UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended FEBRUARY 28, 1997 Commission File No.00019678
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ETS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1414643
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State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1401 Municipal Road, NW, Roanoke, Virginia 24012
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(Address) (Zip Code)
Registrant's telephone number, including area code (540) 265-0004
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Not Applicable
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(Former name, former address and former fiscal year if changed since last
report)
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 and (2) has been subject to the filing
requirements for the past 90 days.
Yes x No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Number of Shares Outstanding
- ----------------------------- ----------------------------
Common Stock 13,858,488
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE><CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997 MAY 31, 1996
----------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 49,646 $ 121,713
Accounts receivable:
Trade (net of allowance of $89,031
in 1997 and $95,100 in 1996) 3,818,426 3,749,040
U.S. Government agencies 55,349 48,299
Other 235,951 116,222
Costs and estimated earnings in excess of
billings on uncompleted contracts 753,650 878,348
Notes receivable from officers 61,674 65,222
Inventory 969,091 550,728
Prepaid expenses 283,085 225,943
---------- ----------
Total current assets 6,226,872 5,755,515
Property, plant and equipment:
Furniture and fixtures 974,959 943,685
Laboratory and equipment 2,816,785 2,651,970
Machinery, tools and equipment 2,975,310 2,773,615
Vehicles 1,834,861 1,539,868
Leasehold improvements 785,923 757,555
---------- ----------
9,387,838 8,666,693
Less accumulated depreciation 6,284,096 5,753,152
---------- ----------
Total property, plant and
equipment, net 3,103,742 2,913,541
Other assets:
Goodwill (net of accumulated amortization
of $23,417 in 1997 and $11,048 In 1996) 231,828 244,198
Notes receivable from officers 292,919 292,919
Prepublication costs (net of accumulated
amortization of $315,987 in 1997 and
$296,008 in 1996) 109,636 129,615
Patents granted (net of accumulated
amortization of $31,216 in 1997 and
$26,319 in 1996) 76,904 74,107
Patents pending 39,085 21,870
Cash value of life insurance 131,729 116,283
Other assets 258,760 286,968
---------- ----------
Total other assets 1,140,861 1,165,960
----------- ----------
$10,471,475 $ 9,835,016
=========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
FEBRUARY 28, 1997 MAY 31, 1996
----------------- ------------
(unaudited) (audited)
<S> <C> <C>
Current liabilities:
Bank overdraft $ 0 $ 8,746
Notes payable to bank 974,607 1,071,427
Notes payable to affiliates 799,422 348,625
Current portion of long-term debt 568,378 378,779
Accounts payable 2,947,627 2,837,386
Accrued expenses and other current
liabilities 543,025 626,894
---------- ----------
Total current liabilities 5,833,059 5,271,857
Long-term liabilities:
Long-term debt 697,702 660,133
Notes payable to stockholder 100,000 600,000
Deferred gain on sale/leaseback 811,489 1,039,720
Common stock subject to repurchase
agreement, 539,130 shares 775,000 775,000
Stockholders' equity:
Common stock, no par value; authorized
30,000,000 shares; issued and outstanding
13,858,488 and 12,580,733 at February 28,
1997 and May 31, 1996, respectively 4,234,602 3,476,235
Preferred stock, no par value, authorized
5,000,000, none issued at February 28, 1997 0 0
Retained earnings (accumulated deficit) ( 1,980,377) ( 1,987,929)
---------- ----------
Total stockholders' equity 2,254,225 1,488,306
---------- ----------
$10,471,475 $ 9,835,016
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28 FEBRUARY 29 FEBRUARY 28 FEBRUARY 29
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Contract Revenues:
U.S. government agencies $ 54,170 $ 84,258 $ 312,491 $ 379,602
Commercial 4,625,369 3,916,424 16,376,302 14,634,879
--------- --------- ---------- ----------
4,679,539 4,000,682 16,688,793 15,014,481
Cost of goods and services 4,127,548 3,925,705 13,923,981 13,380,510
--------- --------- ---------- ----------
Gross Profits 551,991 74,977 2,764,812 1,633,971
Selling, general and
administrative expenses 798,706 866,663 2,588,966 2,417,265
--------- --------- ---------- ----------
Net Operating Income (246,715) (791,686) 175,846 (783,294)
Miscellaneous income 5,634 7,857 21,652 33,421
Gain on disposal of asset 133,287 0 133,287 0
Interest expense (155,233) (89,630) (323,233) (296,277)
