filed by Mr. Real Morel in May 2000 in the Supreme Court of British Columbia, Canada. In this action, Mr. Morel alleges non-payment by the Company of amounts due pursuant to the aforementioned demand promissory notes. After consultation with British Columbia legal counsel and a review of the circumstances surrounding the issuance of the notes, the Company has resolved to dispute this liability. Management of the Company believes that the outcome will not have a material adverse effect on the financial position of the Company. NOTE 7 - SUBSEQUENT EVENT Subsequent to the end of the quarter, the company received an additional $50,000 from the private sale of 250,000 shares of its common stock at $0.20 per share. In addition, these purchasers received warrants to purchase one additional share of common stock for each on purchased, exercisable at $0.40 per share for a period of one year. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION: Envirokare Tech, Inc. (the "Company" or "Envirokare") is engaged in the application design, development and manufacturing, utilizing proprietary thermoplastic composite technologies including Thermo Plastic Flowforming (TPF). Technology: The TPF Process is a proprietary process developed by Thermo Plastic Composite Designs, Inc., that enables the manufacture of large structural parts using long-fiber reinforced thermoplastic resins. The Process utilizes recycled or virgin resins and is designed to reuse its own process scrap, thereby eliminating production waste. TPF Process patents are pending. Historically, advanced composite materials were utilized almost exclusively by the military and aerospace industries where such usage was normally restricted to the manufacture of small parts due to the inordinate cost of hand application, i.e., the process of manually applying layers of composite materials to a mold or shape. Management believes that the TPF Process provides a cost-effective alternative for the in-line production of larger, long-fiber reinforced plastic parts at very low processing costs. The Process has key advantages over many manufacturing processes currently in use such as compression molding, injection molding and rotational molding, including significantly, cost savings realized in the reduced labor required to create larger parts made using the TPF Process. The cost required to assemble multiple smaller components to generate a complete larger part, which often occurs in current production environments, is higher than with the TPF Process. Material costs will typically also be lower because of its use of recycled material, reuse of its own production scrap and in-line compounding, which is the process of mixing raw material components as an actual part of the production process. The TPF Process has application in a broad range of industries including: agriculture, automotive, material handling, transportation, marine, medical, waste management and aerospace. TPF composite products are an advantaged replacement for many wood, aluminum, steel, other metal alloys, concrete, other plastic and fiberglass products, by providing products that have corrosion resistance, are lighter and cost less to manufacture. As a thermoplastic process, TPF has an additional advantage in that it does not emit volatile organic contaminants (VOCs). The Company has acquired this technology through License and Merger Agreements with Thermo Plastic Composite Designs, Inc. On March 30, 2001, the Company, through its wholly-owned subsidiary, Envirokare Composite Corp. ("ECC"), entered into a licensing agreement with TCD that allows the Company to commercially exploit the TPF Process. The agreement provides the Company with the ability to utilize the TPF technology to design, develop, manufacture, market, license and sublicense a wide range of applications including the Company's proprietary Pallet, manufactured through the joint efforts of the Company and TCD, or the Company's sublicensees, for use in agriculture, aerospace, automotive, construction, marine, medical, military, transportation and waste management. The Company paid TCD a one time license fee of $525,000 under the agreement. To complete this acquisition, the Company entered into a merger agreement with TCD, which provides that TCD will merge with ECC if Envirokare's shares achieve an average of the closing bid asked prices at or above prices at or above five dollars per share at any point in time during the thirty-month period following the agreement date, with Envirokare paying merger consideration to TCD in the amount of 3,000,000 shares of its common stock. In the event that Envirokare's shares have not traded at such specified level of five dollars per share by the end of the thirty-month period, Envirokare has the option to effect the merger of TCD with ECC by Envirokare's paying to TCD's shareholders a $15,000,000 consideration, either in shares of Envirokare or in a combination of cash and shares, with the cash payment to be no greater than $7,500,000. The date of such payment would be no later than March 30, 2004. 