SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended May 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission File: 0-19678
ETS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1414643
(State or other Jurisdiction (IRS Employer
Identification
of Incorporation or Organization) Number)
1401 Municipal Road, NW
Roanoke, VA 24012-1319
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (540) 265-0004
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. [x]
Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of registrant is (based on closing price on July 31, 1996) was
$4,638,641*.
The total number of shares outstanding as of July 31, 1996 was
12,580,733.
*Affiliates for the purposes of this item refer to the officers,
directors and/or any persons or firms owning 5% or more of the
registrant's common stock, both of record and beneficially.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
ETS INTERNATIONAL, INC.
FORM 10-K
For the Fiscal Year Ended May 31, 1996
Page
Part I
Item 1. Business 4
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Securityholder 26
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 35
Part III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management 40
Item 13. Certain Relationships and Related Transactions 42
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 42
SIGNATURES 45
SUPPLEMENTAL INFORMATION AND EXHIBITS 46
<PAGE>
PART I
Item 1. Business
Introduction.
ETS International, Inc. ("ETSI"), a Virginia corporation, was
incorporated on February 25, 1987. On January 28, 1988, it acquired
all of the issued and outstanding common Stock of ETS, Inc. ("ETS"),
from John D. McKenna and John C. Mycock (officers and directors of
ETSI) and two others and, the next day completed a public offering
pursuant to the rules of the Vancouver Stock Exchange ("VSE"). On
October 29, 1989, certain sophisticated analytical laboratory equipment
of Centec Analytical Services, Inc. ("Centec"), an analytical
laboratory, were purchased by ETSI and, in 1990, placed in ETS
Analytical Services, Inc. ("ETSAS"), a subsidiary. In 1992, the common
stock of ETSI commenced trading on the Emerging Company Marketplace of
the American Stock Exchange; and ETSI voluntarily delisted its
securities from the VSE.
In June, 1994, ETSI exchanged 2,730,000 of its shares of common stock
("Shares of Common Stock") for all the outstanding common stock of
Stamie E. Lyttle Co., Inc., Lyttle Utilities, Inc. and LPS Corp. all of
which were merged into a wholly-owned subsidiary, ETS Water and Waste
Management, Inc. ("ETSW"). In January, 1995, Environmental Laboratories
Incorporated, an environmental laboratory located in Richmond,
Virginia, was merged into ETS Analytical Services, Inc., the Company's
analytical laboratory subsidiary, in exchange for 183,600 Shares of
Common Stock issued to its stockholders; and, in April, 1995, the
assets of Air Compliance, Inc. were acquired by ETS, Inc., the
Company's air quality subsidiary for 113,000 Shares of Common Stock
issued to the stockholders of Air Compliance, Inc.
In February, 1996, ETSI acquired certain assets of Olympic Industries,
Inc., Pompano Beach, Florida, for 539,130 Shares of Common Stock. The
assets were placed in a newly-formed corporation, ETS Liner, Inc.
("ETSL"). ETSL became a wholly-owned subsidiary of ETSW and the
business continues to be operated from the same location.
In April, 1996, ETSI acquired the assets of an environmental laboratory
in Fairfax, Virginia from Dewberry & Davis in exchange for 65,617
Shares of Common Stock. The assets were placed in ETSAS and continue
to be operated at the same location.
<PAGE>
The Subsidiaries
ETS, Inc.
History and Overview
ETS, formed in 1973, has been engaged in designing, manufacturing and
supplying air pollution control systems, with particular emphasis on
fabric filter particulate collectors, providing software and testing
services to industry and utilities and conducting industrial and
government contract research and development. It also has developed
three products designed for use in the air pollution control industry -
the Limestone Emission Control System, the Baghouse Performance Monitor
and the Dry Reactor. It has suspended the development of one product,
the Reduced Entrainment Precipitator until suitable funding can be
obtained of which there is no guarantee. In fiscal 1996, its service
business generated almost all of its operating revenues. Since its
acquisition by ETSI in 1988, ETS has expanded the services it offers,
particularly in the fields of air pollution control, consulting,
regulatory assistance, toxic emission testing, asbestos surveys and
fabric filter testing and has developed and sold related systems and
products. It intends to continue to develop, market and license
proprietary products for the air pollution control industry. In April,
1995, it expanded its service area to Pennsylvania and New Jersey
through the acquisition of the assets of Air Compliance, Inc., an air
pollution control and toxic emission testing company, located in
Feasterville, Pennsylvania.
Products
The Limestone Emission Control System (the "LEC")
The LEC is an air pollution control system which controls acid gas and
particulate emissions from utility and industrial boilers. Development
of the LEC began in 1982 and was successfully completed in 1993. A
commercial unit was constructed and made operational in December, 1994
and is in successful operation.
<PAGE>
In the LEC, hot sulfur dioxide ("SO2") laden flue gas passes through
the cross section of a vertical moving bed of standard quarry limestone
("CaCO3") gravity fed from a hopper and covered by a thin film of
water. The rate of flow of the limestone can be adjusted by varying the
speed of a screw conveyor into which the limestone falls. Sulfur
dioxide is absorbed from the flue gas into the water and subsequently
reacts with the limestone to form a surface layer principally of
calcium sulfate ("CaSO2") and calcium sulfite ("CaSO3"). The limestone
granules are then reactivated by mild abrasion to remove the calcium
sulfite and calcium sulfate layers. The particles of calcium sulfate
and calcium sulfite fall through a fine screen, thereby exposing the
active limestone for further reaction. Gypsum, the waste product is the
main content of wallboard.
Management believes that the gypsum produced by the LEC will be readily
marketable by utilities or other users as it conforms to commercial
standards. The recycled limestone, supplemented by a new supply, is
then fed back into the hopper for continued reaction with flue gas.
Title IV of the Clean Air Act Amendments of 1990 ("CAAA") deals with
the prevention of smokestack pollution causing "acid rain." It finds
that acidic compounds and their precursors in the atmosphere threaten
natural resources, ecosystems, materials, visibility and public health
and that the principal sources of acid rain are sulfur dioxide and
nitrous oxides. It regulates the emissions of those substances from
fossil fuel fired combustion devices, in part by permitting companies
with low emissions to trade pollution credits with companies with
higher levels. As a consequence, the LEC, with its ability to remove
99% sulfur dioxide may be considered attractive in meeting the SO2.
Allowance Program and the ability of companies to trade pollution
credits.
<PAGE>
On June 23, 1992, ETS entered into a license agreement with Procedair
Industries, Montreal, Canada, a subsidiary of Stein Heurtey, an
industrial furnace manufacturer and a sister company of Procedair,
S.A., a French air pollution control firm, and EGCI, S.A., a French
engineering firm specializing in combustion, to license the LEC. The
license was extended on July 1, 1995 for a period of twelve months.
Presently, this agreement has been extended orally on an "at will"
basis. The license is exclusive in North America and non-exclusive
outside North America. ETS will receive royalties at the rate of 8% of
sales until a sales level of $8,333,333 is reached. Thereafter, until
the expiration of the agreement, ETS will receive royalties of 5% of
sales. ETS is obligated to maintain patents, provide and make available
know-how, provide sufficient information to enable the licensee to
design applications for the system, to make available fully qualified
and competent employees and make available technical information and
sales support at specified levels. No sales have resulted from this
agreement to date and there is no assurance that any license fees will
be generated.
In February, 1993, ETS entered into a license agreement with U-Tah
Industrial Company, Ltd. ("U-Tah") located in Taipei, Taiwan to market
the LEC within Taiwan, R.O.C. The five year contract calls for U-Tah to
provide ETS an up-front license fee, followed by 5% royalties on LEC
system sales. In 1993, ETS opened an office in Taipei, to provide
technical support to its licensees. In March, 1994, the first
commercial sale of the LEC system was made through U-Tah to Shing Ming
Metal Industrial Company, a plant near Taipei. The plant is modest in
size, but represents, to ETS, an opportunity to prove the technology on
a commercial basis. The LEC system was made operational in December,
1994 and has performed pursuant to its specifications to date.
Management believes that this installation represents a breakthrough
for future sales as it proves the LEC technology in ability to remove
SO2from smokestack emissions on a commercially viable basis as well as
its reliability and its cost effectiveness.
The Baghouse Performance Monitor (the "BPM") and the Baghouse
Performance Monitor Expert System
<PAGE>
A baghouse, also referred to as a "fabric filter," is essentially a
collection of numerous fabric bags. Baghouses are the leading method of
collecting particulates from industrial and commercial smokestacks. Of
the 250,000 baghouses presently operating in the United States, ETSI
has targeted the 2,500 largest as its present market. Each bag works
in a fashion similar to a vacuum cleaner to trap dust and particulate
matter from a gas stream. However, as particulates collect on the
fabric of each bag, they form a dust cake which develops increasing
resistance to the flow of gas. Thus, the dust cake must be periodically
removed to maintain system flow stability.
The BPM, and its associated expert system software (both devices
referred to as the "BPM," unless otherwise noted), collects, organizes,
displays and assists the analysis of all the important parameters of a
baghouse emission control system. Its primary purpose is to monitor
current status and stability, warn operators of any system instability
or developing problems and prepare an easy to access and use database
of operational history for any necessary troubleshooting. A BPM can
directly monitor the flow and pressure drop characteristics of many
individual bags within an operating baghouse, thus providing the
capability of simultaneous side-by-side evaluations of alternative
fabrics, designs, or operational methods. To date, the BPM has been
utilized extensively for this purpose in all types of baghouses.
The BPM is manufactured to order from standard components, such as
printed circuit boards and fabricated metal parts which are readily
available from multiple sources. After purchase, materials and
components are inventoried and some subassemblies are completed in-
house. Upon receipt of an order, ETSI technicians assemble, calibrate
and test the devices prior to shipment and installation. ETS's present
manufacturing facilities are considered adequate.
ETS's marketing strategy for the BPM has been to concentrate on the
utility and large industrial baghouse markets which include utilities,
industrial boilers, chemical plants, forest products plants, steel
mills, cement plants and nonferrous mining and smelting operations. ETS
believes that potential customers in these markets may require a
monitoring system. Bag replacement costs are relatively high and a
small percentage of savings justifies the purchase of this relatively
inexpensive monitor. In addition, reduced baghouse capacity may reduce
performance of a given customer's production rates and may result in
emissions of unacceptable levels of pollutants and the closure of the
process and/or imposition of monetary penalties.
<PAGE>
The first commercial BPM installation was completed in 1983. Customers
have included chemical plants, steel mills, glass manufacturers,
foundries, industrial coal-fired boilers and utilities. The BPM has
been described in literature published by the Electric Power Research
Institute, Inc. ("EPRI") which is distributed to all electric
utilities. The EPRI refers all inquiries to ETS. To implement its
marketing strategy, ETS has initiated a direct mail advertising
campaign and employs in-house sales personnel. In addition, ETS
conducts technical seminars and has entered into agreements with firms
in both Mexico and Taiwan for the sale and servicing of the BPM.
Although ETS believes that ultimately Title IV of the CAAA dealing with
permitting will have a positive impact on sales of the BPM. At present,
enforcement is lax and sales of the BPM have been sporadic. Title IV
requires that after the effective date of any permit program relating
to major sources of pollution, it would be unlawful to violate the
conditions of such a permit. States are required, within three years,
to submit a conforming permit program. Major sources are those which
emit, per year, ten tons of any hazardous air pollutant or a
combination of 25 tons of hazardous air pollutants. Title III of the
CAAA relating to Air Toxics establishes a list of 189 substances and
compounds which must be considered hazardous air pollutants and a
procedure for review of that list. Title VII of the CAAA expands and
defines the authority of the individual states to include enhanced
monitoring and requires major source owners to demonstrate compliance
at regular intervals using approved continuous monitoring technology
which the BPM can provide.
The Dry Reactor
The "Dry Reactor" is an air pollution control system designed to
control emission of acid gases, such as hydrochloric acid, sulfur
oxides and nitrous oxides and particulates. Hot flue gases pass through
the Dry Reactor and the acid gases and particles are substantially
removed before the flue gases enter the atmosphere. The Dry Reactor has
applications for emission control in hospital and hazardous waste
incinerators and small municipal solid waste facilities. Both the LEC
and the Dry Reactor use a dry scrubber system to control acid gas
pollutants. However, the Dry Reactor is a smaller, modular unit,
designed for use in smaller installations, whereas the LEC is targeted
at larger utility and industrial boilers.
<PAGE>
The Dry Reactor uses a process called a "dry" scrubber, in contrast to
competing "wet" and "semidry" (sometimes referred to as "half-dry" or
"spraydrying") systems. In wet and semidry systems, when noxious gases
are brought into contact with alkaline materials, these systems produce
liquid wastes which must be handled with pumping and plumbing systems.
Such waste often is corrosive, causing scale, flaking and clogging of
the handling systems and requiring further treatment. In the Dry
Reactor, flue gas is directed into a chamber where it is mixed with a
dry reagent (lime) by the mechanical action of a rotating plate, known
as a "slinger." The slinger delivers the lime perpendicularly to the
flue gas allowing intimate contact of the dry reagent and any
pollutants in the flue gas. This contact causes a reaction which forms
a non-acidic compound and removes as much as 90% of unwanted acid
gases. An internal recirculator, located above the slinger, increases
the contact time thus enhancing the removal of pollutants.
ETS's only commercially sold Dry Reactor was installed at the Fairfax
Hospital, Fairfax, Virginia in 1987 and has been in successful
operation to date. It has removed greater than 98% of unwanted acid
gases since installation without degradation or greater than normal
maintenance. In management's opinion, future sales, if any, of the Dry
Reactor will be generated through increasing enforcement and the
imposition of tougher standards of clean air legislation and
regulations. Specifically, the CAAA institutes a program under which
all subject air pollution sources must obtain an operating permit. The
USEPA is responsible for issuing regulations and monitoring compliance.
The various states must develop and implement the programs. If a state
fails to develop or implement such a permitting program, the USEPA must
develop and implement a federal permit program for that state. However,
until enforcement is strengthened, ETS does not contemplate substantial
sales, if any of the Dry Reactor.
In 1992, Gibbson Engineering Company Ltd. ("Gibbson"), located in
Taipei, Taiwan, was granted the exclusive right to market the Dry
Reactor throughout Taiwan, R.O.C. The agreement provides that Gibbson
pay ETS an upfront license fee followed by a 7% royalty fee on all
system components. No sales have resulted from the agreement.
<PAGE>
The Reduced Entrainment Precipitator (the "REP")
An electronic precipitator gives dust particles an electric charge
which attracts them out of a gas stream onto the sidewalls of the
collector for subsequent collection and disposal. However, in standard
designs, not all the dust particles remain captured on the side walls
and some become dislodged by the gas motion and are "re-entrained" in
the gas flow. The REP prevents reentrainment of dust particles. The REP
uses a conventional electrostatic precipitator to attract dust
particles to a porous fabric collecting surface. Since the collection
surface is porous, a small portion of the gas stream containing the
dust flows through the pores which ensures that the dust layers remain
attached to the collection surface. Specified applications for REP
include control of fine particulate emissions from coal-fired utility
boilers and, possibly, fine particulate control in so-called "clean
rooms" in which complex electronic and computer circuits are produced.
On the basis of the pilot plant test conducted in 1990, management
concluded that the test identified additional design parameters which,
if adopted, would improve performance and that the REP concept can be
utilized, when properly developed, to enhance the collection of fine
particulates at lower cost than existing methods. ETS has not pursued
further testing, does not intend to fund future development and will
require future Government or private funding to continue
development. As the Company's more mature technologies, such as the BPM
and LEC, neared commercial development, the Company determined that its
financial commitment to products should be concentrated on
commercializing and marketing the BPM and LEC. Although it continues to
seek outside funding sources, ETS has no current proposals outstanding
for further funding. In the event the question of commercial viability
is successfully resolved, of which there is no guarantee, ETS intends
to secure a licensee to market the REP of which there is no guarantee.
Even if commercial viability is established to ETS's satisfaction, it
is unlikely that development will be completed and delivery of orders
will commence in the foreseeable future.
<PAGE>
Services
Contract Research and Development.
ETS has performed specific research and development projects for both
government and private industry. These projects primarily involve the
advancement of air pollution control technology and have included the
design and fabrication of pilot plants to demonstrate certain air
pollution control hardware, operation of equipment within the pilot
plants and long-term testing and monitoring of systems. ETS has
designed, built, operated and tested pilot plants for coal-fired
industrial boiler systems, refuse-fired boilers, cement kilns and glass
furnaces. These pilot plants have examined, among other things, control
of fly ash, sulfur dioxide and toxic emissions.
For clients such as Dupont, Celanese, Phillips Fibers, Baltimore Gas &
Electric, Serrine, ARCO and General Electric, ETS has performed studies
of alternative filtration. Studies have ranged from bench top swatch
test programs to pilot plant evaluations, to full scale tests within
operating baghouses utilizing the BPM analysis tools. Some programs
were designed to evaluate the usability of new fabric offerings in
specific applications, others to provide evaluation of new fabrics as a
viable general fabric filter candidate and others to select the optimum
candidate from a group of possible fabric alternatives in a specific
baghouse. Except for U.S. Government sponsored research and
development, all research and development contracts have been performed
on behalf of customers.
Fabric Testing Services.
The fabrics used in baghouses to collect dust must meet certain
requirements as to strength, permeability, pressure resistance, air
flow characteristics and chemical content. ETS offers quality control
and other fabric testing services to the fabric filtration industry to
determine whether baghouse fabrics meet these standards.