Net Income (Loss) $ (263,027) $ (873,459) $ 7,552 $(1,046,150)
========= ========= ========== ==========
Earnings (Loss) per common share:
Primary $ (.02) $ (.07) $ .00 $ (.08)
Fully diluted $ (.02) $ (.07) $ .00 $ (.08)
Average shares of common stock
used for above computation:
Primary 13,553,976 12,795,162 13,054,826 12,716,590
Fully diluted 13,553,976 12,795,162 13,054,826 12,716,590
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTER ENDED FEBRUARY 28, 1997
Retained
Earnings
Common Stock (Accumulated
Shares Amount Deficit)
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Balances at May 31, 1996 12,580,733 $3,476,235 $(1,987,929)
Issuance of common stock for public
relations services 7,500 6,000
Net Income 101,121
---------- --------- ----------
Balances at August 31, 1996 12,588,233 $3,482,235 $(1,886,808)
Issuance of common stock at an affiliate
in connection with the conversion of
a debt 833,333 500,000
Conversion of stock to cash in
connection with an asset acquisition
agreement (65,617) (75,000)
Net income 169,458
---------- --------- ----------
Balances at November 30, 1996 13,355,949 $3,907,235 $(1,717,350)
Proceeds from exercise of employee
stock options 5,014 3,929
Issuance of common stock pursuant to
private placements 461,525 300,000
Issuance of common stock for marketing
expense 36,000 23,438
Net loss $ (263,027)
---------- --------- ----------
Balances at February 28, 1997 13,858,488 $4,234,602 $(1,980,377)
========== ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED
FEBRUARY 28,1997 FEBRUARY 29,1996
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,552 $(1,046,150)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 584,916 609,571
Amortization of deferred gain on
sale/leaseback (228,231) (101,436)
Gain on disposal of equipment (34,000) 0
Increase or decrease in operating assets
and liabilities:
Accounts receivable (302,234) (279,823)
Costs and estimated earnings in excess of
billings on uncompleted contracts 124,698 469,888
Inventories (418,363) (200,167)
Prepaid expenses (57,142) (45,375)
Accounts payable 176,079 524,758
Accrued expenses and other liabilities (83,869) (95,670)
Cash surrender value of life insurance, net (15,446) (19,408)
Other Assets 6,151 (49,158)
--------- ---------
Net cash provided by (used in)
operating activities (239,889) (232,970)
Cash flow from investing activities:
Purchase of property, plant and equipment (721,145) (297,281)
Sale of property, plant and equipment 0 1,664,650
Patent costs incurred (24,909) (14,524)
Proceeds from sale of equipment 34,000 0
--------- ---------
Net cash provided by (used in)
investing activities (712,054) 1,352,845
<PAGE>
Cash flows from financing activities:
Bank overdraft (8,746) (57,266)
Notes receivable from officers
(increase) decrease 3,548 58,005
Notes payable increase (decrease) (96,820) (477,280)
Proceeds from long-term debt 453,000 398,012
Principal payments on long-term debt (225,832) (1,645,667)
Proceeds from issuance of common stock 303,929 49,481
Notes payable to affiliates increase (decrease) 450,797 (75,000)
Proceeds from notes payable to stockholder 0 600,000
--------- ---------
Net cash provided by (used in)
financing activities 879,876 (1,149,715)
--------- ---------
Increase (decrease) in cash and cash equivalents (72,067) (29,840)
Cash and cash equivalents at beginning of year 121,713 65,175
--------- ---------
Cash and cash equivalents at end of period $ 49,646 $ 35,335
========= =========
</TABLE>
Supplemental disclosures of cash flow information and noncash investing
activities: Interest paid on notes payable and long-term debt was $323,233
and $296,277 for the nine months ended February 28, 1997 and February 29,
1996 respectively. Capital lease obligations of $ .00 and $195,706 were
incurred during the first nine months of fiscal 1997 and 1996 respectively
for vehicles, furniture and fixtures and laboratory equipment. During the
year, the Company sold certain assets in exchange for a $100,000 note
receivable resulting in a gain of $99,287.
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information as set forth in Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
February 28, 1997 are not necessarily indicative of the results that may be
expected for the year ending May 31, 1997.
NOTE B--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.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE C--EARNINGS PER SHARE
Earnings per share have been computed on the basis of the weighted average
number of shares outstanding, after giving appropriate effect for common
stock issued. Stock options and warrants have been included as common stock
equivalents when they result in dilution of earnings per share.