12 Product Research, Development and Testing: - ----------------------------------------- General Product Technology Testing: During the second quarter of 2002, the Company engaged the Metis Design Corporation, Inc. ("Metis Design"), formerly Horizon Defense and Aerospace Solutions, Inc., to conduct a review of the TPF technology. Metis Design, based in Cambridge, Massachusetts, is an advanced technology firm specializing in composites consulting, damage monitoring and structural concept design and analysis. In September 2002, Metis Design presented the Company's management with final findings regarding the TPF technology. In its report, Metis Design noted that, as the utilization of advanced thermoplastic composite materials has extended into market segments such as military and aerospace, commercial manufacturers are increasingly demanding lower cost, quicker and more flexible reinforced thermoplastic processing techniques. Metis Design found that the TPF Process has significant potential to address this need. In addition, Metis Design reported that the TPF Process could represent a solution to a long-standing need in the long-fiber reinforced composite manufacturing process the TPF Process enables manufacturers to mass-produce at high rates and labor efficiencies compared to many current production techniques, while retaining accuracy and the ability to utilize low molding pressures. The report also noted that the TPF Process provides economic advantages over other thermoplastic composite molding methods through reduced labor, material, tooling and machine costs. Metis conducted narrow coupon tensile tests on composite material samples produced from the TPF Process. These tests are the standard procedure for determining certain mechanical properties of a material. The test results demonstrated that the material properties exhibited in the product, as formed by the TPF Process, are comparable to those from products formed through traditional processes, and are similar to those properties published by commercially available materials. Product Development - E Pallet: Since inception, the Company has been engaged in the development of the Pallet. In December 1998, acquired equipment, early-stage rubber mold technology and patent rights to the development of rubber mold technology for creating a pallet made of recycled materials. In 1999, the Company and TCD entered into a product/technology contract for the continued development of the pallet. TCD undertook to assist the Company in optimizing earlier versions of the Pallet design. The contract required TCD to deliver a pallet that would meet design specifications including specified size and weight requirements and a customized composition matrix. The contract also provided that TCD would supply an engineered mold for the Company's first production facility. The Company's payments for the development of a first generation Pallet mold totaled $50,800 in 1999 and $83,000 in 2000. Commencing in May 2000, additional Pallet testing and evaluation was conducted by the Pallet and Container Research Laboratory of Virginia Polytechnic Institute and State University, located in Blacksburg, Virginia. This laboratory is recognized for its work in the area of testing and analysis of products designed for use in the materials handling industry. Based on the initial test results, the Company and its product design contractor, TCD, made design adjustments to the Pallet. Further Pallet testing and evaluation through 2001 resulted in further design adjustments. As a result of the design adjustments and modifications, the first generation mold was deemed to be of no commercial value. The Company built a second generation mold during 2001, at a cost of $43,000, incorporating design modifications based on technical information derived from tests of the previous mold. Pallets produced from this mold were tested and evaluated at the Pallet and Container Research Laboratory during the second quarter of 2002. The study of the second mold product evaluated the strength, stiffness and durability of the Pallet as a general purpose pallet with a 2,800 pound weight capacity set as the standard. The study findings included the following: o The Pallet could safely support a 2,800 pound, uniformly distributed load in warehouse storage racks as well as on conveyors; o The Pallet was found to be highly resistant to damage caused by rough handling, based on the drop test protocol carried out, which involved dropping empty Pallets from various heights after the Pallets were chilled to a temperature of -13 degrees Fahrenheit; and o Because the Pallet's performance was found to significantly exceed requirements for a 2,800-pound uniform load standard, the study recommended that the Company consider reducing the Pallet's glass loading (i.e. the percentage of glass fiber used in the composite), or refining its design, to further reduce Pallet weight and cost. 13 Based on the results of testing conducted on the second generation E Pallet, during the second quarter of 2002, the Company engaged Metis Design to optimize this Pallet redesign. The Pallet design modifications, as proposed by Metis Design, allow for a significant weight reduction of the Pallet making the Pallet more cost-effective and easier to handle, while structural features are not anticipated to be materially affected. The Company is presently negotiating product development agreements with prospective partners to produce the next generation Pallet prototypes which the Company believes will lead to a comprehensive production agreement for Pallet manufacture. Once redesign work is completed by Metis Design, the Company will conduct further tests on the Pallet, with testing designed to provide information as to the longevity of the Pallet, as compared to pallets made from non-TPF processes, including pallets made from other materials. Information provided from this additional engineering analysis will further the development of marketing strategies for the Company. There can be no assurance that this additional engineering will not delay the Company's plans for the commercialization of the Pallet. The Company is presently negotiating with prospective clients who may complete development of the Pallet in cooperation with the Company and make it available for commercialization. The Company anticipates that the reengineered E Pallet will be available for sale sometime in early 2004. In addition to the second-generation Pallet discussed above, the Company is also evaluating pallets and other material handling devices incorporating wireless tracking capabilities, based on technology acquired in the Company's 2000 acquisition of Electroship (N.Y.) Inc. The