<PAGE>
Stack Testing and Other Field Services.
ETS offers analyses of particulate and gaseous emissions for evaluating
the performance of pollution control devices and statutory compliance.
Customers include both government and private industry. Testing has
been undertaken at steel plants, cement factories, quarries, foundries,
chemical plants and utilities. To assist in supplying these services,
ETS has four mobile field testing laboratories for on-site testing and
analysis.
Other field services include continuous emission monitor certification,
asbestos surveys, environmental audits, analysis and evaluation of on-
line systems, filter bag analysis of operating systems through on-site
and laboratory examinations, evaluation of bags for use in particulate
filtration systems, new filter media inspection and testing, compliance
with emissions standards, on-site and laboratory particle size analysis
and OSHA in-plant air quality testing. This service is appropriate for
compliance with Title III of the CAAA involving Air Toxics because
compliance
requires sophisticated field and laboratory capability. Title IV of the
1990 CAAA requires the annual testing of 2,000 utility continuous
emissions systems. ETS has become a major vendor for this service.
Major clients, on a continuing basis, for ETS's field service
activities include Westinghouse, Philip Morris, DuPont, Air and Water
Technologies, Allied Chemical, Duke Power, Tennessee Valley Authority
and Baltimore Gas & Electric.
Regulatory Assistance.
ETS offers its industrial clients which operate facilities subject to
state and federal environmental regulations professional assistance in
understanding relevant environmental regulations. Many environmental
regulations are complicated, apply only to certain types of operations
and not to others and change in their scope and content from time to
time. They are written by technical personnel employed the regulatory
agencies in order to fulfill legal requirements of the relevant laws
and statutes promulgated thereunder. ETS staff consists of technically
trained people who maintain a current knowledge of these environmental
regulations and are also familiar with clients' plant operations. Thus,
ETS can provide clients specific interpretations of regulations and
assist in establishing the most effective route to demonstrate or
achieve compliance with specific requirements. The CAAA, particularly
Title V regulating permitting, has had a positive effect on demand for
ETS's regulatory assistance services. ETS does not employ an attorney
on a regular basis in rendering its regulatory assistance services; but
has available specialized counsel on an as-needed basis. ETS
recommends that its clients seek independent legal counsel to address
legal issues, including but not limited to past noncompliance with
environmental regulations. In addition, ETS often works with the
clients' legal counsel in resolving issues of noncompliance with
federal and state environmental regulations.
<PAGE>
Monitoring.
Federal and state environmental protection agencies are increasingly
requiring self-monitoring by industry. Monitoring activities involve
either direct measurement of pollutants emitted in the stack gases or
measurement of pollutant concentrations in ambient air at or beyond the
plant's fence line. Both measurements involve the collection of large
quantities of data using sensitive continuous monitoring systems. ETS
assists in designing, calibrating and auditing the monitoring systems
and in preparing periodic reports and summaries of the data obtained.
Consulting.
The consulting aspect of ETS's business is diverse. Included are expert
testimony, pollution control equipment operational problem solving,
review of plant specifications, market analysis recommendations,
license evaluation and acquisition analysis.
Technical Services.
ETS has performed technical and economical evaluations of existing and
proposed air pollution control systems. It provides air pollution
control system design and on-site services during system erection and
startup. ETS also provides advice on emission control system design,
specifications and bid evaluation.
Training and Education.
ETS regularly offers several in-depth seminars in the fields of air
pollution control design and regulatory assistance, incinerator
emissions control, fabric filtration and electrostatic precipitation.
It also has produced a cassette tape seminar. Although training and
education constitute only a minor portion of ETS's business, ETSI
believes that its involvement in this area allows industry participants
to become familiar with its products and services. In total, in excess
of 1,000 industry representatives have attended ETS seminars since
their inception. The seminars resulted in numerous clients for other
services offered by ETSI. ETS has a continuous and comprehensive
seminar program servicing industry and government. Recent seminars have
been conducted in Canada, Mexico and Taiwan in addition to those held
in the United States.
Between February and April, 1996, ETSI provided an Air Pollution
Control Technologies Course sponsored by the United States Agency for
International Development Office of Energy and Infrastructure and
administrated for the Institute of International Education.
Participants included representatives of industry and regulatory
agencies from Bolivia, Brazil, Chile, Columbia, Cyprus, Ecuador, Egypt,
Ghana, India, Indonesia, Jamaica, Jordan, The Philippines, Taiwan and
Tanzania. ETSI conducted a similar course under USAID sponsorship in
1991.
<PAGE>
Technical Writing.
ETS's technical writing staff is experienced in all areas of air and
water pollution control and is proficient at the art of relating
technical data in a readily understandable manner. Other capabilities
include research, graphics layout and design and proofreading.
Literature Searches. Under contract with both government and industry,
ETS has successfully conducted extensive literature searches in the
area of particulate and sulfur dioxide control. ETS maintains an
extensive and well-cataloged in-house library and, when required,
employs outside library services.
It is anticipated that the service business will continue with
additional expansion of revenues from areas such as field testing and
regulatory assistance. ETSI intends to continue to explore foreign
market opportunities for ETS's products, particularly in Taiwan,
Canada, Mexico, Korea, Japan and China to focus on marketing the BPM
system and more actively to pursue licensing of the Dry Reactor and
Limestone Emission Control System. In addition, the CAAA is anticipated
to result in increased activities in both laboratory analysis, field
testing, baghouse monitoring and other aspects of ETS and ETSAS'
business.
Patents, Licenses And Trademarks
ETS currently holds various U. S. patents and licenses covering certain
aspects of its proprietary products that it considers material to
present sales and further development and marketing of such products.
Features of the Dry Reactor involve a process subject to U. S. Patent
No. 4,273,750, expiring in 1998, the rights to which were acquired by
ETS in 1982.
ETS is the assignee of U.S. Patent No. 4,663,136, issued to Dale A.
Furlong on May 5, 1987, for an invention which is the process basis of
the LEC. ETS was also assigned another patent on another apparatus
utilized in the sulfur dioxide and particulate removal process (U.S.
Patent No. 4,764,348) which was issued to Dale A. Furlong on August 10,
1988. That patent is the basis of European patents issued to ETS.
ETS owns two additional patents relating to the LEC. Aspects of the LEC
are also covered by U.S. Patent 4,663,136 and European patents based on
it. Management of ETS believes that the patents relating to the LEC
will protect it from infringing use. ETS is preparing an application
for an additional patent covering equipment design aspects of the LEC.
There is no guarantee that such application will result in a patent.
ETS holds U.S. Patent No. 4,481,017, issued to Dale A. Furlong and
assigned upon issuance to ETS, covering the combination of the
electrostatic precipitator and fabric filtration technologies used in
the REP. This patent was issued on November 6, 1984.
<PAGE>
ETS holds U.S. Patent No. 4,719,791 which relates to the BPM system and
claims protection for several unique aspects of the system. This patent
was issued on January 17, 1988 and assigned to ETS.
ETS has acquired the non-exclusive license to utilize U. S. Patent No.
4,297,113, which provides a method for eliminating the effect of bag
failure on baghouse operations. ETSI has no specific plans for the use
of such patent. The license is nonassignable and will lapse upon
termination of John D. McKenna's employment with ETSI.
ETS Analytical Services, Inc.
ETSAS maintains extensive laboratory facilities and modern mostly
automated and computerized equipment to detect other types of
environmental contamination. It has established a stringent Quality
Assurance/Quality Control ("QA/QC") Program to insure data reliability.
Although at the end of the 1995 fiscal year, ETSW was a Superfund
Contract Laboratory, its status as a Superfund Laboratory had not been
renewed due to lack of funding for the program. It continues, however,
to receive contracts from the United States Environmental Protection
Agency ("USEPA") and other governmental agencies. ETSAS is also a
certified laboratory in the states of Virginia and in North Carolina
for water, waste water, soil and hazardous waste analysis. In addition
to its laboratory operations, ETSAS offers a wide range of field
services including sampling of water and soil, infield testing and on-
site monitoring, environmental assessment and monitoring program. ETSAS
owns a mobile laboratory which provide on-site analysis for trace
organics compounds. In January, 1995, Environmental Laboratories, Inc.,
a Richmond Virginia - based company, founded in 1980, engaged in water,
wastewater, soil and materials analysis, was merged into ETSAS. This
additional operation is located in the same city as ETSW. The merger
expands the geographic range of ETSAS, enables the Richmond operation
to bid on larger and more complex contracts than it could support prior
to the merger and facilitates a closer working relationship with ETSW.
The acquisition of environmental laboratory assets located in Fairfax,
Virginia enhances the ability of ETSAS to bid on projects in Northern
Virginia.
<PAGE>
ETSAS's analytical services include obtaining and isolating samples of
industrial and other waste materials including potentially hazardous
wastes, analyzing samples by identifying and quantifying their toxic
components, electronically archiving data and the delivery of
analytical data in a legally defensible manner. ETSAS's analyses are
used by regulatory authorities, such as the United States Environmental
Protection Agency and the City of Roanoke, Virginia, and site owners,
such as Exxon, Union Carbide and Columbia Gas Transmission, to report
the risks posed by the potential or actual presence or release of
hazardous substances.
ETSAS performs analyses of waste materials to determine the chemical
compounds present, organizes the data obtained and presents a
comprehensive report of this data. There may be myriad potentially
harmful chemical compounds present in wastes and multiple tests may be
required to determine the levels of contaminants at even a single site.
Results obtained indicate only the amount of contaminant at the time of
the test. To assess the probability of future hazards or the degree of
correction of the pollutants also requires several tests at relatively
constant intervals. There is also the possibility that the hazardous
waste may have migrated from its initial site. Additional analysis and
remedial action away from the original test site may be required where
the migration of hazardous waste is a possibility.
Samples of the material to be tested are taken by either ETSAS's
clients or its own personnel and forwarded to the laboratory for
analysis. ETSAS is required to establish the authenticity of the test
samples and therefore each container supplied by clients is accompanied
by its chain of custody form. ETSAS's technical staff utilizes mobile
sampling equipment for the sampling and testing of hazardous waste
sites, monitoring wells or industrial discharges.
<PAGE>
Sample Management.
All incoming samples, whether they are shipped via courier service or
dropped off by local customers, are received by this section and logged
into the ETSAS Laboratory Information Management System ("LIMS") which
tracks analyses and reports laboratory data. The ETSAS LIMS is an
internally developed software system that has received wide recognition
from industry and government. The Sample Custodian is responsible for
all receiving, storage, and tracking functions. All samples must be
signed out by laboratory analysts for processing, thus maintaining a
complete chain of custody within ETSAS.
Atomic Spectroscopy ("AS"). The Atomic Spectroscopy section analyzes
all samples requiring elemental analysis by atomic spectroscopy. Among
the techniques the AS section employs are the following:
Graphite Furnace AAS determines low levels of toxic elements such as
arsenic, selenium, and thallium. It can detect and quantify levels less
than 1 part per billion.
Cold Vapor Mercury AAS tests for low level mercury analysis (0.2 parts
per billion in water) in a variety of sample types.
Air Analysis of multi-metal air trains by Microwave Digestion and AS
techniques. Analysis of metals and elements by Inductively Coupled
Plasma Emission ("ICP").
Organics. The Organics section provides laboratory services relating to
the detection and measurement of various organic substances in a
variety of sample types, such as groundwater, RCRA sludges, tissue,
oils/waste oils, and others. Examples of these include pesticide,
herbicide, and fungicide residues such as chlordane, endrin, toxaphene,
silvex, and Ethylene Dibromide ("EDB"). ETSI can detect PCBs
(polychlorinated biphenyls) in dielectric fluids, oils, waste oils,
wastewater, and soils, performs high pressure liquid chromatography for
the analysis of explosives and other high molecular compounds, detects
total organic halide ("TOX") and purgable organic halide ("POX") in
groundwater and other liquid media; total organic carbon ("TOC") and
purgable organic carbon ("POC") in aqueous samples. It "fingerprints"
by gas chromatography to identify unknowns and finds benzene, toluene,
ethylbenzene, xylenes ("BTEX") in groundwater by gas chromatography and
photoionization detector ("PID"). Finally it performs analyses of
trace organics by gas chromatography and mass spectrometer ("GC/MS")
for volatile organic
compounds ("VOA" or "VOC") and semi-volatile organic compounds in
accounts with certain ETA methods.
<PAGE>
Inductively Coupled Plasma Laboratory. ICP is used for rapid analysis
of metals/elements. The ICP is fully automated and computerized and is
capable of analyzing up to 69 elements per sample in approximately 5
minutes. Much of the analysis on the USEPA Superfund and Office of
Water contracts is performed on this instrument. Raw data is
transferred into the ETSAS LIMS for processing and reporting. The ICP
laboratory uses "SuperScan," a low cost qualitative scan developed by
ETSI for 69 elements per sample.
Gas Chromatograph/Mass Spectrometry ("GC/MS") involves a three-step
process. First, a test sample is introduced into the gas chromatograph
portion of the system which separates the individual chemical
compounds. The separated compound then elutes into the mass
spectrometer are often subject to multiple regulatory requirements.
Quality Assurance/Quality Control. ETSAS maintains an ongoing QA/QC
Program that is designed to give data of the highest documented
quality. The QA/QC Program is a continuing system of internal and
external checks of data validity. The entire program is contained in a
150 page manual which is available to clients upon request.
ETSAS maintains strict quality control in all facets of testing and
analysis to insure accuracy of results. Internal quality assurance
procedures, formulated within USEPA guidelines, govern how samples and
controls are handled and are monitored daily. Standards are used to
calibrate the equipment on a daily basis. Samples are periodically
issued by both the quality control manager and various federal, state
and local certifying licensing agencies, to determine whether test
results from samples furnished by the agencies fall within acceptable
limits.
ETS and ETSAS maintain a network of more than 30 computers for sample
log-in, sample tracking, data handling, data reporting and accounting
activities. The computers are linked together through a Novell Netware
System, and many of the analytical instruments are on-line to this
system which allows for computerized raw data transfer. Data reporting
can therefore be customized to a clients individual needs, including
the reporting of quality assurance. The total hard disk data storage
capacity of the Novell system exceeds one gigabyte.
<PAGE>
Significant ETS and ETSAS Contracts
Examples of some significant environmental contracts executed by ETS
and ETSAS are:
Successfully Completed:
USEPA award for the analysis of multimedia, multi-concentration samples
for selected metals for a one year base period and three additional one
year options (total contract value, $770,000), completed 1995;
USEPA award for source testing and method evaluation for stationary
source emissions for a one year base period with a contract value of
$637,629 and two additional one year options (total base contract value
in the event the options are exercised, $2,300,000), completed 1992;
USEPA award for chemical analytical services for multimedia multi-
concentration inorganic (maximum contract value, $663,000), completed
1995;
U.S. Navy project to conduct emission inventories at various naval
bases (contract value estimated at $400,000), completed 1994;
DOE project to determine toxic emission levels from utility coal fired
boilers (contract value, $60,000), completed 1993;
KVB/Analect - CEMS certification at major power utilities for
equipment vendor; (contract value, $940,000), completed in fiscal 1996;
Inland Steel Company - designing emissions control system for
pulverized coal facility; (contract value, $291,000), completed May,
1996; and
USEPA Office of Water - analysis of industrial discharges across the
United States, (contract value, $160,000), completed September, 1995.
Ongoing:
Westinghouse certification and compliance testing of facilities; multi-
year continuous contract started in 1987 (estimated contract value,
$450,000/year);
Pine Bluff Arsenal field services to test control equipment, five year
task order contract, 13 test schedules in a year; started March 1994,
one year with five option years (maximum contract value, $ 150,000 per
year);
<PAGE>
Title V permit contracts for various industrial clients; 60% completed
as of the end of fiscal 1996; scheduled completion December, 1997
(estimated value, $500,000);
Vector Group, Inc. - on-site analysis of trace organic substances;
ongoing (estimated contract value, $120,000).
Gas Compressor Stations - analysis of PCB's from several stations;
ongoing continuous series of analyses without a determined completion
date (estimated contract value, $150,000).
Ironton Iron, subsidiary of Intermet Corporation - various
environmental engineering and emission control system design projects;
75% completed at end of fiscal 1996 (estimated contract value,
$750,000).
USEPA Engineering and Analysis Division - analysis of trace metals and
elements in wastewater, sludges and hazardous wastes; one year with
four one year option period; contract value $1.770,000 if fully
exercised.
USEPA Engineering and Analysis Division - wet chemistry analysis of
wasterwaters and sludges from the same sites for cyanides, phenols,
fluorides and other substances; one year with four one year option
period; contract value $1.140,000 if fully exercised.
Special Projects
Special Projects are those tests or contract requirements that need
special attention or do not fit into the responsibilities of the other
sections. Each project is assigned a Project Manager who directs the
work efforts needed, monitors the progress of the work tasks, and
reports all the required data and findings to the client. In recent
years, ETSAS has received very few special projects and was not in
negotiations for any as of the end of fiscal 1996.
<PAGE>
Sales And Marketing
ETS and ETSAS presently market their services through their sales
personnel, and utilize direct mail, trade exhibitions and promotional
literature. 75-90% of their revenues are realized from commercial
clients and 10-25% from the USEPA and other government agencies.
However, this ratio is anticipated to change as a result of the receipt
by ETS and ETSAS of awards of U.S. Government contracts under the CAAA.