NOTE D--OTHER MATTERS
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following: (i) changes in legislative
enforcement and direction, (ii) unusually bad weather conditions, (iii)
unanticipated delays in contract execution, (iv) sudden loss of key
personnel, (v) abrupt changes in competition, and (vi) abrupt changes in
market opportunities.
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 throughout
the existence of ETS International, Inc. ("ETSI" or the "Company"), 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, a "Home Page" on the
World Wide Web, seminars, and attendance at trade shows and conferences and
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 its wholly owned subsidiary, ETS
Water and Waste Management, Inc. ("ETSW"). The combination was effected
through the issuance of 2,730,000 shares of ETSI common stock and was
accounted for as a pooling of interests. On January 20, 1995, ETSI merged a
Richmond, Virginia firm, Environmental Laboratories, Inc., with its
subsidiary, ETS Analytical Services, Inc. ("ETSAS"), which increased ETSAS'
size by about 50%, making ETSAS the largest environmental contract laboratory
in the Commonwealth of Virginia. This combination was effected through the
issuance of 183,600 shares of ETSI common stock and also was accounted for as
a pooling of interests. On April 2, 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, Inc. (ETS). On February 5, 1996, ETSI purchased, with the issuance of
539,130 shares of ETSI common stock, the assets of Olympic Industries, Inc.
(d/b/a Pipe-Liner Installers) of Pompano Beach, Florida, and incorporated
these assets into a new corporation, ETS Liner, Inc. ("ETSL"), a wholly-owned
subsidiary of ETSW. The results of the periods presented include the merger
transactions as if they had been consummated at the beginning of the periods.
<PAGE>
ETSI has divided its revenues into four 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.
Third Quarter Fiscal 1997 Compared to Third Quarter Fiscal 1996
Revenues for the third quarter of fiscal 1997 were $4,679,539 compared
to $4,000,682 for the third quarter of fiscal 1996 resulting in a 17%
increase in revenues. Revenues for the current nine months were $16,688,793
compared to $15,014,481 for the nine month period ended February 29, 1996 for
a 11% increase. These increases largely were the result of market
improvements and improved Company sales in the infrastructure/construction
area.
Total service revenues for the quarter were $913,878 compared to
$1,158,074 for the third quarter of fiscal 1996 for a 21% decrease. Field
testing service revenues were $384,339 compared to $547,838 for a decrease of
30%. Revenues in the source testing service area were significantly lower
than expected with no identifiable reason other than a continued soft market.
Also, projects that were expected to be performed in the third quarter were
delayed, at the request of the clients, to the fourth quarter. Five major
customers consisting of a municipal waste incinerator plant, a commercial
medical waste disposal plant, a government contractor, a
consulting/engineering firm and an electrical power utility plant made up 47%
of the total field testing revenues.
Fiscal 1997 third quarter revenues for analytical laboratory services
amounted to $482,010 compared to $503,917 for the third quarter of fiscal
1996 for a 4% decrease. This decrease was due to start-up delays for new
contracts and light sample shipping activities in connection with
Environmental Protection Agency (EPA) contracts. Several of the production
personnel have been converted to part-time positions which should provide the
laboratory greater flexibility to adjust staffing levels in response to
fluctuations in workload. The laboratory is currently in the process of
centralizing its computer hardware systems for greater efficiency among the
three lab locations. There is a program in effect to improve laboratory
automation and data handling by improving computer software and automation,
which is expected to allow greater throughput of samples with less personnel.
Regulatory assistance revenues were $27,129 for the current third
quarter of fiscal 1997 compared to $78,789 for the third quarter of fiscal
1996 for a 66% decrease. The current quarter contracts were of small dollar
value with no major customers. This appears to be due to continued softening
of the market of environmental testing services. Monitoring service revenues
for the quarter were $20,400 compared to $27,530 for the prior year's quarter
with the major customer being a chemical plant with 97% of the total.
<PAGE>
Revenues for the third quarter for consulting services, which include
consulting, engineering and training and education, was $16,801 compared to
$58,285 for the prior year's third quarter, for a 71% decrease. This
decrease appears to be the result of the lack of active enforcement of
existing regulations which has created a softer and highly competitive
market. Consulting and engineering services were $9,512 compared to $16,326
in the third quarter of fiscal 1996. The current quarter consisted of a few
small dollar value contracts. This decrease appears to be the result of the
lack of active enforcement of existing regulations which has created a softer
and highly competitive market. Several engineering projects are expected to
begin in early April and run through the fourth quarter. The sale of books
for the third quarter of fiscal 1997 amounted to $7,010 compared to $5,050
for the third quarter of fiscal 1996. Revenues for seminars were $279
compared to $36,909 for the third quarter of fiscal 1996. There appears to
be client interest in several domestic and international training programs
that may be scheduled in the fourth quarter.