Company believes that initial Pallet designs that incorporate wireless tracking capabilities will prove marketable in multiple markets. Company plans for additional development of this wireless tracking technology are scheduled for late 2003. Product Development - New Age Shelters: The Company and New Age Shelters Ltd. ("New Age") entered into a non-binding letter of agreement, dated March 20, 2003 replacing an earlier agreement dated October 1, 2002, expressing the intent of the parties to combine their businesses through a merger of New Age into EnviroDome LLC ("Envirodome"), a wholly-owned subsidiary of the Company. New Age is a building systems manufacturing company. This transaction was cancelled after the end of the reported period, an action the Company believes to be in the best interests of both the Company and New Age Shelters Ltd. Product Development - Schaefer Systems International, Inc. On March 28, 2003, the Company entered into a product development and purchase agreement with SSI replacing a earlier agreement dated August 6, 2002. Under the terms of this agreement and pursuant to performance and dimensional criteria provided by SSI, the Company will design and develop and produce a quantity of prototypes for field testing, field trials and related approvals. Payments to the Company for successful completion of product development will aggregate $185,500, with an additional $300,000 to be payable if SSI elects to develop an additional, similar product with different dimensions. The initial term of the contract is 26 weeks. A payment of $61,215 was made by SSI to the Company (at the time of the August 6, 2002 agreement) to facilitate the development of the proprietary product. The balance of the development fee is payable: 47% upon completion of first parts off of the product and verification of performance and 20% within 30 days after Development Completion. SSI continued its right to order additional development for an additional payment of $300,000. Product Marketing and Market Exploitation: - ----------------------------------------- The Company's plan for the marketing and exploitation of its technologies over the next twelve months includes: 1. direct development and manufacturing of products for materials handling (pallets). 2. 3rd party licensing of TPF Technology for specific applications and products as well as for specific geographic areas. 3. product development for 3rd party applications and licensed manufacturing. The Company expects to continue to market its technology both directly through officers and directors and through third party marketing agreements. 14 The Company has entered into an preliminary agreement with a company in Thailand for exploitation of the Company's technology for that country. This agreement provides for the manufacture and distribution of TPF products and includes the rights to market, develop and manufacture applications using the Company's technology in that country in exchange for a payment $350,000 paid at the signing of the final agreement. An administrative fee of $5,000 has been paid into escrow by the licensee but no closing date has yet been scheduled. An additional $2,000,000 is to be paid not later than December 31, 2004. The Company is to receive ongoing royalty payments in the amount of $0.18 per kg of throughput processed by the producers under these agreements. There is no assurance that this transaction will close, that the initial fees will be paid pursuant to this agreement, or if closed, that the producers will enter into production generating ongoing royalties The Company expects additional results from a broad range of continuing marketing and sales activities. As well, the Company expects to close its merger with TCD during the next quarter and with it acquire additional marketing and sales opportunities. Expected Purchase of Plant and Significant Equipment and Expected Significant Changes in Number of Employees: - -------------------------------------------------------- During the third quarter of 2003, the Company expects to close its Merger Agreement with TCD combining that company with its wholly owned subsidiary ECC. This will bring into the Company an existing TPF production facility including equipment and leased premises. The size of this facility is limited and is used primarily for product development and small production runs. The Company has continued preliminary development work toward the end of creating a full scale production facility for manufacture of Company and third party products, however, no specific site has yet been contracted for. The Company continues to consider the option of assisting a prospective third party licensees in the construction of a manufacturing facility in exchange for access to such a facility but no decision has been made. There is no assurance that funds will be available for the development of such a facility or that a third party licensee can be located for the alternative. During the balance of the fiscal year, the Company expects to add one to three people to its existing staff. As well, the Company will add personnel required for the operation of the existing TCD facility upon the completion of the merger with that company. The schedule for any new production facility will dictate the addition of any personnel associated with that facility. Liquidity: - ---------- The Company has budgeted expenditures of $720,000 for the 12 months ending March 31, 2004. During the fiscal quarter ended June 30, 2003, the Company raised $30,000 from the private placement of the Company's Common shares and had cash remaining at the end of the quarter of $23,252. During this fiscal year, the Company received $37,150 in revenues for product development work with an additional $37,150 of product development and prototype work scheduled for this customer during the third quarter of the fiscal year. The Company has