ETS's extensive sponsorship of seminars and training programs has
resulted in recognition and has secured clients. ETS is negotiating
with major industry partners for the development, licensing and sale of
its products. ETS has entered into license agreements for several of
its products. ETS has begun receiving license fees, but there is no
assurance that substantial license fees will be received in the future.
Representative Clients
Clients of ETS and ETSAS represent the following industries: power
generation (utilities), petrochemical, chemical, tobacco, iron and
steel, non-ferrous metals, gas utilities, heavy manufacturing,
engineering, government agent contractors, municipalities and regional
and federal government agencies. Representative clients are those in
the industrial segments to which ETS and ETSAS supplies services. Such
clients of ETS and ETSAS include: Kentucky Power Company and
Pennsylvania Power & Light (power generation), EXXON (petrochemical),
Dupont and National Paint and Coating (chemical), Philip Morris
(tobacco), Inland Steel (iron and steel), Reynolds Metals (non-ferrous
metals), Columbia Gas (gas utilities), Westinghouse (heavy
manufacturing), Dames & Moore (engineering), KVB (government agency
contractors), County of Roanoke, City of Richmond (municipalities) and
USEPA (regional and federal government agencies).
Competition
Although the pollution control industry in general is growing rapidly,
competition is intense. Marketing resources and expertise are
increasingly important to success. In addition, the pollution control
markets are subject to rapid change. Unforeseen technological,
legislative or business developments relating to pollution control
outside the scope of ETS and ETSAS' business may have significant
adverse effects upon ETS and ETSAS' business. Many of ETS and ETSAS'
competitors have substantially greater resources than ETSI and the size
and reputation of many of these companies may give them a competitive
advantage over ETSI. However, ETSI has successfully competed for USEPA
contracts against large firms such as General Electric Company and
Bechtel Power Corporation. Likewise, ETSI has won utility contracts in
competition with firms as Research Cottrell, Inc. and Gilbert
Commonwealth Engineering.
<PAGE>
Major competition for the LEC and Dry Reactor markets come from the
U.S., Japan and Europe. From the U.S. they include Babcock and Wilcox,
General Electric Environmental Service and Research Cottrell. Chiyoda,
Hitachi, Mitsui and Fugi Kasui from Japan and Lurgi, Flakt/ABB,
Steinmuller, FLS Miljo, Snamprozette and Tampella from Europe. Most of
these companies offer both semi-dry and wet systems. However, it is
management's opinion that the LEC is the lowest cost, most efficient
acid gas removal system.
ETSI is aware of at least two companies which are developing smokestack
chemical removal products which reduce nitrous, as well as sulfur,
oxides which are removed by ETS's LEC process. In management's opinion,
the Company's LEC device is smaller, less complex, simpler to operate
and easier to retrofit than one of the competing products and has a
lower waste disposal cost and its waste is nonhazardous compared to the
second competing process.
In the event the REP technology is developed so that a commercial
product results, the REP's competition is expected to come from the
major suppliers of precipitators and baghouses. The REP, as proposed,
has no present direct competition as no other firm presently offers a
combination of electrostatic and filtration technologies. However, it
may be possible for competitors to develop technologies to achieve the
same end.
ETS is presently not aware of any competitors offering products
directly competitive with the BPM.
ETS also has competition in every area of its service market. The stack
testing service market is sensitive to location. Over one hundred
companies offer such services in the United States. The top four
companies are believed to be Entropy (North Carolina), Clean Air
Engineering (Chicago, Pittsburgh, St. Louis), Mullins (Texas) and
Engineering Science (North Carolina).
Fabric testing presents a smaller market, in which location is less
important. ETS has a well - equipped independent testing laboratory.
The majority of customers of the fabric testing market is shared by
fewer than six firms, including Filter Lab Services, Environmental
Consulting Company and Grubb Filtration.
Competition for analytical laboratory services comes from local
concerns for regional business. National and government services
require more sophisticated analytical techniques for which many
laboratories lack equipment and personnel. The USEPA has stated that it
will institute a national certification program. If and when it does,
many competing firms may leave this aspect of the business.
<PAGE>
ETS competes with universities, equipment manufacturers and other
consultants in the area of contract research and development. ETSI
believes that the key criteria considered by potential purchasers of
its services and products are service and product quality, the quality
of support, the consistency of marketing and promotion programs, the
financial stability of ETSI and pricing.
Government Regulation
The United States Environmental Protection Agency is the principal
federal agency responsible for environmental matters, including the
disposal and discharge of hazardous substances. State and local
governments are involved in implementing environmental programs on a
state and local level. USEPA, state and local policies can adversely
affect the demand for ETS and ETSAS' services by relaxing regulations
requiring tests, by delaying the effective date of regulations which
require tests and by relaxing its enforcement efforts. Furthermore, to
the extent that the budgets of administrating agencies are reduced, or
funds not made available to them, the demand for ETS and ETSAS'
services can also be adversely affected. Applicable federal legislation
includes the Resource Conservation Recovery Act ("RCRA", the Clean
Water Act, the Safe Drinking Water Act, the Clean Air Act and
amendments, Toxic Substances Control Act, the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"), and
the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
which authorized the appropriation of $8.5 billion for Superfund for
the five-year period beginning October 17, 1986 and was refunded in
1990 for an additional five years for $5.1 billion. Funding for SARA
was not renewed at the termination of the extension of the act. ETSAS
suffered some loss of revenue as a result. However, the laboratory has
diversified into serving industrial and commercial clients and receives
Federal contracts which were not funded through SARA.
ETSAS generates small quantities of hazardous waste in processing,
certain samples. Such hazardous waste is segregated in special
containers and disposed of by licensed waste transporters. ETSAS
reserves the right to return the unused portions of samples received.
ETSAS is also licensed with the USEPA and the State of Virginia to
generate and properly store small quantities of hazardous waste. Such
waste may not be stored longer than six months and must be disposed of
through a licensed hazardous waste transporter to an approved
treatment/disposal site. ETSI believes that its operations have at all
times been in compliance with all federal, state and local
environmental laws and regulations. Lyttle, in its remediation
projects, often removes hazardous waste.
<PAGE>
ETS and ETSAS' activities and its facilities are subject to regulation
under federal, state and local laws, ordinances and rules and
regulations relating to the environment, environmental quality and
occupational health and safety including RCRA, the federal Occupational
Safety and Health Act ("OSHA") and similar state laws and regulations
promulgated thereunder. In connection with ETSAS's business of waste
analysis and management, ETSAS believes it is acting in compliance with
applicable environmental laws.
ETSI has obtained certifications from all jurisdictions in which it
does business as required to conduct its laboratory testing. ETSAS is
required to pass proficiency tests and evaluations which are given on a
periodic basis to retain its certification and to participate in
contracts under the Superfund Program. ETSAS has never failed a
proficiency test and believes, but there can be no assurances, that it
will be able to obtain the required certifications and approvals in all
jurisdictions where it plans to do business in the future. The
inability of ETSI to retain present, or obtain new, certifications or
approvals where required would adversely affect its business.
Markets
ETSI has targeted utilities, industrial boilers and incinerators as the
most likely users of its air pollution control equipment. Customers for
air pollution control services and equipment include any organizations
which operate a process that emits pollutants. Examples of potential
customers include industries that utilize burning processes such as
coal-fired utility and industrial boilers, incinerators for hazardous
and municipal wastes, chemical processes such as printing, paint
manufacturing, petrochemical refining and production, pulp and paper
making and dust creating processes such as cement manufacture, mining
and grain handling. In addition, governmental agencies are purchasers
of the products and services of ETSI. The utility industry and users of
municipal and hazardous waste incinerators and resource recovery
facilities comprise ETS's principal potential customers.
Customers for analytical laboratory services include local concerns,
government agencies, resource recovery facilities and national
companies. ETSAS contacts potential clients through advertising, direct
mail and telephone and competitive bid.
<PAGE>
Fiscal 1996
A combination of adverse weather conditions and lax enforcement of
environmental regulations caused both ETS and ETSAS significant losses
in fiscal 1996. Many particulate and chemical pollution testing
programs were delayed because of the impossibility of collecting
samples. In addition, lax enforcement cause delays in the fulfilment of
long term testing programs. During this period, numerous competiting
laboratories were forced out of business. ETS and ETSAS have increased
the efficiency of their operations through automation and decreased
employment. However, its cost savings activities followed the downward
trend in both volume and price and the laboratories could not afford to
cut to the extent that they could not fulfill the quality and quantity
of testing required by their client base. In the opinion of management,
the adverse economic consequences of weather and legislative and
enforcement hiatus have bottomed out and the laboratories have, once
again, returned to profitability.
Employees
ETS and ETSAS have a total of 16 management and supervisory, 64 field
and technical and 21 administrative employees. Employees are not
represented by labor unions and relations are considered excellent.
Insurance
ETSI, for itself and its subsidiaries, ETS and ETSAS, currently carries
general and automobile liability insurance with an aggregate limit of
$2,000,000 with $1,000,000 for each occurrence and professional
liability insurance of $1,000,000. It also carries excess liability
insurance of $1,000,000, as well as workers' compensation and liability
insurance in statutory amounts.
ETS Water & Waste Management, Inc.
<PAGE>
History and Overview
Stamie E. Lyttle Co., Inc. was established by Stamie Lyttle in 1947 as
a partnership originally known as Lyttle & Barnes. With two employees,
it installed septic systems for new homes. In succeeding years, it
expanded into other related environmental and construction areas and
upon the reorganization into a subsidiary of ETSI had grown to 140
employees and was generating annual revenues in excess of $12,000,000.
Lyttle Utilities, Inc. was formed in 1982. Until the reorganization,
Lyttle Utilities, Inc. contracted water and sewer installations for
municipalities while Stamie E. Lyttle Co., Inc. concentrated on
residential construction. In 1985, LPS Corp. was formed as a leasing
company for the affiliated companies. Stamie E. Lyttle Co. Inc., Lyttle
Utilities, Inc. and LPS Corp. were merged in June, 1994 into ETSW, a
subsidiary of ETSI. Business previously conducted individually by the
three companies is now conducted by ETSW under the name "Stamie E.
Lyttle Company." Lyttle provides infrastructure services to
municipalities throughout the State of Virginia, including the state
government, encompassing installation of water, sewer and storm sewer
mains, installation of gas lines and environmental clean-up. For the
private sector, Lyttle provides services to industrial, commercial and
residential developers. Industrial and commercial services include
installation of septic, sprinkler and plumbing systems and disposal of
nonhazardous waste. Residential services include plumbing, septic
systems, installation and cleaning, installation of water sprinkler
systems. landscaping, and hookup of development projects to municipal
water and waste disposal systems.
ETSW also operates ETSL under the name "Pipe-Liner Installers." Pipe-
Liner Installers is primarily involved in the trenchless rehabilitation
of sewer and water lines under a license from Ultraliner, Inc.
("Ultraliner") covering most of the State of Florida. ETSW also has a
license from Ultraliner covering Northern Virginia.
Municipal Activities
Municipalities, particularly in the regional area surrounding Richmond,
Virginia traditionally serviced by Lyttle, have been growing at an
annualized rate of approximately 5%. This growth has strained the
ability of towns and counties to deliver water to its industrial and
residential base and to handle waste. In addition, these same
municipalities have had to upgrade their decaying and inefficient water
and waste handling systems though construction, remediation and clean-
up. The process of installing and upgrading water and waste disposal
facilities is a never-ending one because of continued population and
industrial growth, aging infrastructure and compliance with federal and
state environmental regulations.
<PAGE>
In 1956, Lyttle expanded to solve the needs of municipalities to
provide construction services in the area of water, sewer and storm
sewer mains. In order to bid for such services, Lyttle must
"prequalify" for each job (as in the City of Richmond) or annually
prequalify for each community which it serves. Prequalification
requirements include a proven track record of successfully completing
similar projects, necessary manpower and equipment to commence and
complete the project and bonding capacity to support the technical and
manpower needs. The bond required is a "performance and payment bond"
issued by a surety company based on contractor competence and financial
backing. Lyttle has successfully prequalified for every job for which
it has bid and is prequalified by all the municipalities in which it
works.
Municipalities and the state government must, by law, advertise in
local newspapers and public bulletin boards and through the Dodge
Report The Dodge Report is distributed weekly to subscribers and
contains all material information on municipal construction projects
including description, scope of work, requirements for the contractor,
estimated amount of bid and availability of plans and specifications,
thus enabling contractors to decide which projects to pursue and to
formulate bids. Lyttle not only bids on the basis of the specifications
contained in the Dodge Report, but is also often invited by the
municipalities themselves to bid on specific projects. Lyttle selects
the projects that it desires to bid based on its computer analyses of
present and future work requirements and its anticipation of
profitability of the project based on the cost of past similar
projects. It then prepares and submits bids on appropriate projects.
Bidding is generally closed. Bids are opened in a public place and the
low qualified bidder is awarded the contract. In some instances,
specifically projects for the City of Richmond, Virginia and the State
of Virginia, minority participation is required to complete the project
and is set forth in the requirements and in the bid. Because of its
size and experience, Lyttle has developed an excellent relationship
with qualified minority contractors who ably perform their tasks as
part of the contracting team.
The municipality notifies the low bidder contract awards in writing,
stating the time frame in which the project must be completed. If
Lyttle is the low bidder, Lyttle must submit a profile called the
"Critical Path Method" or "CPM" setting forth the time frame in which
it intends to complete the project so that the designated
representative of the municipality can follow the project as outlined
in the CPM. Projects generally run in phases with progress billing on a
monthly basis until completion.
<PAGE>
Typical Recent Municipal Projects:
County of Chesterfield, completed in 1992, was a 4 mile long 24 inch
diameter water line along the James River. The total award was
$2,400,000. Completion was accomplished before the contract deadline.
Construction intersected an historic preserved neighborhood and
ecological concerns were paramount in this project. Lyttle received an
award from the County for maintenance of the ecology.
Fairfax County Parkway, completed in 1994, was a 5 mile long, 36 inch
diameter water line for the State of Virginia. The total award was
$2,300,000.
County of Henrico, completed in 1994, was a 1 1/2 mile long 24 inch
diameter sewer line. The total award was $1,700,000.
County of Chesterfield, completed in 1994, was the rehabilitation of a
water line involving the removal of decaying water line and installing
a new water line in its place. Total award was $850,000.
City of Richmond, awarded in June, 1994, completed in March, 1995, was
a 36 inch diameter transmission. Total award was $2,600,000
Fairfax County Water Authority, awarded April, 1994, completed in June,
1995, was a 36 inch diameter water line. Total award was $2,442,000.
City of Richmond, awarded September, 1995, estimated completion in
March, 1997 represents construction of a concrete drainage channel and
the reconstruction of a strorm drain system and related work. Total
award is $1,353,252.
York County, awarded June, 1995, involved installation of 16" water;
completed in February, 1996. Total award was $625,000.
County of Henrico, awarded in August, 1996 is a contract valued at
$268,696 to furnish two water lines. Completion is expected in October,
1996
<PAGE>
Commercial Construction
Lyttle performs services for developers, corporations and homeowners.
For residential and commercial developers, Lyttle provides the
interface between the developer and the local zoning authorities for
site development plan, sewer and water main hookup and soil conditions.
For commercial and industrial customers, Lyttle provides the technical
expertise required to maintain the plant conditions in an
environmentally safe fashion. For example, a factory or office building
owner often will establish its own sewer system but will later discover
that the installation does not meet the needs for adequate holding tank
capacity. Lyttle, in such a situation, will design and modify the
equipment to meet legal and environment requirements. It also maintains
such equipment.
For homeowners, it provides plumbing, cleaning, sprinkler system
maintenance, fencing and landscaping on an individual basis. This
business representing approximately 20% of revenues, has been
successful because Lyttle can allocate manpower on an "as needed" basis
from other jobs. Thus, it can uniquely provide reliable and timely
service without the problems of job overload which afflict smaller
competitive firms. Lyttle was often the original installer of the
equipment for the developer and maintains records of each facility
indefinitely and thus knows which equipment was installed and when so
that it can often assess problems before arrival of its employees on
site.
Typical Lyttle Commercial Projects
The following are representative commercial projects undertaken by
Lyttle:
Port of Richmond, as a subcontractor to the prime contractor, to be
completed in December, 1994, involved water and sanitary sewer
construction. Total contract is $220,000
Delmar Properties, a subsidiary of Chesapeake Corporation, two
contracts, completion, October, 1994, involved water, sanitary and
storm sewer construction. Total aggregate contract amount is $550,000.
Salisbury Corporation, completed in October, 1994, involved
construction of water and sewer systems. Total contract amount of the
two contracts is $400,000.
<PAGE>
Dawkins Branch, completed 1991, involved a sanitary sewer. Total
contract price was $860,000.
Ethyl Corporation, as a subcontractor, completed in 1993, involved a
water and sewer system for a research facility. Total contract amount
was $450,000.
Stonehouse, Inc., a wholly-owned subsidiariary of Chesapeake
Corporation, involved the installation of 36" water line; this contract
was the first phase of a 20-year development project. The first phase
was successfully completed in March, 1996. Total contract amount was
$770,000.
Ultraliner
In February, 1996, ETSI acquired certain assets of Olympic Industries,
Inc., Pompano Beach, Florida, for 539,130 Shares of Common Stock. The
assets were placed in a newly-formed corporation, ETSL, which became a
wholly-owned subsidiary of ETSW.