Product revenues were $1,896 compared to $6,180 for the third quarter
of fiscal 1996. This decrease largely was the result of little activity with
the baghouse monitor products. The current quarter revenues were generated
as a result of baghouse performance monitor hardware and software.
Construction service revenues for the quarter were $3,746,964 compared
to $2,778,143 for the third quarter of fiscal 1996, for a 35% increase. The
Company had a better workload than expected during the third quarter. Major
areas of activities were in the utility division, which is usually the lowest
in the winter quarter. The Company had two major projects: the White Oak
Semiconductor facility and the Whitehall-Robins facilities. The White Oak
facility is a joint venture between Motorola and Siemens for a semiconductor
facility in the eastern portion of Henrico County, Virginia. The contract
awarded to ETSW is with DPR Construction, Inc. for $1,800,000 for
construction of water and sanitary systems at the White Oak facility. Work
is to be completed by June 1, 1997. The Whitehall-Robins contract award is a
subcontract with F. T. Evans for installation of 12" PVC sewer pipe. The
amount of the subcontract award is $431,000 and is projected to be completed
by the end of the 1997 calendar year. These two projects contributed 40% of
the construction revenues in the third quarter which made the construction
service for the quarter profitable. ETSL, a subdivision of ETSW, major area
of work for the quarter was the installation of fold-and-form liner (known as
"Ultraliner") under various Florida contracts. Some of the lack of
profitability of ETSL was due to management change as the president/general
manager retired and was replaced by a new Chief Operating Officer in
February, resulting in duplication of officers salaries and expenses for a
brief period, and a lack of new contracts received during this transition
period.
Cost of goods and services for the third quarter of fiscal 1997 were
$4,127,548 or 88% of sales compared to $3,925,705 for the third quarter of
fiscal 1996 or 98% of sales. Gross profits for the third quarter were
$551,991 or 12% of sales compared to $74,977 or 2% of sales for the same
period of fiscal 1996. This increase in gross profits is part of an ongoing
effort of the Company to reduce overhead cost. Selling, general and
administrative expenses were $798,706 for the third quarter of fiscal 1997
compared to $866,663 for the third quarter of fiscal 1996, for an 8%
decrease. The general and administrative expense has leveled off from the
expense of the start-up of the ETSL office in Florida and the ETSAS office in
Fairfax, Virginia which occurred in the first quarter of fiscal 1997.
<PAGE>
Miscellaneous income for the third quarter of fiscal 1997 was $5,634
compared to $7,857 for the third quarter of fiscal 1996. Miscellaneous
income for the two third quarters consisted of interest income. Gain on sale
of assets amounted to $133,287 for the current quarter. Interest expense for
the current quarter was $155,233 compared to $89,630 for the prior year's
third quarter. Interest expense reflects interest paid on notes payable and
long-term debt, including the credit lines and the interest expense
associated with capital leases.
Net loss for the quarter was $263,027 compared to net loss of $873,459
for the third quarter of fiscal 1996. The nine months of fiscal 1997 ended
with a net income of $7,552 compared to a net loss of $1,046,150 for the nine
month period of fiscal 1996.
Liquidity And Capital Resources As Of the End Of The Third Quarter Of
Fiscal 1997
During the third quarter of fiscal 1997, proceeds were received from
the exercise of stock options by employees to purchase an aggregate of 5,014
shares of the Company's common stock for a total price of $3,929. Proceeds
were also received during the quarter from sales of unregistered securities
in the aggregate amount of $300,000 for 461,525 shares of ETSI common stock
issued with matching warrants. These proceeds were used for operating and
working capital. 36,000 shares of ETSI common stock were issued to
consultants for marketing and public relations services. (See Part II.
Changes in Securities.)
ETSI maintains its primary banks in Roanoke and Richmond, Virginia.
These banks provide the Company's line of credit and other loans in the
aggregate amount of $1,400,000 to accommodate the need for temporary working
capital. In March, 1997, after the close of the third quarter, this line of
credit was replaced with a secured credit facility of up to $2,500,000. The
note which establishes the facility calls for a fixed monthly interest of
$25,000 over a two year term, subject to call by the holder upon 60 days
notice and is secured by the assets of the Company and its subsidiaries.