in process an additional $185,000 of development work for another customer (see "Product Development - Schaefer Systems, Inc.") and expects to receive these revenues during the current fiscal year. The Company conducts product development work with the expectation that successful development will lead to manufacturing or license contracts for the Company's process, although there is no assurance that such manufacturing or license contacts will result from this work or that additional revenues will be forthcoming. ITEM 3. CONTROL AND PROCEDURES Within the 90 days prior to the filing date of this Quarterly Report, the issuer carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-14(a) and Rule 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and the Principal Accounting Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in this Quarterly Report. There have been no significant changes in our internal controls or in other factors, which could significantly affect such internal controls, subsequent to the date we carried out our evaluation. 15 PART II -OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002 (the "2002 Annual Report"), for a discussion of an action filed by Mr. Real Morel against the Company in the Supreme Court of British Columbia, Canada. The status of this matter remains the same as discussed in the 2002 Annual Report. ITEM 2. CHANGES IN SECURITIES During the quarter, the company received an additional $30,000 from the private sale of 150,000 shares of its common stock at $0.20 per share. In addition, these purchasers received warrants to purchase one additional share of common stock for each on purchased, exercisable at $0.40 per share for a period of one year. In January 2003, existing warrant holders were offered a reduction in their respective warrant exercise prices to $0.15 per share if exercised on or before February 14, 2003. This offer resulted in the Company raising $198,000 in cash and issuing 1,320,000 shares of common stock. Participants were issued replacement warrants, exercisable over a two year period, for the same number of shares of the Company's common stock as issued on exercise of the amended warrants. Exercise prices for the new warrants are $0.75 per share (as to warrants issued in a 2001 equity private placement) and $0.65 per share (as to warrants issued in a 2002 equity private placement). ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description of Document - ------- -------------------- 3.1 Company's Articles of Incorporation, as amended October 12, 1999................................................(1) 3.2 Company's By-laws as amended and restated December 11, 2000.......(2) 10.1 Merger Agreement by and among the Company, Electroship Acquisition Corp., Electroship (N.Y.) Inc., Electroship Partners, John Gremmo, John A. Notarianni, Leo J. Mangan, Raymond Anthony Joao and Richard Reichler, dated as of December 1, 2000.............................................(3) 10.2 Assignment of Patent Application from Electroship Partners to Electroship (N.Y.) Inc. and Defined Field of Use License Agreement between Electroship Partners and Electroship (N.Y.) Inc. dated as of September 30, 2000..........(3) 10.3 License Agreement between Envirokare Composite Corp. and Thermoplastic Composite Designs, Inc., dated March 30, 2001.....(2) 10.4 Merger Agreement by and among the Company, Envirokare Composite Corp., Thermoplastic Composite Design, Inc., Dale Polk, Sr. and Dale Polk, Jr., Dated March 30, 2001.........(2) 10.5 Letter Agreement between the Company and Charles H. Stein, dated May 8, 2001...............................................(4) 10.6 Agreement and General Release between the Company and Charles H. Stein, Dated November 27, 2001.......................(5) 10.7 New Age Shelters Letter Agreement, dated October 1, 2002..........(6) 10.8 Agreement with Schaefer Systems International, Inc, dated March 28, 2003............................................(6) 10.9 New Age Shelters Letter Agreement, dated March 20, 2002...........(7) (1) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, filed with the Commission on April 7, 2000, and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000, filed with the Commission on April 16, 2001, and incorporated herein by reference. (3) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the Commission on January 3, 2001, and incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 2001, filed with the Commission on June 15, 2001, and incorporated herein by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed with the Commission on March 28, 2002, and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002, filed with the Commission on April 14, 2002, and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003, filed with the Commission on May 15, 2003 and incorporated herein by reference. b) Reports on Form 8-K A report on Form 8-K was filed by the Company on February 20, 2003, concerning the issuance of a press release to announce that it raised $198,000 from current warrant holders in connection with an offer to amend outstanding warrants issued in equity private placement transactions during 2001 and 2002. See "Part II-Item 2. Changes in Securities" 17 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, On August 14, 2003. ENVIROKARE TECH INC. By: /s/ George Kazantzis ----------------------- Name: George Kazantzis Title: President, Interim Chief Executive Officer and Treasurer CERTIFICATIONS I, George Kazantzis, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Envirokare Tech, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly presents in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 14, 2003 ENVIROKARE TECH, INC. /s/ GEORGE KAZANTZIS ---------------------------------------- Name: George Kazantzis Title: President, Interim Chief Executive Officer and Treasurer 18 -----END PRIVACY-ENHANCED MESSAGE-----