Through the purchase of these assets, the Company entered the
trenchless rehabilitation business throughout Florida and in Northern
Virginia. The Company believes that the trenchless rehabilitation
market will be a major growth area as the sewer and water lines in most
urban areas throughout the world are wearing out. Over time, pipes get
old and brittle causing breaks which lead inevitably to water leaks and
the seapage of ground water into the pipes. In many cases, roots grow
into pipes and entire sections of pipe are frequently missing.
The traditional method of repairing such pipe is by digging a trench
above the pipe, removing the old pipe and replacing it with new pipe.
The cost and time spent in avoiding environmental damage is great; and
the disruption caused by digging up the old damaged lines and replacing
them can be major. Since most older pipe is found in downtown areas,
the adverse effects on traffic, air quality and the creation of ear
splitting noise from jack hammers and earth moving equiment are
exacerabated by the surrounding foot and vehicular traffic.
<PAGE>
The "Ultraliner" technology used by ETSW and its subsidiary, ETSL,
permits rehabilitation of such lines on a faster, cheaper and cleaner
basis without the necessity of digging trenches. First a robotic
vehicle with lights and video cameras traverses the damaged lines to
detect blockage, offset joints or other impediments. Then, any remedial
work is performed within the existing lines either through a point
repair from the surface or through a remote device. Installation of
Ultraliner requires only one insertion point. At the job site, liner
which is constructed specifically for the job and which is folded to
fit within the existing sewer or water line is inserted so that it
extends through the damaged length. The length of each pipe is at least
the distance from manhole to manhole. Insertion is made with a power
winch and steel cable connected to the end of the liner.
Then, through application of heat and pressure, the liner expands to
form a perfect fit within the existing line. The fit is so tight that
it leaves no annular space for unwanted water migration between the
Ultraliner and the old pipe. The new smooth interior maintains peak
flow and inhibits buildup of foreign material. The life of the
replacement liner is the same as new pipe.
The Company estimates that trenchless rehabilitation has a current
annual market of $250,000,000 and predicts growth to $500,000,000 by
the year 2000. In addition, there is associated diagnostic engineering
work. The Company estimates that the worldwide market, including
engineering, is in excess of $1 billion.
ETSL has been awarded a contract with an estimated value of $650,000
with the City of Fort Lauderdale to install 8" Ultraliner for
rehabilitation of old sewer lines. Installation under the contract
commenced in March, 1996; estimated completion in September, 1996. The
City of Orlando has awarded ETS Liner, Inc. a one-year maintenance
contract with a value up to $500,000.
ETSW has successfully completed two demonstration projects. The first
one was in Fairfax County, Virginia, in November, 1995 of lining 1,438
linear feet of existing eight inch concrete sewer pipe, including
reinstatement of 22 sewer services for existing homes, which was
witnessed by personnel from the engineering community and
municipalities from the Richmond and Northern Virginia areas. The other
project is located in Stafford County, Virginia involving the lining of
390 linear feet of eight inch sewer pipe and the reinstatement of five
sewer laterals which was completed in June, 1996. Although both of
these projects were small, they demonstrated both the effectiveness of
the Ultraliner technology and of the ability of Lyttle to implement the
technology.
<PAGE>
Fiscal 1996
At the beginning of the fiscal year, ETSW aggressively bid on three
major commercial projects involving the laying of waterlines for new
residential housing and commercial office parks. The bids were
accepted. During construction, which took place in late fall and in the
winter of 1995-1996, ETSW experienced approximately 60 days of snowfall
and rain and approximately 30 additional days of wet and muddy
conditions which prevented or slowed completion of the projects.
Projection completion was not only rendered over-budget but delayed;
and much overtime was required to complete the projects once the
weather improved in the Spring. In addition, ETSW bid on landscaping
projects in housing developments which, because of weather conditions,
proved to be unprofitable.
Present market conditions for commercial construction of water, sewer
and irrigation are strong, aided by the planned construction of several
major semi-conductor factories in the Richmond, Virginia area.
Lyttle Future Plans
Lyttle began in the Spring of 1995 and has continued in fiscal 1996 to
expand the services it offers into Northern and Western Virginia in the
areas of plumbing, sprinkler irrigation and fencing with the intention
of making Lyttle a household name in these areas as it is in the
Richmond area. Lyttle also has begun to bid for projects through
Virginia and into Maryland and New Jersey. It plans to increase its
geographical reach through steady and organized growth.
Lyttle has begun to tap the growth of Northern Virginia by providing
similar municipal services there as it does in the Richmond area. In
April, 1994, it opened an office in Fairfax, Virginia from which it is
bidding on municipal construction projects. It was awarded a major
contract with the Fairfax County Water Authority as a subcontractor to
Branch Highways which is presently under construction. It desires to
acquire companies in similar businesses, although no such acquisition
candidates have been located and there is no assurance that any will be
found. Lyttle intends to focus on commercial construction projects and
on projects involving the Ultraliner technology.
Lyttle is working with ETS and ETSAS, to provide turnkey construction
projects utilizing its construction expertise and ETS's LEC and Dry
Reactor technologies and ETSAS's chemical and water analyses of
pollutants. The advantage of proposed joint ventures with the other
ETSI subsidiaries is that previously ETS could only offer its
technologies on a royalty only basis, whereas with ETSW it can now
offer both the technology and the construction of devices employing a
given technology or clean up of environmental problems. Thus, ETS need
not market its technologies through contractors, but directly to end-
users, specifically, hospitals for Dry Reactor and utilities and
manufacturing companies for the LEC system.
<PAGE>
Lyttle Personnel
Lyttle has 160 employees, 30 in residential service, 100 in
construction and 30 in supervisory and administration service. Lyttle
employees are not represented by any union. Management considers its
relationship with its employees to be good. Some of its personnel are
third generation employees.
Lyttle Insurance
Lyttle carries $2,000,000 of general liability, $1,000,000 of product
liability, $1,000,000 per occurrence of bodily injury and automobile
and a $5,000,000 umbrella insurance policy. Lyttle also is covered by a
surety bond.
Lyttle Government Regulation
Lyttle's activities are regulated by Federal and state statutes. In
general, Federal statutes are enforced on the state level by the
Virginia Department of Labor and Safety for OSHA safety standards and
by the Department of Health or Department of Public Works for sewer,
septic and water systems. Lyttle has never been cited for a safety
violation.
Lyttle Competition
Lyttle's competition comes from many smaller and narrowly focused
companies in its geographical region. Lyttle's market share of each of
its business activities exceeds 50% in the Richmond, Virginia area. In
the trenchless sewer and water main rehabilitation business, its major
competitor is Insituform, Inc. ETSE believes that its technology is
superior and that it can underbid Instituform on projects and still
provide adequate margins. However, Insituform has been completing
projects for municipalities for over a decade and Ultraliner must first
prove itself to municipalities through successful completion of small
contracts before it could be chosen on larger programs.
<PAGE>
Completion of Material Contracts by Subsidiaries of ETSI
Most of ETSI's subsidiaries' contracts are of a short-term duration and
are completed within a few months of the order or award. Certain
contracts, such as those from utilities, are annual and are completed
in stages against task orders. Government agencies often issue open
orders for which task orders are issued. There are no conditions
precedent to the issuance of task orders and they are issued pursuant
to the specific orders of the client for the services. The Company's
backlog consists of contracts and task orders, already given but not
yet completed and does not include open orders which may or may not
result in task orders. In general, it has been ETSI's experience over
the past three fiscal years that substantially all open orders
ultimately result in task orders.Task orders have, from time to time,
exceeded the amount of open orders due to needs of the client which
developed subsequent to the contract date. However, the dates when open
orders result in task orders, subject to the length of the contract,
and the possibility that certain open orders will not result in task
orders depends on both the needs of the client throughout the contract
period and, in the case of federal agencies, the availability of
funding. There can be no assurance that existing contracts or future
contracts containing open orders will result in task orders covering
the entire contractual amounts. In addition, ETSI is not aware of any
significant unrecognized cost to complete any open contract.
Item 2. Properties
ETSI occupies approximately 45,000 square feet of office and laboratory
space in a modern commercial building in Roanoke, Virginia, under lease
agreements of its subsidiaries, ETS and ETSAS, effective as of February
1, 1991, which expire on December 31, 2000, from PDJ Associates, a
partnership in which John D. McKenna, President and Roberta Greiner,
widow of Gary P. Greiner, formerly an officer and director, are
partners. ETSI believes that the leases with PDJ Associates are on
terms as favorable as those which would have been available from a non-
affiliated third party.
The analytical capabilities of ETS and ETSAS consist of three entities:
a) a fixed-location state of the art automated and computerized
comprehensive analytical laboratory for the analysis of contaminated
air, water and solid waste samples; b) mobile laboratories which
provide the capability for field analysis of toxic air emissions; and
c) a fixed location fabric testing laboratory which provides
specialized filter bag (fabric) testing and evaluations. The laboratory
and office premises are adequate for ETS and ETSAS' present and
anticipated needs.
<PAGE>
On June 1, 1994, ETSW entered into a lease of its premises which are
owned by the estate of Stamie E. Lyttle at $10,500 per month for two
years. On June 1, 1996, the lease was renewed for a one year term with
three one year renewal options. 11,500 square feet is allocated for
office space; 20,000 square feet for warehouse and 10,000 for service
and maintenance. Outside storage exists for materials storage and for
parking of vehicles. The premises are located on 13 acres on the south
side of Richmond, two miles from Interstate 95. ETSW maintains its own
fleet of vehicles and equipment. The premises and equipment are
considered adequate for the needs of ETSW.
In addition, subsidiaries of ETSI lease regional office and/or
laboratory space in Pompano Beach, Florida, Fairfax, Virginia and
Huntington Valley, Pennsylvania.
Item 3. Legal Proceedings.
No material legal proceedings are pending to which the Company or any
of its property is subject, nor to the knowledge of the Company are any
such legal proceedings threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
ETSI's common stock trades on the American Stock Exchange - Emerging
Company Marketplace ("AMEX-ECM") under the symbol "ETS.EC." The
following table summarizes the market price information for ETSI's
Shares on the AMEC-ECM during fiscal 1995 and 1996.
High Low
Year Ended May 31, 1996
First Quarter $2.06 $1.50
Second Quarter $1.81 $1.25
Third Quarter $1.56 $1.31
Fourth Quarter $1.38 $0.94
Year Ended May 31, 1995
First Quarter $2.31 $1.38
Second Quarter $2.13 $1.75
Third Quarter $2.19 $1.75
Fourth Quarter $2.13 $1.63
As of May 31, 1996 there were approximately 1,600 stockholders.
No dividends have been declared or paid by ETSI and it is anticipated
that, for the foreseeable future, all profits will be reinvested in the
business of ETSI.
<PAGE>
In addition to the registrant's shares of common stock, there were
issued and outstanding as of May 31, 1996 warrants and options to
purchase shares of common stock as follows:
Number Type Exercise Termination
Price Date
14,999 Warrants $1.76 September 1, 1996
32,680 Warrants $1.92 September 22, 1996
5,000 Warrants $2.20 December 28, 1999
10,000 Warrants $2.20 December 31, 1999
1,000 Warrants $2.20 January 3, 2000
25,000 Warrants $2.20 January 17, 2000
10,000 Warrants $2.20 March 31, 2000
123,173 Options $1.05* February 7, 1997
100,000 Options $1.58* February 28, 1997
50,000 Options $2.14* April 23, 1997
274,000 Options $2.35* November 4, 1997
350,000 Options $1.50 July 13, 1998
100,000 Options $1.37 July 19, 1998
23,200 Options $1.38 August 20, 1998
15,000 Options $1.75 October 28, 1998
2,000 Options $1.63 November 5, 1998
157,200 Options $1.06 April 11, 1999
476,000 Options $1.69 June, 17, 1999
75,000 Options $1.81 September 29, 1999
14,000 Options $1.88 January 12, 2000
4,000 Options $1.88 January 16, 2000
90,000 OptionS $1.75 January 31, 2000
8,000 Options $2.06 March 1, 2000
160,000 Options $1.75 May 8, 2000
200,000 Options $1.06 May 24, 2001
*Canadian dollars
<PAGE>
Item 6. Selected Financial Data
Selected Financial Data as of and for the Years Ended May 31
1996 1995 1994 1993 1992
Total Revenue $20,539,261 $19,911,906 $17,090,109 $17,408,201 $17,090,492
Gross Profit 1,983,500 3,535,181 2,383,846 2,550,313 2,812,551
Operating
Income (Loss) (1,638,564) 496,616 (588,525) (767,711) 1,891
Net Income
(Loss) (1,998,791) 502,666 (701,392) (865,419) 5,701
Total Assets 9,835,016 9,658,611 7,672,962 6,987,982 7,637,083
Long-term Debt 1,638,912 2,475,967 1,641,741 1,482,871 2,018,103
Total Stock-
holders' Equity 1,488,306 3,329,664 2,436,151 2,974,101 3,686,734
Earnings (Loss) Per Share:
Primary $(0.16) $0.04 $(0.06) $(0.07) $0.00
Fully Diluted $(0.16) $0.04 $(0.06) $(0.07) $0.00
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of operations
Introduction
A few relatively large contracts in any one business segment in any
fiscal year can make any segment generate relatively large revenues in
that year. Because disproportionate generation of income has occurred
periodically throughout the existence of ETSI, the Company's strategy
has been to offer a variety of services and maintain a flexible staff
capable of executing different tasks. Services are tied to different
markets, such as new pollution control equipment expenditures by
industry, government funding or legislative enforcement. In addition,
ETSI continually markets its services through brochures, seminars and
attendance at trade shows and conferences and by telemarketing. ETSI
attempts to increase its business in the aggregate. As the United
States experiences economic and legislative cycles, the demand for each
of the Company's services fluctuates accordingly.
On June 1, 1994, ETSI merged with three related Richmond, Virginia
firms, Stamie E. Lyttle Company, Inc., Lyttle Utilities, Inc. and LPS
Corporation, and consolidated them into ETSW, a wholly owned subsidiary
of ETSI. The combination was effected through the issuance of
2,730,000 shares of ETSI common stock and has been accounted for as a
pooling of interests. On January 19, 1995, ETSI merged a Richmond,
Virginia firm, Environmental Laboratories, Inc., with its subsidiary,
ETSAS, which increases ETSAS size by about 50% and makes ETSAS the
largest environmental contract laboratory in the state of Virginia.
This combination was effected through the issuance of 183,600 shares of
ETSI common stock and has also been accounted for as a pooling of
interests. On April 3, 1995, ETSI purchased, with the issuance of
113,000 shares of ETSI common stock, the assets of Air Compliance,
Inc., a Pennsylvania Corporation, and incorporated these assets into
the business of ETS. On February 5, 1996, ETSI acquired certain assets
of Olympic Industries, Inc. in exchange for 539,130 shares of ETSI's
common stock and incorporated these assets into a new wholly owned
subsidiary of ETSW, ETS Liner, Inc. On April 18, 1996, ETSI acquired
certain laboratory assets of Dewberry and Davis, Inc. in exchange of
65,617 shares of ETSI's common stock and incorporated these assets into
ETSAS. These transactions are discussed further in Note 2 to the
audited consolidated financial statements for the year ended May 31,
1996 ("fiscal 1996"). The transactions are anticipated to broaden the
revenues and asset base of ETSI in coming years. The results of
operations for the fiscal years presented include the poolings of
interests transactions as if as if they had been consummated at the
beginning of the earliest period presented while purchase transactions
are reflected since the date of acquisition.
<PAGE>
ETSI has divided its revenues into four meaningful categories; (a)
services - encompassing field and analytical testing, regulatory
assistance and monitoring; (b) consulting/engineering - encompassing
consulting and engineering services and educational areas; (c)
products; and (d) construction.
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues for fiscal1996 were $20,539,261 compared to $19,911,906 for
the year ended May 31, 1995 ("fiscal 1995") for a 3% increase.
Total testing service revenues were $5,957,008 for the current year
compared to $6,122,207 for fiscal 1995 for a 3% decrease. This decrease
was due to several factors. The unfavorable weather conditions caused
postponements and delays in executing contracts. There was also a
decline in bidding opportunities for the testing service area as a
number of customers had budget constraints and the state and federal
government still at odds in the pollution control area led to the delay
of awarding and start-up of government contracts for the analytical
laboratory.
Field testing service revenues were $2,356,553 compared to $2,778,032
for fiscal 1995 for a 15% decrease. This decrease was due in part to
the decrease in services for a pollution control monitoring system
supplier for stack testing particularly related to continuous emission
monitors for electric utilities which was a major part of the fiscal
1995 field testing services. Although the number of contracts serviced
in fiscal 1996 were about the same as the previous year, the dollar
amount of the contracts were somewhat lower. Major customers for fiscal
1996 included two electric power utility plants, an air pollution
control product manufacturer and two municipal waste incinerator plants
representing 31% of field testing services.
Revenues for analytical laboratory services which also include in-house
projects and products were $2,904,652 for the year compared to
$2,769,169 for fiscal 1995 for an increase of 5%. Commercial revenues
were up 10% and included increases in groundwater monitoring and CERCLA
soil remediation activities. Government revenues were down 56% for the
current year due to the U.S. Congressional budget impasse. This not
only caused delays in the incremental funding of existing contracts
but produced delays in awarding several new contracts for which the
laboratory had negotiated a best and final status. Because of the
severe winter weather the commercial and government projects scheduled
during the third quarter were delayed and re-scheduled up to three
months later.
<PAGE>
Regulatory Assistance revenues were $534,889 compared to $490,531 for
an increase of 9% over the fiscal 1995 revenues. Major customers
comprising 59% of the total included a paper manufacturer, a chemical
manufacturer, an iron foundry and a railroad company. Revenues for
monitoring services were $160,914 for fiscal 1996 compared to $84,475
for fiscal 1995 for an increase of 91%. Two customers, a printing
company and a chemical plant, accounted for 93% of the total monitoring
service revenues.
<PAGE>
Revenues for consulting/engineering services for fiscal 1996 were
$354,484 compared to $492,490 for fiscal 1995 for a 28% decrease.
Consulting service revenues were $112,033 which was an increase of 58%
over the prior years' revenues of $70,761 with major customers being a
government contractor consultant and research firm for 54% and an
electric utility plant for 27% of the total consulting revenues. The
increase was due largely to the increased services for the same
government contractor over fiscal 1995. Revenues for engineering were
$116,278 for fiscal 1996 compared to $349,395 for fiscal 1995 for a 67%
decrease. Major customers for the current year consisted of two steel
manufacturers for 89% of the total engineering. The decrease in
revenues was due to a decrease in services from fiscal 1995 for one of
these steel manufacturers.
Revenues for in-house projects which consist of sale of books were
$38,213 compared to $17,916 for fiscal 1995 for an increase of 113%.
Additional tutorials have been added to the line of books. To educate
the public on the availability of our books, promotional material is
being included with the seminar materials and some promotional mailings
are being made. Seminar revenues were $87,960 compared to $54,418 a
year ago for a 62% increase. The current year included revenues from a
seminar sponsored by the United States Agency for International
Development (USAID) for an Air Pollution Control Technologies Course
which commenced in the third quarter and provided 76% of fiscal 1996
seminar revenues and the increase for the year.
Product revenues were $8,430 for fiscal 1996 compared to $17,737 for a
decrease of 52% and included both the Baghouse Performance Monitoring
(BPM) hardware and software products. A new clean air regulation
includes a section that will require baghouse operators to provide more
exact monitoring with a record of the problems and the corrective
actions taken. ETS has proposed to the Environmental Protection Agency
(EPA) that the BPM be considered as an acceptable protocol for logging
and monitoring this information.
<PAGE>
Construction revenues for fiscal 1996 were $14,219,339 compared to
$13,279,472 for fiscal 1995 for a 7% increase. The current year
experienced growth in some areas of business while some areas showed a
decline in the sales. Construction activities in general were slow due
to higher interest rate and a severe winter. Irrigation showed a
significant growth and this growth pattern is expected to continue in
fiscal 1997. However, the utility and septic construction experienced a
decline in overall activities in terms of sales and bidding.
Fortunately, toward the end of year, both of these areas showed
improvements in bidding inquiries which will result in sales growth for
the future. Even with the increase in sales for fiscal 1996, the
construction business had a large loss for the year. The nature and
cost of projects during fiscal 1996 were heavily weighted toward
materials rather than labor and equipment thereby reducing the gross
profit margins as higher gross profits are generated from labor and
equipment components than from materials. The local area economy was
slow and market competitive pressures kept prices of projects at lower
levels thereby further reducing gross profit margins. Adverse weather
conditions brought construction to a standstill during the third
quarter and first part of fourth quarter, thereby delaying work until
late fourth quarter or the first quarter of fiscal 1997.
Cost of goods and services for fiscal 1996 were $18,555,761 or 90% of
revenues compared to $16,376,725 or 82% of revenues during fiscal 1995.
This increase was attributed to price erosions due to competitive
pricing resulting in higher cost in executing the work, the delays
experienced with the unfavorable weather conditions and the nature and
cost of projects heavily weighted toward materials rather than labor
and equipment.
With a 3% increase in revenues and an increase of 13% in the cost of
goods and services, the gross profit for the year ended at $1,983,500
or 10% of revenues for the current year compared to a gross profit of
$3,535,181 or 18% of revenues for fiscal 1995.
Selling, general and administrative expenses for the current year were
$3,622,064 or 18% of revenues compared to $3,038,565 or 15% of revenues
for fiscal 1995. The increase is the result of additional legal
expense and added facilities relating to acquisitions and an overall
general increase in office operations.
<PAGE>
Interest income from savings on deposit for fiscal 1996 was $21,107
compared to $28,610 for fiscal 1995. Interest expense representing the
interest for utilization of the credit line and interest paid in
financing of capital equipment was $392,131 for the current year
compared to $348,870 for fiscal 1995. Other income representing the
sale of miscellaneous scrap materials was $10,797 compared to $22,266
for fiscal 1995.
Net Loss for fiscal 1996 was $1,998,791 compared to net income of
$502,666 for fiscal 1995. The current year loss was a result of several
factors. All the subsidiaries were affected by the unfavorable weather
conditions causing delays, a decline in bidding opportunities due to
budget constraints of customers, competition pressure keeping margins
low, and the state and federal government still at odds delaying
awarding of contracts.
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenues for the year ended May 31, 1995 ("fiscal 1995") were
$19,911,906 compared to $17,090,109 for the year ended May 31, 1994
("fiscal 1994") for a 17% increase.
Total testing service revenues were $6,122,207 for fiscal 1995 which
was an increase of 21% over revenues for fiscal 1994 of $5,066,353.
Field testing services generated revenues of $2,778,032 compared to
$1,681,471 for the preceding year for a 65% increase. There was a
significant increase in the stack testing business particularly related
to continuous emission monitors for electric utilities. There were five
major customers which contributed 50% of the total field testing
revenues. These customers consisted of a pollution control monitoring
system supplier, an iron foundry, an electric power utility plant and
two municipal waste incinerator plants. The enforcement of Title IV
1990 Clean Air Act Amendments provided the opportunity during fiscal
1995 to obtain substantial electric utility testing contracts. The
acquisition of Air Compliance, Inc., as previously mentioned, accounted
for 5% of the field service revenues.
<PAGE>
Analytical laboratory revenues in fiscal 1995 were $2,769,169 compared
to $2,920,767 for fiscal 1994 for a 5% decrease. Much of this decrease
is attributable to a nationwide over-capacity in the environmental
laboratory business which has depressed pricing. In fiscal 1995, the
ETSAS Roanoke laboratory, received 12% more samples than in fiscal 1994
but the higher discounts were responsible for a reduction of revenues
compared to fiscal 1994. The merger of Environmental Laboratories,
Inc., Richmond, Virginia, contributed 36% of the total laboratory
revenues for the 1995 fiscal year and 36% for the 1994 fiscal year.
The total laboratory services included 17% government services and 83%
commercial services.
Revenues for regulatory assistance for fiscal 1995 were $490,531
compared to $312,433 for fiscal 1994 for a 57% increase. Three major
customers, a chemical plant, an iron foundry and a steel manufacturer,
accounted for 53% of the regulatory assistance revenues for fiscal
1995.
Monitoring services decreased in fiscal 1995 to $84,475 from $151,682
for fiscal 1994 mainly due to a decrease in services for a chemical
plant. The total for fiscal 1995 consisted of revenues from a chemical
plant and an electric utility plant.
Consulting/engineering service revenues for fiscal 1995 were $492,490
compared to $471,190 for the 1994 fiscal year. The consulting activity
generated revenues of $70,761 compared to $368,525 for fiscal 1994.
This drastic reduction in revenues were mainly due to the completion of
an Environmental Protection Agency contract. Engineering services were
up sharply to $349,395 from $5,960 for fiscal 1994. These services
included services for a steel manufacturer, an iron foundry and a
Taiwan steel fabricator and boiler maker for design of a baghouse. The
sale of books amounted to $17,916 for the 1995 fiscal year compared to
$30,396 for fiscal 1994 and seminars were also down at $54,418 revenues
compared to $66,309 for the 1994 fiscal year.
Revenues from the sale of products were $17,737 compared to $11,383 for
fiscal 1994 and consisted of an order for a Baghouse Performance
Monitor (BPM) from a steel supplier.
Construction service revenues for fiscal 1995 were $13,279,472 compared
to $11,541,183 for a 15% increase. 60% of these revenues were from
underground water, gas and sewer utility work, 15% from irrigation and
land services and 25% for septic system installation, fencing and other
related services. Major customers included the City of Richmond
representing 18% of the total construction revenues for fiscal 1995,
the municipalities of the local, county and city governments, the State
of Virginia and major developers in the Richmond, Virginia area.
Growth areas include the fencing service and the Fortune 500 customers.
<PAGE>
ETSI's gross profit for fiscal 1995 was $3,535,181 or 18% of revenues
compared to $2,383,846 or 14% of revenues for fiscal 1994. This
increase was due to an increase in revenues and a decrease in cost of
goods sold of 4% as a percent of total revenues.
Selling, general and administrative expenses were $3,038,565 for fiscal
1995 compared to $2,972,371 for fiscal 1994. This increase was due in
part to extra expenses relating to the mergers and acquisitions during
the year amounting to 2.2%.
Interest income for the current year was $28,610 compared to $16,099
for fiscal 1994 as a result of earned interest from savings on deposit.
Interest expense for the year was $348,870 compared to $212,861 for
the prior fiscal year. This expense represents the interest expense
for utilization of the credit line and interest paid in financing of
capital equipment. Insurance proceeds represents $304,044 of life
insurance proceeds received as a result of the death of an officer of
ETSI.
Net income for fiscal 1995 was $502,666 compared to a loss of $701,392
for fiscal 1994. The transition from a loss to a profit was the direct
result of higher revenues as ETS benefitted from the implementation of
parts of the 1990 Clean Air Act Amendments and ETSW improvement in
revenues by taking advantage of the somewhat improved construction
markets and a turnaround on the bottom line as a result of the
reorganized and streamlined organization. ETSAS was the only subsidiary
not to have an improved year as its markets remained flat and pricing
very competitive.
Liquidity And Capital Resources As Of The End of Fiscal Year 1996
During fiscal 1996, ETSI received $82,433 from the exercise of employee
stock options. As of May 31, 1996, there were 2,469,573 stock options
outstanding to employees with expiration dates of February 7, 1997
through May 24, 2001 and 98,679 outstanding warrants to various people
with expiration dates of September 1, 1996 through March 31, 2000.
On February 5, 1996, ETSI purchased, with the issuance of 539,130
shares of ETSI stock, the assets of Olympic Industries, Inc. of Pompano
Beach, Florida, and incorporated these assets into a new corporation,
ETS Liner, Inc., a wholly owned subsidiary of ETSW. ETSI entered into a
repurchase agreement with Olympic Industries whereby the Company agreed
to repurchase these shares of stock. See Note 7 to the audited
consolidated financial statements for further details.
ETSI acquired certain laboratory assets of Dewberry and Davis, Inc. in
Fairfax, Virginia on April 18, 1996 in exchange for 65,617 shares of
ETSI common stock and incorporated these assets into the assets of
ETSAS.
<PAGE>
ETSI has an aggregate line of credit of $1,590,000 to accommodate the
need for temporary working capital. As of May 31, 1996, $1,071,427 of
the total line of credit was being utilized.
Major components of cash flow used in operating activities included the
net loss for fiscal 1996 of $1,998,791 and an increase in accounts
receivable of $310,839 which was offset by depreciation and
amortization, a decrease in cost and estimated earnings in excess of
billings on uncompleted contracts and an increase in accounts payable
which resulted in net cash used in operating activities of $351,453.
Cash flow provided by investing activities of $1,347,358 included
proceeds from a sale/leaseback of equipment of $1,660,900 and sale of
equipment of $36,940 less purchases of property, plant and equipment of
$334,065 and patent costs incurred of $16,417. Major components of cash
flow used in financing activities of $939,367 include the principal
payments on long-term debt of $1,869,789 and reduction in credit line
of $179,237, proceeds from notes payable to stockholder of $600,000 and
proceeds from long-term debt of $344,465. The net cash and cash
equivalents at May 31, 1996 was $121,713 compared to $65,175 at May 31,
1995.
Backlog at May 31, 1996 was $6,844,851 compared to $4,414,772 at May
31, 1995. ETS and ETSAS held open orders from various clients,
including commercial clients as well as federal and state government
agencies. If all the work under these open orders is authorized, the
Company estimates that its backlog would increase by $1,181,866 to a
total of $8,026,717 compared to open orders at May 31, 1995 of
$4,234,275 to a total backlog of $8,649,047. This decrease in total
backlog reflects the decrease in government activity. Most of ETSI's
contracts are of short-term duration and are completed within a few
months of the order or award. Certain contracts such as those from
utilities are annual and are completed in stages against task orders.
Government agencies often issue open orders for which subsequent task
orders are issued. There are no conditions precedent to the issuance of
task orders and they are issued pursuant to the specific orders of the
client for the services. Experience shows that substantially all open
orders ultimately result in task orders and at times have exceeded the
amount of the open order. There can be no assurance that existing
contracts or future contracts containing open orders will result in
task orders covering the entire contractual amounts. ETSI is not aware
of any significant unrecognized cost to complete any open contract.
Recently, ETS received a letter of intent to license the LEC technology
from a subsidiary of Taiwan's largest and most prominent engineering
firm. This firm provides a full range of architectural/engineering and
construction services to utility and industrial power producers
throughout Asia. Negotiations are in process which would involve a
$50,000 technology transfer fee and a 4-6% royalty on a sales guarantee
of $6,000,000. Initially the license will cover power projects in
Taiwan. The firm has expressed interest in expanding the coverage to
other Asian countries including China. In January 1996, ETSI entered
into a collaborative agreement with Korea Cottrell, a firm for the
manufacture and sale of the LEC to the Korean market. This firm is
Korea's premier supplier of air pollution control systems. Marketing
efforts have been initiated in eastern Europe where countries such as
Poland, Hungary and the Czech Republic must address their air emissions
to be considered for membership in the European Community.
<PAGE>
Recent Accounting Developments
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed of," which is required to be adopted by the Company for the
year ending May 31, 1997. Statement 121 requires companies to review
long-lived assets and certain identifiable intangibles to be held, used
or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company believes the adoption of this statement will
not have a significant effect on its consolidated financial statements.
In October 1995, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), which is effective for
transactions entered into in fiscal years beginning after December 15,
1995. The Company believes the adoption of SFAS 123 will not have a
significant effect on its consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
See Financial Statements starting on page F-l for this information.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No disagreements exist with respect to accounting and financial
disclosure.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following sets forth certain information concerning the directors
and executive officers of ETSI. At the Annual Meeting of Shareholders
held in October, 1995, the following individuals, were elected to serve
as directors of ETSI. Billy H. Branch, who was appointed to fill the
vacancy created by the death of Gary P. Greiner, resigned. All
Directors hold office for a one year term or until their successors are
elected and have qualified. The Officers serve at the discretion of the
Boards of Directors.
Name Position
John D. McKenna President and a Director
John C. Mycock Secretary, Treasurer and a Director
Coleman S. Lyttle Director
Navin D. Sheth Director
Lee A. Raver Director
Thomas W. Marmon Director
David F. Tompkins Director
John D. McKenna (56 years old) has been President of ETSI since 1988,
and serves as Chief Executive Officer of ETS and ETSAS. He was
President of ETS from 1978 to 1991 and has been a Director of ETS since
its incorporation in 1973. Dr. McKenna received his B.S. in Chemical
Engineering from Manhattan College in 1961 and undertook graduate
studies in mechanical engineering at the University of Bridgeport in
1962 and 1963. He received his M.S. in Chemical Engineering from Newark
College of Engineering in 1968 and his M.B.A. from Rider College in
1974. In 1991, Dr. McKenna received his Ph.D. from Walden University,
Minneapolis, MN. Dr. McKenna's expertise in air and water pollution
control applications includes economic evaluation applications, pilot
plant and fall scale studies of alternative pollution control
techniques. He has written a textbook on air pollution technology and
has authored or co-authored 31 publications on the subject of air
pollution control. On May 1, 1992, Dr. McKenna was chosen by the
Centennial Committee to Select Outstanding Engineering Graduates of
Manhattan College School of Engineering as one of Manhattan College's
Outstanding Engineering Graduates. He is a member of Tau Beta Pi, the
National Honor Society of Engineering; the National Association of
Environmental Professionals; and is listed in Who's Who in Engineering,
Environmental Registry, Finance and Industry, the World and Science and
Engineering. He is Past Chairman of the State of Virginia Advisory
Board on air Pollution.
<PAGE>
John C. Mycock (57 years old) has been an Officer and Director of ETSI
since 1988 and serves as Secretary/Treasurer of ETS and Secretary of
ETSAS. He has been an Officer and Director of ETS since 1979. He has
had over twenty years experience in the field of air pollution control.
Mr. Mycock currently is responsible for all preorder sales and
marketing activities of ETS. He has been involved in start-up and
testing of scrubbers, precipitators and fabric filters. His experience
has been heavily oriented to utility boiler control systems for both
particulate and sulfur oxide emissions. He is the author of a handbook
of air pollution control, engineering and technology and the author or
co-author of fifteen publications, primarily on the subject of fabric
filters and baghouses. Mr. Mycock attended Mercer County Junior College
and Trenton State College.
Coleman S. Lyttle (43 years old) has served as President of Lyttle
since June, 1994. From 1982 to 1994, he was President of Stamie E.
Lyttle Company, Inc. and Lyttle Utilities, Inc. From 1975 to 1982, he
was Senior Estimator and Project Manager of Stamie E. Lyttle Company,
Inc. Mr. Lyttle received his B.S. in Business Administration from
Virginia Polytechnic and State University in 1975.
Navin D. Sheth (50 years old) has served as Executive Vice-President of
Lyttle since June, 1994 and, since May, 1996, also served as Chief
Operating Officer. From 1972 to May, 1994, he was associated with
Stamie E. Lyttle Company, Inc. in the following capacities from 1982 to
1994 - Vice President-Finance; from 1979 to 1982 - Controller; from
1972 to 1979 - Operations Analyst. Mr. Sheth was Assistant Professor,
Virginia College, Lynchburg, Virginia from 1971 to 1972. He received
his B.S. in chemistry in 1967 from Bombay University and his MBA in
1971 from Atlanta University, Atlanta, Georgia.
Lee A. Raver (54 years old) has served as a Director of ETSI since its
incorporation in 1987. His educational background includes a B.S.
degree in Business Administration from University of Tennessee in 1966.
For the past fifteen years, Mr. Raver has acted principally as a
venture capitalist and private investor in multi-family real estate and
emerging growth companies. He presently is president of Raver Realty,
Inc., a real estate brokerage firm located in Richmond, VA, and a
director of Claycomb Press, Inc., a private publishing company located
in Chevy Chase, Maryland.
Thomas W. Marmon (64 years old), a retired businessman, became a
director of ETSI in 1992. He has, since 1990, served as a Director of
Ceres, Inc., an incentive motivation company. From 1989 to 1991, he was
a Director of Western Canada Water, Vancouver, B.C., a bottled water
company. From 1971 to 1987, he was a partner in Darinon, and from 1973
to 1984, he was President and a principal stockholder of Forest View
Psychiatric Hospital, a provider of inpatient and outpatient
psychiatric services. From 1981 to 1987, he was President and a
principal stockholder of Comus, Inc., a consumer electronic
manufacturer and distributor. The assets of these four Grand Rapids,
Michigan-based businesses were sold upon the retirement of the
principals from active participation.
<PAGE>
David F. Tompkins (48 years old) has been President of ETSAS since its
formation in 1990. From 1978 to 1990, he was employed by Centec for
which he served as President from 1985. In his positions with ETSAS
and, previously with Centec since 1985, he has been responsible for
technical administration of the Inorganic Analytical section as well as
strategy, policy and financial planning and control of business
operations. From 1978 to 1985, his responsibilities included technical
and administration of the laboratory operations as well as strategy,
policy and financial operations. Mr. Tompkins received his B.S. in
Geology from Kent State University in 1971, his B.A. in Chemistry from
Kent State University in 1973 and his M.Ad. from Lynchburg College in
1985. He holds a patent and was the recipient of an IR 100 Award for
1984 on the PCB Field Test Kit of which he was a co-inventor.
Significant Employees
Arthur B. Nunn (44 years old), President of ETS, Inc., served as
President of Air Compliance, Inc. until the acquisition of its assets
by ETS in April, 1995. From 1981 to 1991, he was Vice-President of
Scott Environmental Technology, Inc.; from 1978 to 1981, Department
Manager, Environmental Engineering Division of TRW, Inc.; from 1977 to
1978, Monitoring Engineer for the Fairfax County Air Pollution Control
Board; and from 1976 to 1977, Regional Chemist, Northern Virginia for
the Virginia State Air Pollution Control Board. Mr. Nunn served in the
Air Force from 1975 to 1976. His experience in the fields of air
pollution control include consulting, modeling, engineering,
permitting, regulatory development, sampling, analysis and impact
evaluation. He is the author of numerous articles in the field of air
toxics management and monitoring. Mr. Nunn received his B.S. in
Chemistry from the Virginia Military Institute in 1975 and his M.S. in
Environmental Science from George Washington University in 1978.
Edward D. Handel Ph.D. (46 years old) has, since 1990, served as
Manager, Regulatory Assistance. He received his B.A. in Chemistry from
Youngstown (Ohio) State University in 1972 and his Ph.D. in Chemistry
from North Dakota State University in 1977. From 1981 to 1990, he was
employed by Centec where he was responsible for the technical
administration of the Organic Analytical and research and development
section. From 1979 to 1981, he was an Assistant Professor at Virginia
Polytechnic Institute on the Faculty of Chemistry. Dr. Handel directs
activities related to environmental permitting, including performing
air dispersion modeling using both measurement and computer techniques
and the establishment of meteorological stations on plant sites
required to collect data for modeling purposes. Dr. Handel also directs
environmental audits and risk assessments.
<PAGE>
Richard H. Snyder (60 years old) was owner and General Manager of
Olympic Industries, Inc. from 1971 to 1966 until it sold certain assets
relating to the Ultraliner technology to the Company. He continues as
manager of the Florida-based operation. From 1970 to 1971, he was
Director of Dadson, Inc. From 1967 to 1970, Mr. Snyder was Assistant to
the Vice-President of Mississippi River Transmission Corporation. From
1965 to 1967, he was Assistant to the General Superintendent for the
Standard Oil Company (Ohio). From 1958 to 1965, he was Project Engineer
for Marathon Pipeline Company. Mr. Snyder earned his BSCE from Case
Institute of Technology in 1958.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered
during the Company's fiscal year ended May 31, 1996 to the President of
the Company and to other Officers and Directors receiving greater than
$100,000 in salary and bonus.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other All
Principal Salary Bonus Annual Restricted Options LTIP Other
Position Year ($) ($) Compen- Stock SARs Payouts Compen
sation Awards # ($) sation
($) ($)
John D. 1996 $93,783
Mckenna.
President
and
Chairman of
the Board
Coleman
Lyttle 1996 $150,943
President of
a subsidiary
and a Director
<PAGE>
Aggregated Options Granted and Exercised in Last Fiscal Year and
Fiscal Year End Option/SAR Values
The following table sets forth certain information concerning the
number of stock options held by the named Officers as of May 31, 1996.
Number of
Shares Dollar value
underlying of unexercised
unexercised (in-the-money)
options/warrants options/warrants
on 05/31/96 on 5/31/96
Number Number of
of Options Exer- Non- Non-
Options Warrants cise Exer- Exer- Exer- Exer
Name Title Granted Exercised Price cisable cisable cisable cisable
John D.
McKenna Pres. 120,000 $-0-
John C. Sec/
Mycock Treas. 80,000 $-0-
David F.
Tompkins Dir. 66,604 $-0-
Lee A.
Raver Dir. 470,000 $-0-
Thomas W.
Marmon Dir. 120,000 $-0-
Coleman
S. Lyttle Dir 20,000 $-0-
Navin D.
Sheth 20,000 $-0-
In addition, Coleman Lyttle will receive a bonus of $30,000 in the
event, in any fiscal year, ETSW generates net pre-tax income of
$100,000 or 1% of sales (whichever is lower); Navin Sheth will receive
a $25,000 bonus in the event, in any fiscal year, ETSW generates net
pre-tax income of 3% of sales.
Directors receive no fees or other compensation for acting as such.
They are reimbursed for travel and other expenses related to their
attendance at meetings of the directors. In June, 1996, each director
received 20,000 nonstatutory stock options exercisable at the closing
market price at the date of issue of $1.00 and expiring five years
thereafter.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a) Securities Ownership of Certain Beneficial Owners.
As of July 31, 1996 the following persons were known by ETSI to own of
record or beneficially more than five (5%) percent of the voting
interests of ETSI.
Title of Class Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class
Common Stock John D. McKenna 1,228,100 9.8%
1401 Municipal Road, NW
Roanoke, VA 24012
Common Stock Roberta Greiner 1,276,000 10.2%
5408 Setter Road
Roanoke, VA 24012
Common Stock Coleman S. Lyttle 1,091,334 8.7%
2210 Belt Boulevard
Richmond, VA 23224
Common Stock Thomas W. Marmon 1,084,288 8.6%
4390 Airwest Drive, SE
Grand Rapids, MI 49512
Common Stock Dr. Allen Kahn 971,834 7.7%
2125 Evans Road
Flossmore, IL 6042
1. Coleman S. Lyttle is the executor of the Estate of Stamie E. Lyttle
and trustee of certain trusts created thereby. He is not a beneficiary
of the estate or the beneficial owner of Shares owned by the estate or
by any such trust.
<PAGE>
(b) Security Ownership of Management.
John D. McKenna is an Officer and Director; Coleman S. Lyttle and
Thomas W. Marmon are Directors of ETSI. Their ownership of ETSI's
voting interests is stated above. In addition, as of July 31, 1996, the
following Officers and/or Directors of ETSI own the number of Shares
set forth after their names:
Title of Name and Address Amount and Nature Percent of
Class of Beneficial Owner of Beneficial Ownership Class
Common Stock John C. Mycock 336,450 2.7%
1401 Municipal Road, NW
Roanoke, VA 24012-1309
Common Stock Lee A. Raver 341,800 2.7%
1788 Hungary Road
Richmond, VA
Common Stock David F. Tompkins 6,106 0.0%
1401 Municipal Road, NW
Roanoke, VA 24012-1309
Common Stock Navin D. Sheth 532,208 4.2%
2210 Belt Boulevard
Richmond, VA 23224
Common Stock All Officers and 4,620,286 36.7%
Directors as a group
*Calculation is based upon 12,580,733 Shares of Common Stock
outstanding and does not include 267,934 Treasury Shares of ETSI,
539,130 Shares subject to a repurchase agreement related to the
acquisition of certain assets of Olympic Industries, Inc. or Shares
underlying the exercise of outstanding Options or Warrants (see Note 2
to Audited Consolidated Financial Statements).
<PAGE>
Item 13. Certain Relationships and Related Transactions.
ETSI, through its subsidiaries, rents office and laboratory space from
PDJ Associates, a partnership whose partners are Roberta Greiner, widow
of Gary Greiner, formerly an officer and director of ETSI, and John D.
McKenna, President, under a lease which terminates on December 31, 2000
and is subject to one renewal option for an additional period of five
years. Pursuant to this lease, aggregate rent was $14,500 per month for
the first year which commenced February 1, 1991 with annual increases
of 5%.
On June 1, 1996, ETSW entered into a lease of its premises which are
owned by the Estate of Stamie E. Lyttle at $10,500 per month for a
period of one year with three one-year renewal options.
In February, 1996, the Company acquired the assets of Pipe-Liner
Installer Company for 226,087 Shares of Common stock to Olympic
Industries and 313,043 Shares to Richard Snyder, its president. The
assets were placed in a subsidiary, ETSW, called ETS Liner, Inc.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements.
See "Index to Consolidated Financial Statements" on page F-Index herein.
(2) Financial Statement Schedules Required to be Filed by Item 8 on
this Form.
None.
3) Exhibits
See list on following page.
<PAGE>
Exhibit Incorporated by Reference
No. Description or Filed Herewith
3(a) Certificate of Incorporated by reference to
Incorporation Exhibit 3(a) to the Registration
as amended Statement on Form S-18
filed 9-18-87 File No. 33-17326
(the "Registration Statement")
3(b) By-Laws Incorporated by reference
to Exhibit 3(b) to the
Registration Statement
3(c) By-Laws as amended Incorporated by reference
to Exhibit 3(c) to the
Registration Statement
3(d) Restated By-Laws Incorporated by reference
to Exhibit 3(d) to the
Registration Statement
on Form 10, filed 11-22-91,
File Number 0-19678 ("Form 10")
4(a) Stock Certificate Incorporated by reference
to Exhibit 4(b) to the
Registration Statement
10(e) Lease between ETS, Inc. Incorporated by reference
and PDJ Associates re: to Exhibit 28(y) to the Form 10
1401 Municipal Road, NW,
Roanoke, VA 24012
10(f) Lease between ETS Incorporated by reference
Analytical Services, to Exhibit 28(z) to the Form 10
Inc. and PDJ Associates
re: 1401 Municipal Road,
NW, Roanoke, VA 24012
10(g) Lease between ETS Water Filed herewith
and Waste Management,
Inc. and the Estate of
Stamie E. Lyttle
23(e) KPMG Peat Marwick LLP Filed herewith
Opinion to Financial
Statements
(b) Reports on Form 8-K
None.
(c) Exhibits
See (a) 3. above.
(d) Financial Statement Schedules
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto authorized.
ETS INTERNATIONAL, INC.
(Registrant)
By: s/John D. McKenna
John D. McKenna
President and Principal
Executive Officer
By: s/John C. Mycock
John C. Mycock
Secretary/Treasurer and
Principal Financial Officer
Dated: August 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed
by the following persons on behalf of the registrant and in the
capacities on the date(s) indicated.
s/John D. McKenna
John D. McKenna Director August 29, 1996
s/John C. Mycock
John C. Mycock Director August 29, 1996
s/David F. Tompkins
David F. Tompkins Director August 29, 1996
s/Coleman S. Lyttle
Coleman S. Lyttle Director August 29, 1996
s/Navin D. Sheth
Navin D. Sheth Director August 29, 1996
Lee A. Raver Director
Thomas W. Marmon Director
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ETS Water and Waste Management, Inc.
Richmond, Virginia:
We have audited the consolidated statements of income and retained
earnings and cash flows of ETS Water and Waste Management, Inc.,
formerly Stamie E. Lyttle Co., Inc., Lyttle Utilities, Inc. and LPS
Corp. for the year ended May 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements of ETS Water and
Waste Management, Inc., formerly Stamie E. Lyttle Co., Inc., Lyttle
Utilities, Inc. and LPS Corp. referred to above presents fairly, in all
material respects, the results of their operations and their cash flows
for the year ended May 31, 1994, in conformity with generally accepted
accounting principles.
Keiter, Stephens, Hurst, Gary & Shreaves, P.C.
Richmond, Virginia
June 9, 1995
<PAGE>
SUPPLEMENTAL INFORMATION AND EXHIBITS
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The registrant's fiscal year ended May 31, 1996. The registrant has set
a date for its Annual Meeting of Stockholders of October 25, 1996.
Four copies of all material to be mailed to stockholders with respect
to such meeting will be furnished to the Securities and Exchange
Commission but such documents, when furnished, will not be deemed to be
filed with the Securities and Exchange Commission or otherwise subject
to liabilities of Section 18 of the Act (except to the extent that the
registrant specifically incorporates such material by reference in any
subsequent Form 10-K); it is expected that such documents will consist
of a Form of Proxy, Notice of Annual Meeting, Information Statement
with Schedules and/or Exhibits annexed thereto.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
May 31, 1996
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of May 31, 1996 and 1995 F-2 and F-3
Consolidated Statements of Income (Loss) - Years Ended May 31,
1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity - Years Ended
May 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - Years Ended May 31,
1996, 1995 and 1994 F-6 and F-7
Notes to Consolidated Financial Statements - May 31, 1996, 1995
and 1994 F-8 to F-22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ETS International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ETS
International, Inc. and Subsidiaries as of May 31, 1996 and 1995, and
the related consolidated statements of income (loss), stockholders'
equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ETS
International, Inc. and Subsidiaries as of May 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
loss, stockholders' equity and cash flows of ETS International, Inc.
and Subsidiaries for the year ended May 31, 1994, prior to their
restatement for the 1995 poolings-of-interests. Separate financial
statements of other companies included in the 1994 restated
consolidated statements of loss, stockholders' equity and cash flows
were audited and reported on separately by other auditors. These other
companies total contract revenues and net loss represented 68 percent
and 62 percent of the respective restated totals for 1994. We also
audited the combination of the accompanying consolidated statements of
loss, stockholders' equity and cash flows for the year ended May 31,
1994, after restatement for the 1995 poolings-of-interests; in our
opinion, such consolidated statements have been properly combined on
the basis described in note 1 of the notes to the consolidated
financial statements.
July 26, 1996
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
May 31, 1996 and 1995
Assets 1996 1995
Current assets:
Cash and cash equivalents $ 121,713 65,175
Accounts receivable:
Trade (net of allowance of $95,100
in 1996 and $99,500 in 1995) 3,749,040 3,430,536
U.S. Government agencies 48,299 71,740
Other 116,222 154,796
_________ _________
3,913,561 3,657,072
Costs and estimated earnings
in excess of billings on
uncompleted contracts 878,348 1,017,889
Notes receivable from officers 65,222 441,956
Inventories 550,728 527,823
Prepaid expenses 225,943 214,349
_________ _________
Total current assets 5,755,515 5,924,264
Property, plant and equipment:
Furniture and fixtures 943,685 890,744
Laboratory equipment 2,651,970 2,512,487
Tools and equipment 2,773,615 3,567,280
Vehicles 1,539,868 1,216,407
Leasehold improvements 757,555 751,739
_________ _________
8,666,693 8,938,657
Less accumulated depreciation
and amortization 5,753,152 5,738,508
_________ _________
Property, plant and equipment, net 2,913,541 3,200,149
Other assets:
Goodwill (net of accumulated
amortization of $11,048 in 1996
and $911 in 1995) 244,198 108,351
Notes receivable from officers 292,919 -
Prepublication costs (net of
accumulated amortization of $296,008 -
in 1996 and $195,203 in 1995) 129,615 230,420
Cash surrender value of life
insurance, net 116,283 95,687
Patents granted (net of accumulated
amortization of $26,319 in 1996
and $20,227 in 1995) 74,107 72,580
Patents pending 21,870 13,073
Other 286,968 14,087
________ ______
1,165,960 534,198
_________ _______
$ 9,835,016 9,658,611
See accompanying notes to consolidated financial statements.
<PAGE>
Liabilities and Stockholders' Equity 1996 1995
Current liabilities:
Bank overdraft $ 8,746 57,266
Notes payable to banks 1,071,427 1,250,664
Notes payable to affiliates 348,625 301,159
Current portion of long-term debt 378,779 1,608,150
Accounts payable 2,837,386 1,758,787
Accrued expenses and other liabilities 626,894 485,104
_________ _________
Total current liabilities 5,271,857 5,461,130
Long-term debt 660,133 867,817
Note payable to stockholder 600,000
Deferred gain on sale/leaseback 1,039,720
Common stock subject to repurchase
agreement, 539,130 shares 775,000
Stockholders' equity:
Common stock, no par value;
authorized 20,000,000 shares;
issued and outstanding
12,580,733 and 12,437,416
at May 31,1996 and 1995,
respectively 3,476,235 3,318,802
Retained earnings
(accumulated deficit) (1,987,929) 10,862
__________ _________
Total stockholders' equity 1,488,306 3,329,664
Commitments and contingencies
__________ __________
$ 9,835,016 9,658,611
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated States of Income (Loss)
Years Ended May 31, 1996, 1995 and 1994
1996 1995 1994
Contract revenues:
U.S. Government agencies $ 487,257 520,037 825,035
Commercial 20,052,004 19,391,869 16,265,074
__________ _________ __________
20,539,261 19,911,906 17,090,109
Cost of goods and services 18,555,761 16,376,725 14,706,263
Selling, general and
administrative expenses 3,622,064 3,038,565 2,972,371
_________ _________ _________
(1,638,564) 496,616 (588,525)
Interest income 21,107 28,610 16,099
Interest expense (392,131) (348,870) (212,861)
Insurance proceeds - 304,044 -
Other, net 10,797 22,266 83,895
__________ ________ ________
Income (loss) before income taxes (1,998,791) 502,666 (701,392)
Income tax expense - - -
__________ _________
_________
Net income (loss) $ (1,998,791) 502,666 (701,392)
Net income (loss) per common share:
Primary $ (.16) .04 (.06)
Fully diluted ( 16) .04 (.06)
Average shares of common stock used
for above computation:
Primary 12,479,167 12,841,256 11,881,281
Fully diluted 12,479,167 12,841,256 11,881,281
________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended May 31, 1996, 1995 and 1994
Retained
Earnings
Common Stock (Accumulated
Shares Amount Deficit)
Balances at May 31,1993 11,814,650 $ 2,764,513 209,588
Proceeds from issuance of
common stock 42,428 55,000 -
Proceeds from exercise of
employee stock options 11,000 6,155 -
Proceeds from exercise of
stock warrants 121,045 102,287 -
Net loss (701,392)
__________ _________ ________
Balances at May 31, 1994 11,989,123 2,927,955 (491,804)
Proceeds from issuance of
common stock 98,679 167,390 -
Repurchase of common stock (216,809) (437,000) -
Issuance of common stock in
connection with
asset acquisition 113,000 219,220 -
Proceeds from exercise of
employee stock options 185,629 219,650
- -
Proceeds from exercise of
stock warrants 267,794 221,587 502,666
Net income
__________ _________ ________
Balances at May 31, 1995 12,437,416 3,318,802 10,862
Issuance of common stock in
connection with
asset acquisition 65,617 75,000 -
Proceeds from exercise of employee
stock options 77,700 82,433
Net loss (1,998,791)
__________ _______ ________
Balances at May 31, 1996 12,580,733 $ 3,476,235 (1,987,929)
________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended May 31, 1996, 1995 and 1995
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ (1,998,791) 502,666 (701,392)
Adjustments to reconcile
net income (loss) to
net cash used in operating
activities:
Depreciation and amortization 873,214 892,960 779,867
Provision for bad debts 56,350 8,000 37,861
Amortization of deferred gain on
sale leaseback (177,512) - -
(Gain) loss on sale of equipment 13,474 - (17,028)
Increase or decrease in operating
assets and liabilities:
Accounts receivable (310,839) (714,591) (544,960)
Costs and estimated earnings
in excess of billings on
uncompleted contracts 153,528 (546,400) (181,289)
Inventories 2,095 (155,871) (15,322)
Prepaid expenses 2,235 (97,862) (42,606)
Cash surrender value of
life insurance, net (20,596) (14,139) (11,084)
Other (65,000) 20,926 (5,553)
Accounts payable 1,078,599 (117,020) 307,237
Accrued expenses and
other liabilities 41,790 (17,178) 58,988
_______ _______ _______
Net cash used in operating activities (351,453) (238,509) (335,281)
Cash flows from investing activities:
Purchases of property,
plant and equipment (334,065) (940,898) (418,704)
Prepublication costs - (7,490) (5,508)
Patent costs incurred (16,417) (15,649) (6,956)
Cash received in acquisitions - 915 -
Proceeds from sale/leaseback
of equipment 1,660,900 - -
Proceeds from sale of equipment 36,940 - 21,487
Other - - (8,000)
_______ _______ _______
Net cash provided by (used in)
investing activities 1,347,358 (963,122) (417,681)
(Continued)
<PAGE>
1996 1995 1994
Cash flows from financing activities:
Bank overdraft increase (decrease) $ (48,520) 57,266 -
Notes receivable from of ficers
(increase) decrease 83,815 (1,188) (56,198)
Notes payable to banks increase
(decrease) (179,237) 197,901 544,763
Notes payable to affiliates increase 47,466 101,347 199,812
Proceeds from note payable
to stockholder 600,000 - -
Proceeds from long-term debt 344,465 1,731,291 450,171
Principal payments on long-term debt (1,869,789)(1,301,056) (793,226)
Proceeds from issuance of common stock 82,433 608,627 163,442
Repurchase of common stock - (437,000) -
Net cash provided by (used in)
financing activities (939,367) 957,188 508,764
Increase (decrease) in cash and
cash equivalents 56,538 (244,443) (244,198)
Cash and cash equivalents at
beginning of year 65,175 309,618 553,816
Cash and cash equivalents at
end of year $ 121,713 65,175 309,618
Supplemental disclosures of cash flow information and noncash investing
activities:
Interest paid on notes payable and long-term debt was $382,233,
$361,794 and $193,537 for the years 1996, 1995 and 1994, respectively.
Capital lease obligations of $88,269, $399,572 and $157,028 were
incurred during 1996, 1995 and 1994, respectively, under leases entered
into for vehicles, furniture and fixtures, and laboratory equipment.
During 1996, the Company acquired certain assets of two entities (see
note 2) in exchange for 604,747 shares of its common stock. During
1995, the Company acquired the net assets of Air Compliance, Inc. (see
note 2) in exchange for 113,000 shares of its common stock.
See accompanying notes to consolidated financial statements.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
Currency
All references to dollars ($) are United States dollars unless
otherwise denoted as Canadian (CDN).
Principles of Consolidation
The consolidated financial statements include the accounts of ETS
International, Inc. and its wholly-owned subsidiaries, ETS, Inc., ETS
Analytical Services, Inc. and ETS Water and Waste Management, Inc.
("the Company"). Significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventories
Inventories, consisting of raw materials and components used in testing
equipment, are stated at the lower of cost (first-in, first-out method)
or market.
Long-term Contracts
Revenues on uncompleted long-term contracts are recorded using the
percentageofcompletion method. Provisions are made for estimated
losses at the time the losses are determinable. Revenues related to
certain government contracts are subject to adjustments upon audit of
costs by the government, with any such adjustments reflected in the
accounting period in which determined. Billings are prepared according
to specific terms of individual contracts. Contracts will generally
provide for periodic payments as work is completed with final amounts
due upon completion and acceptance of the project by the customer.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost.
Property and equipment under capital leases are stated at the present
value of minimum lease payments at the inception of the lease.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) (Continued)
Provisions for depreciation and amortization have been calculated under
accelerated and straightline methods over the following estimated
useful lives of the assets:
Furniture and fixtures
5 - 10 years
Laboratory equipment
5 - 10 years
Tools and equipment
5 - 10 years
Vehicles
3 - 5 years
Leasehold improvements
5 - 10 years
Property and equipment under capital leases are amortized on the
straight-line basis over the shorter of the lease term or the estimated
useful life of the asset. Leasehold improvements are amortized on the
straight-line basis over the shorter of the lease term or the estimated
useful life of the improvement.
Patents
The Company has incurred costs related to patent applications which
have been or will be made. Costs related to patents granted are being
amortized over a period of 17 years using the straightline method.
Costs relating to patents pending are deferred until the patent is
granted.
Prepublication Costs
Prepublication costs related to the Company's production of textbooks
and other training materials are stated at the lower of cost or market.
These deferred costs are amortized over a period of 5 years from
publication date using the straight-line method.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straightline basis over
periods not exceeding 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operations. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
Research and Development
Research and development costs are charged to operations as incurred.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) (Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share
Earnings per share have been computed on the basis of weighted average
number of shares outstanding. Stock options and warrants have been
included as common stock equivalents for the year ended May 31, 1995
and have been excluded for the years ended May 31, 1996 and 1994, due
to their antidilutive effect on earnings per share.
Licensing Agreements
The Company has licensing agreements with certain customers to sell
proprietary products developed by the Company, including the Limestone
Emission Control (LEC) System and the Dry Reactor. The Company is to
receive amounts ranging from five percent to eight percent of gross
sales as royalties for the sale of these proprietary products. Minimum
royalty fees are recognized when due from the licensee based on product
sales, training completion and terms of the license agreements. These
agreements contain certain restrictive clauses requiring the licensees
to meet minimum sales targets or the license agreement may be revoked
at the Company's option. The LEC system incorporates some claims of a
patent issued to the U.S. Department of Energy (DOE). Under terms of
an agreement with the DOE, the Company is required to pay the DOE a
royalty fee of one percent. No royalty fees or expenses were
recognized by the Company for the years ended May 31, 1996, 1995 and
1994.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Business Combinations
On June 1, 1994, ETS International, Inc. acquired the common stock of
Stamie E. Lyttle, Inc., Lyttle Utilities, Inc. and LPS, Inc. (the
"Lyttle Companies") in exchange for 2,730,000 shares of ETS
International, Inc.'s common stock. On January 19, 1995, ETS
International, Inc. acquired the common stock of Environmental
Laboratories Incorporated (ELI) in exchange for 183,600 shares of ETS
International, Inc.'s common stock. These acquisitions were accounted
for by the poolingofinterests method and, accordingly, the
consolidated financial statements include the operations of the Lyttle
Companies and ELI for all periods presented. There were no material
adjustments of the net assets of the Lyttle Companies or ELI as a
result of adopting the same accounting practices as ETS International,
Inc. and its subsidiaries.
The effects of the poolingsofinterests on previously reported
operations is as follows:
May 31, 1994
Originally
Reported Mergers Restated
Total contract revenue $ 4,497,343 12,592,766 17,090,109
Net income (loss) $ 102,158 (803,550) (701,392)
On April 3, 1995, ETS International, Inc. acquired the net assets of
Air Compliance, Inc. in exchange for 113,000 shares of ETS
International, Inc.'s common stock. On February 5, 1996, ETS
International, Inc. acquired certain assets of Olympic Industries, Inc.
in exchange for 539,130 shares of ETS International, Inc.'s common
stock (see note 7). On April 18, 1996, ETS International, Inc.
acquired certain laboratory assets of Dewberry and Davis, Inc. in
exchange for 65,617 shares of ETS International, Inc. common stock.
These acquisitions were accounted for as purchases; accordingly, the
results of operations of the acquired entities are included in the
consolidated financial statements only from the date of acquisition.
Proforma results of operations are not presented because the effect is
not material to the consolidated financial statements. The goodwill
arising as a result of the excess of the purchase price over the fair
value of net assets acquired is being amortized on a straightline basis
over periods not exceeding 15 years.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) (Continued)
The following table summarizes these acquisitions:
1996 1995
Purchase price (604,747 and 113,000
shares of stock issued in 1996
and 1995, respectively) $ 850,000 219,220
Accounts receivable 2,000 130,230
Equipment 529,200 16,397
Franchise fee 200,000 -
Other assets 72,816 3,344
Accounts payable and other liabilities (100,000) (40,013)
________ _______
Net assets acquired
(estimated fair value) $ 704,016 109,958
________ ________
Excess of purchase price over
fair value of net assets acquired
(goodwill) $ 145,984 109,262
(3) Accounts Receivable
A summary of the changes in the allowance for doubtful accounts follows:
Years Ended May 31
1996 1995 1994
Balances, beginning of year 99,500 91,500 53,994
Provision for bad debts 56,350 8,000 37,861
Accounts written off (60,750) - (355)
_______ ______ ______
Balances, end of year $ 95,100 99,500 91,500
The Company currently derives its primary contract revenues from
domestic customers. During 1996, 1995 and 1994, there were a limited
number of customers in Mexico, Canada and Taiwan. The Company is
currently expanding its international sales efforts.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) (Continued)
No single customer accounted for more than 5 percent of contract
revenues for the year ended May 31, 1996. At May 31, 1996, one
customer had an accounts receivable balance which exceeded 5 percent of
total stockholders' equity. The accounts receivable balance of this
customer was $273,562.
For the year ended May 31, 1995, the Company had contract revenues from
two customers, each of which accounted for more than 5 percent of
contract revenues, aggregating approximately $3,479,000 or 17 percent
of contract revenues. These two customers had accounts receivable
balances which exceeded 5 percent of total stockholders' equity. The
accounts receivable balances for these customers totaled $755,004.
For the year ended May 31, 1994, the Company had contract revenues from
two customers, each of which accounted for more than 5 percent of
contract revenues, aggregating approximately $3,317,000 or 19 percent
of contract revenues.
(4) Notes Payable and Long-term Debt
Notes payable to banks consists of the following:
May 31
1996 1995
$1,500,000 revolving line of credit,
due on demand, bearing interest at
the bank's prime rate plus 1/4%,
which approximated 8.5% at May 31,
1996, secured by accounts receivable,
inventory, machinery, furniture and
fixtures, intangibles and all other
assets of the Company with a maximum
of $100,000 not subject to borrowing
base $ 981,590 663,839
$500,000 line of credit, due on demand,
bearing interest at prime plus 1/2%,
secured by all assets of the Company - 496,988
$90,000 line of credit, due on demand,
bearing interest at prime plus 2%,
which approximated 11% at May 31, 1996,
secured by certain equipment 89,837 89,837
______ ______
$ 1,071,427 1,250,664
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) (Continued)
Long-term debt consists of the following:
$1,300,000 term note payable to bank,
due August 1999, bearing interest at
prime plus I %, paid in full
during 1996 $ - 1,105,000
Term note payable to finance company,
due September 1997, bearing interest
at 7.70%, paid in full during 1996 357,100
$250,000 term note payable to bank,
due February 1998, bearing interest
at prime plus I %, which approximated
10% at May 31, 1996, payable in
monthly installments of $8,062,
secured by certain equipment 154,889 225,783
$185,806 term note payable to finance
company, due December 1999, bearing
interest at 19.47%, payable in monthly
installments of $6,350, secured by
certain vehicles and equipment 153,761 -
$100,000 term note payable to finance
company, due February 2001, bearing
interest at 12.5%, payable in monthly
installments of $2,658, secured by
certain vehicles 95,100
Installment loans with maturities to 1999,
bearing interest at varying interest
rates from 6.65% to 9.25%, payable in
varying monthly installments of $402
to $3,397 including interest, secured
by vehicles and equipment 175,175 186,849
Capital lease obligations, with
maturities to 2001 (see note 5) 459,987 601,235
_________ _________
1,038,912 2,475,967
Less current maturities 378,779 1,608,150
_________ _________
$ 660,133 867,817
Aggregate debt maturities for each of the next five years ending on
May 31 is as follows: 1997, $378,779; 1998, $349,229; 1999, $221,439;
2000, $83,864 and 2001, $5,601, respectively.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Leases
Property, plant and equipment included the following amounts of assets
under capital lease obligations:
May 31,
1996 1995
Furniture and fixtures $ 221,057 221,057
Laboratory equipment 987,960 899,691
Vehicles 68,727 68,727
Leasehold improvements 30,437 30,437
_________ _________
1,308,181 1,219,912
Less accumulated amortization (640,925) (469,800)
_________ ________
$ 667,256 750,112
The capital lease payments were $246,527 in 1996, $219,418 in 1995 and
$164,604 in 1994. Lease amortization is included in depreciation
expense ($171,125 in 1996, $129,146 in 1995 and $100,727 in 1994).
Future minimum payments under capital and operating leases are as
follows:
Capital Operating
Leases Leases
1997 $ 190,653 1,298,142
1998 149,021 1,034,801
1999 118,212 917,196
2000 57,292 622,259
2001 6,321 338,514
_______ ________
521,499 $4,210,912
Less amounts representing interest
(9.6% - 16.5%) (61,512)
Present value of lease payments
(including $182,491 classified
as current) $ 459,987
Rent expense for operating leases of approximately $1,407,000, $682,000
and $625,000 was recognized for the years ended May 31, 1996, 1995 and
1994, respectively.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) (Continued)
On October 25, 1995, the Company entered into a sale/leaseback
agreement which provided for the sale and leaseback of certain
equipment. This equipment, with a net book value of $443,668, was sold
for $1,660,900 and was leased back to the Company for a 48month period
at $39,015 per month. The resulting gain of $1,217,232 on the sale of
equipment is being amortized over the life of the operating lease and
has a remaining balance of $1,039,720 at May 31, 1996.
(6) Income Taxes
The Company is in a net operating loss position, accordingly, no income
tax expense has been recognized for the years ended May 31, 1996, 1995
and 1994.
Income tax expense differs from the amount computed by applying the
statutory corporate tax rate of 34 percent to income (loss) before
income taxes as follows:
1996 1995
Expected federal income tax expense
benefit) $(679,588) 170,906
Increase (decrease) resulting from:
State income tax, net of
federal income tax impact (75,939) 12,112
Life insurance proceeds - (103,375)
Travel and entertainment 22,075 30,104
Utilization of net operating
loss carryforwards - (105,085)
Change in the beginning of
the year balance of the valuation
allowance for deferred tax assets 727,936 (11,021)
Other 5,516 6,359
_______ _______
Income tax expense $ - -
The significant components of deferred income tax expense (benefit) for
the years ended May 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax expense (benefit) exclusive
of the decrease in the beginning of the
year balance of the valuation allowance
for deferred tax assets $ (727,936) 11,021
Utilization of net operating
loss carryforwards - 105,085
Expiration of investment tax credit
carryforwards (8,760) (26,956)
Increase (decrease) in beginning of the
year balance of the valuation allowance
for deferred tax assets 736,696 (89,150)
________ ________
$ - -
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
May 31, 1996 and 1995 are presented below:
1996 1995
Deferred tax assets:
Net operating loss and tax
credit carryforwards $ 887,260 696,444
Deferred gain on sale/leaseback
transaction due to accrual
versus cash basis of accounting
for financial reporting and
tax purposes 394,678 -
Other 164,478 59,238
_______ ______
Total gross deferred tax assets 1,446,416 755,682
Less valuation allowance (1,123,746) (387,050)
___________ ________
Net deferred tax asset 322,670 368,632
___________ ________
Deferred tax liabilities:
Accounts receivable and accounts
payable, principally due to
accrual versus cash basis of
accounting for financia
reporting and tax purposes 209,480 220,400
Property, plant and equipment,
principally due to difference
in depreciation for financial
reporting and tax purposes 94,800 124,930
Other 18,390 23,302
_______ ______
Total gross deferred tax liabilities 322,670 368,632
_______ _______
Net deferred tax liability $ - -
____________________________________________________________
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the
level of historical taxable losses and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will not
realize the benefits of these deductible differences and loss
carryforwards in excess of the amount which can be offset by the
reversal of future taxable items.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) (Continued)
At May 31, 1996, the Company has loss carryforwards for income tax
purposes of approximately $2,104,457 available to offset future taxable
income. If not utilized, these loss carryforwards will expire as
follows:
Expiration
Date
$ 555,174 2003
1,000,451 2008
548,832 2010
_________
$ 2,104,457
In addition, the Company has various tax credit carryforwards of
approximately $88,000 which will expire between the years 1997 and 2000.
(7 ) Common Stock Subject to Repurchase Agreement
In connection with the Olympic Industries, Inc. asset acquisition (see
note 2), the Company entered into a common stock repurchase agreement
(the "repurchase agreement"). Under the repurchase agreement, the
Company is obligated to repurchase at the stock price set forth in the
Asset Purchase Agreement ($1.43 per share) up to onehalf of the issued
shares on the first anniversary of the acquisition and up to onehalf of
the issued shares on the second anniversary of the acquisition.
Accordingly, the 539,130 shares issued in connection with the asset
acquisition have been classified as common stock subject to repurchase
at their aggregate repurchase price of $775,000. The Company may
satisfy its obligation related to the shares subject to repurchase on
the second anniversary upon the successful registration of the issued
shares with the Securities and Exchange Commission (SEC). It is the
Company's intention to complete this registration; however, upon
completion it will be subject to final SEC approval.
(8) Stock Options and Warrants
Pursuant to various stock option and stock warrant agreements, the
Company has granted nontransferable options and warrants to acquire the
Company's common stock to certain officers, directors, investors and
employees of the Company and its subsidiaries. Options and warrants
are granted at approximate fair market value based on the higher of the
most recent tenday average price of the stock or the last day's closing
price of the stock on the date of the grant.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) (Continued)
The aggregate amount of shares under option pursuant to these
agreements were as follows:
Number
of Shares Option Price Per Share
________________________________
Options outstanding
at May 31, 1993 611,568 $ 0.74 CDN to 2.35 CDN
Granted 908,500 $ 1.06 US to 1.75 US
Exercised (11,000) $ .74 CDN
Expired (14,000) $ 2.35 CDN and 1.06 US
________
Options outstanding
at May 31, 1994 1,495,068 $ 1.05 CDN to 2.35 CDN
and 1.06 US to 1.75 US
Granted 972,000 $ 1.69 US to 2.06 US
Exercised (185,629) $ 1.05 CDN and 1.06 US
to 1.37 US
Expired (3,350) $ 2.35 CDN and 1.37 US
__________
Options outstanding
at May 31, 1995 2,278,089 $ 1.05 CDN to 2.35 CDN
and 1.06 US to 2.06 US
Granted 448,000 $ 1.00 US to 1.68 US
Exercised (77,700) $ 1.05 CDN to 2.35 CDN
and 1.06 US to 1.38 US
Expired (178,816) $ 1.05 CDN to 2.35 CDN
and 1.06 US to 1.88 US
_________
Options outstanding
at May 31, 1996 2,469,573 $ 1.05 CDN to 2.35 CDN
and 1.00 US to 2.06 US
Options exercisable at May 31, 1996 and 1995 approximated 1,800,000 and
1,700,000, respectively. Options generally become exercisable over a
period not exceeding five years from the date of grant and warrants are
exercisable upon issuance.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) (Continued)
The aggregate amount of shares under warrant pursuant to these
agreements were as follows:
Number
of Shares Option Price Per Share
Warrants outstanding
at May 31, 1993 459,090 $ 1.06 CDN to 1.50 CDN
Granted 42,428 $ 1.60 US to 1.63 US
Exercised (121,045) $ 1.06 CDN to 1.50 CDN
Expired (70,250) $ 1.50 CDN
_________
Warrants outstanding
at May 31, 1994 310,223 $ 1.60 US to 1.63 US and
1.07 CDN to 1.23 CDN
Granted 98,679 $ 1.60 US to 2.20 US
Exercised (267,794) $ 1.07 CDN to 1.23 CDN
__________
Warrants outstanding
at May 31, 1995 141,108 $ 1.60 US to 12.20
Granted -
Exercised (42,429) $ 1.60 US to 1.63 US
__________
Warrants outstanding
at May 31, 1996 98,679 $ 1.76 US to 2.20 US
____________________________________
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
StockBased Compensation (SFAS 123), which is effective for transactions
entered into in fiscal years beginning after December 15, 1995. The
Company believes the adoption of SFAS 123 will not have a significant
effect on its consolidated financial statements.
(9) Related Party Transactions
The Company and its subsidiaries lease various office space and
laboratories from entities whose members include certain officers and
directors of the Company. Rent expense under these operating leases
approximated $405,000, $399,000 and $366,000 for 1996, 1995 and 1994,
respectively.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) (Continued)
Other accounts receivable consists primarily of advances to officers,
directors and other employees. At May 31, 1996 and 1995, $76,265 and
$120,676, respectively, were the result of these advances.
The Company has notes receivable from officers of $358,141 and $441,956
as of May 31, 1996 and 1995, respectively. The notes bear interest at
six percent. As of May 31, 1996, $65,222 is due on demand and $292,919
is due May 31, 1998.
The Company has notes payable to affiliates of $348,625 and $301,159 as
of May 31, 1996 and 1995, respectively. These affiliates include
certain partnerships and individuals whose members are officers and
directors of the Company. The notes are due on demand and bear
interest at six percent.
The Company has a note payable to a stockholder of $600,000 as of
May 31, 1996, which is due November 1, 1997. The note bears interest
at eleven percent, which is payable monthly.
During 1995, the Company received $304,044 of life insurance proceeds
as a result of the death of one of its officers. Subsequent to the
officer's death, the Company repurchased 216,809 shares from the estate
of the officer. The shares repurchased included 100,000 shares
exercisable under available options. The shares were repurchased at
their approximate fair market value at the date of the officer's death.
(10) Other Matters
The Company does not receive hazardous waste during the normal course
of business. The Company does receive environmental samples for
analysis; and, occasionally, in the process of analysis, small
quantities of hazardous waste are generated. Such waste is stored in
designated areas, lab packed for disposal, picked up by licensed
hazardous waste contractors and transported to licensed disposal
facilities. In addition to its laboratory activities, the Company is
engaged in field testing. It is the Company's intention to conduct its
operations in an effective, safe and prudent manner, and to ensure
against potential risks. The Company carries workers' compensation
insurance for its employees and insurance for any personal liability
and injury which could occur to nonemployees and/or the property of
others.
The Company is involved from time to time in litigation and
environmental matters; however, it is the opinion of management that
there are no matters currently existing which would have a material
impact on the financial position or results of operations of the
Company.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments (SFAS 107), requires the Company to
disclose estimated fair values of its financial instruments. SFAS 107
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments: The carrying amounts
reported in the consolidated balance sheets for cash and cash
equivalents, notes receivable, notes payable and longterm debt
approximate fair value. The fair value of notes receivable is
estimated by discounting the future cash flows at rates the Company
would currently receive for similar notes receivable. The fair values
of notes payable and longterm debt is estimated by discounting the
future cash flows of each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities by the
Company's bank.
(12) Fourth Quarter Adjustments
Significant adjustments to the fourth quarter for the year ended
May 31, 1996 included a charge of approximately $120,000 to adjust
inventory to actual physical counts, $56,000 as a provision for bad
debts based on specific reviews of customer accounts and a $52,000
charge to reduce prepublication costs to their estimated net realizable
value in consideration of slower than anticipated textbook sales.
(13) New Accounting Standard
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Longlived Assets and for Longlived Assets to be Disposed
of (SFAS 121). SFAS 121 requires companies to review longlived assets
and certain identifiable intangibles to be held, used or disposed of,
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company is required to adopt this statement in fiscal 1997. The
Company believes the adoption of this statement will not have a
significant effect on its consolidated financial statements.
<PAGE>
EXHIBIT 10(h)
Lease between ETS Water and Waste Management, Inc. and the Estate of
Stamie E. Lyttle
<PAGE>
LEASE
THIS LEASE made this 1st day of June, 1996, by and between ESTATE OF
STAMIE E. LYTTLE ("lessor"), and ETS WATER AND WASTE MANAGEMENT, INC.
("lessee"), in consideratio of the mutual covenants and promises
contained herein, the parties, intending to be legally bound hereby, do
agree as follows:
1. Lessor leases to the lessee on the following terms and conditions,
certain real estate, being a portion of that real estate, located at
2210 East Belt Boulevard, Richmond, Virginia (the property).
2. The terms of this lease is from June 1, 1996, through May 31, 1997.
Lessee shall be entitled to three (3) successive renewals hereof, each
for a term of one (1) year, upon the same terms and conditions as
herein set forth. It is agree that unless lessee shall notify lessor
not less than thirty (30) days prior to the expiration of the original
term, or any renewal term, of its intention to terminate this lease,
lessee shall be deemed to have exercised its option to renew this lease
without additional notice. The rent for the term of the lease,
including any renewals, shall be $10,500.00 per month, payable by the
10th day of the month. Lessee shall pay a late charge equal to 5% of
the rent due for any payment not received by the 15th of the month. All
improvements, of any nature, or character, made, or installed, on the
property shall become the property of the lessor upon termination of
this lease. Lessee shall make no such improvements without the prior
written consent of the lessor. Such consent shall not constitute an
agreement on the part of the lessor to be liable for the costs of such
improvements and such improvements shall be made solely at the cost of
the lessee. Such improvements shall also be made in compliance with any
and all local, state or federal building codes and any other applicable
codes, ordinances and regulations.
3. The lessee covenants with the lessor to pay the rent in the manner
above stated, not to assign or sublet the premises, or any part
thereof; and to leave the premises in good repair.
4. Lessee covenants that it will keep the property in good repair and
will replace all glass and plate glass broken during the tenancy,
Lessee shall be solely responsible for all maintenance and repairs of
any kind or nature to the property or improvements thereon used by
lessee.
<PAGE>
5. Lessee hereby waives the benefit of the Homestead Exemption laws of
the State of Virginia as to all obligations hereunder and agrees to pay
all expenses incurred in the collecting same, including 25% attorneys
fees in case the claim is placed with an attorney for collection.
6. This contract represents the final understanding between the
parties; no representations shall be binding on the lessor or the
lessee unless contained herein, and no agent of the lessor or the
lessee has authority to change or modify any of the terms hereof except
by writing endorsed hereon or attached hereto. The lessee has inspected
the premises and agrees to accept the same, and the lessor is under no
obligation to make any repairs to said premises during the period of
this lease, or any renewals thereof, except as otherwise herein
provided.
7. If the property or any part thereof be condemned by the public
authorities, the lessor shall in no way be responsible for the
resulting inconvenience or damage to the lessee, nor shall there by any
reduction in rent; if upon such condemnation the demolition or removal
of the magazines shall be required, the lease shall terminate without
the lessor being in any way responsible on account whatsoever to the
lessee.
8. Upon the breach of any covenants herein contained or the repudiation
of the lease y the lessee, or the failure of the lessee to move into
the premises a the beginning of the term, or the abandonment or
vacation of the premises by the lessee, or the occurrence of any
conduct on the part of the lessee which is deemed questionable or
objectionable by the lessor, or the lessee being adjudicated bankrupt,
or the appointment of a receiver or trustee of the lessee's property,
the total rent herein provided for whether accrued or not, shall
immediately become due and payable, and the lessor shall have the right
to enter the premises at once, by force or otherwise, without being
liable to any prosecution therefore, and to distrain for rent, and also
to re-rent the [premises as agent for the lessee for the unexpired term
and receive the rent therefore; or the lessor may at his option,
immediately terminate this lease; providing that neither terminating
this lease under this clause nor receiving possession of the premises
shall deprive the lessor of an bother action or remedy against the
lessee for possession, for rent, or for damages.
9. The failure of either party hereto to insist on the strict
observance by the other party of any covenants herein contained shall
in no way be construed as a waiver of a future breach of the same or
other covenants.
<PAGE>
10. The lessor shall not be liable for any damage to persons or
property by, or from, gas, electricity, gasoline, fire, water, ice,
snow, storm, sewage or any other cause. Lessee agrees to indemnify and
hold harmless lessor against any and all claims or liabilities of any
kind resulting from or arising our of the lessee's use of the property
and improvements, or the construction of the improvements thereupon.
11. The less or shall have the right to enter the premises during
reasonable business hours in order to examine the same, or to make such
repairs or alternations as he shall desire for the safety or
preservation of the premises, or to exhibit the same to prospective
purchasers or tenants.
12. Any and all notices affecting this lease may be served y any party
hereto, his agent or subagent, as effectively as if the same were
served by a sheriff or other officer authorized by law to serve such
notices.
13. Feminine and neuter pronouns as to be substituted for those of the
masculine form, and the plural is to be substituted for the singular
number in any place or places herein in which the context may require
such substitution.
14. Lessor shall be responsible for payment of real estate taxes.
15. If lessor shall at any time during the initial and any renewal term
hereof receive any bona fide offer to purchase the premises, it shall
offer them to lessee at the same price, terms and conditions as that
contained in such bona fide offer, Lessee shall have thirty (30) days
from and after receipt thereof to decide whether or not to purchase the
premises at such price. If lessee shall give notice of intent not to
purchase or shall give no notice within the time herein limited, lessor
may accept such offer and proceed with the same thereunder. If lessee
notifies lessor or that it elects to purchase the premises at such
price, the parties shall enter into a contact of purchase and sale
forthwith. Such contract shall provide, among other things, for
prorating taxes to date of closing and conveyance free and clear of
easements, restrictions and encumbrances by General Warranty Deed, with
English Covenants of Title, properly executed and in form for
recording.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this lease this 1st day
of June, 1996.
LESSOR: LESSEE:
ETS AND WASTE MANAGEMENT, INC.
Coleman Lyttle
________________________ _______________________
Administrator for Navin D. Sheth
Estate of Stamie E. Lyttle Executive Vice President
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<PAGE>
Exhibit 27
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Financial Data Schedule
Year Ended May 31, 1996
(Unaudited)
(Dollars in Thousands Except Per Share Data)
This schedule contains summary financial information extracted from
financial statements for the year ended May 31, 1996 and is qualified
in its entirety by reference to such financial statements.
Year Ended
May 31, 1996
Cash and cash items $ 122
Marketable securities 0
Notes and accounts receivable - trade 3,892
Allowances for doubtful accounts 95
Inventory 551
Total current assets 5,756
Property, plant and equipment 8,667
Accumulated depreciation (5,753)
Total assets 9,835
Total current liabilities 5,272
Bonds, mortgages and similar debt 1,639
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common stock 3,476
Other stockholders' equity (1,988)
Net sales of tangible products 0
Total revenues 20,571
Cost of tangible goods sold 0
Total costs and expenses
applicable to sales and revenues 22,178
Other costs and expenses 0
Provision for doubtful accounts and notes 56
Interest and amortization of debt discount 392
Income before taxes and other items (1,999)
Income tax expense 0
Income/loss from continuing operations (1,999)
Discontinued operations 0
Extraordinary items 0
Cumulative effect - changes in accounting principles 0
Net income or loss (1,999)
Earnings per share - primary (0.16)
Earnings per share - fully diluted (0.16)
Amounts inapplicable or not disclosed as a separate line on the Balance
Sheet or Statement of Loss are reported as 0 herein.