Currently $2,000,000 has been drawn down which included payoff of the bank
credit line, a note with a bank and a note with an affiliate of ETSI. Based
on the current drawdown as of April 10, 1997, the $25,000 fixed interest is
equivalent to a 15% annual interest rate. The Company may repay the note at
any time without penalty upon 60 days notice. The credit facility is
provided by an ETSI investor and director, Thomas W. Marmon.
Pursuant to a Regulation S Convertible Debentures Purchase Agreement
dated as of February 28, 1997 (the "Debentures Purchase Agreement"), and a
Regulation S Warrants Purchase Agreement dated as of February 28, 1997 (the
"Warrants Purchase Agreement"), ETS International, Inc. (the "Company"), on
February 28, 1997 (the "Closing Date"), placed $750,000 of its 7% Convertible
Debentures due February 27, 2002 (the "Debentures") and issued warrants (the
"Warrants") to purchase 1,000,000 shares of Company Common Stock, no par
value. The offering was made under the Securities Act of 1933 (the "1933
Act"), as amended, in reliance on the exemption from registration set forth
in Regulation S under the 1933 Act to foreign institutional investors and/or
agents associated with the transaction.
The holder of the Debenture(s) is entitled to convert the Debenture(s)
initially issued to such holder beginning forty-five days after the Closing
Date, into that number of fully paid and nonassessable shares of the
Company's Common Stock, calculated in accordance with the following formula
(the "Conversion Rate"):
<PAGE>
Number of shares issued upon conversion = (Principal + Interest)/Conversion
Price, where
I Principal = The Principal amount of the Debenture(s) to be
converted.
II Interest = Principal x (N/365) x .07, where
A. N = the number of days between (i) Closing Date, and
(ii) the applicable Date of Conversion for the Debenture(s)
for which conversion is being elected, and
B. Conversion Price = the lesser of (x) 100% of the average
Closing Bid Price, as that term is defined below, of the
Company's Common Stock for the five trading days
immediately preceding the Closing Date, or (y) 65% of the
average Closing Bid Price, as that term is defined below,
of the Company's Common Stock for the five trading days
immediately preceding the Date of Conversion.
The term "Closing Bid Price" means the closing bid price on the market
as reported by the OTC Bulletin Board or NASDAQ's National Market System or
Small Capitalization System ("NASDAQ"), or American Exchange Emerging Company
Marketplace, or if then traded on a different national securities exchange,
the Closing sales price on the principal national securities exchange on
which it is so traded and if not available, the mean of the daily high and
low sales prices on such securities exchange on which it is traded, or, if
Bulletin Board or NASDAQ or such other exchange or market where traded, then
the Closing Bid Price on the immediately preceding reported date.
Each of the Debentures that remains issued on the date which is five
years after the Closing Date automatically will be converted into shares of
Common Stock on such date at the Conversion Rate then in effect (calculated
in accordance with the formula above). The Conversion Price will be adjusted
in the event of a stock split, stock dividend, merger, consolidation,
exchange of shares, recapitalization, reorganization or other similar event
by the Company. The Company may in its sole option force conversion of the
Debentures, in whole at any time from and after one year from the Closing
Date, on not less than fifteen nor more than thirty days prior written notice
by the Company to the holder of the Debentures.
Each Warrant entitles the holder to purchase, in consideration of the
services performed by such purchaser or its affiliates or the securities
purchased by such purchaser in connection with the Company's offering of the
Debentures, 100,000 shares of Company Common Stock. The exercise price of
the Warrants is equal to 100% of the average Closing Bid Price of the
Company's Common Stock for the five days immediately preceding the Closing
Date, such Warrants to be exercised at any time from and after forty-five
days from the Closing Date and on or before February 27, 2002. The smallest
number of shares of Common Stock with respect to which a holder may exercise
a Warrant at a given time in accordance with the formula set forth above is
1,000 shares or such lesser amount held by the purchaser.
Major components of cash flow used in operating activities include
amortization on deferred gain on sale/leaseback of $228,231, increase in
accounts receivable of $302,234 and increase in Inventories of $418,363 less
cash provided by depreciation and amortization of $584,916, cost and
estimated earnings in excess of billings on uncompleted contracts of $124,698
and increase in accounts payable of $176,079.
<PAGE>
Net cash used in investing activities of $712,054 consisted mainly of
purchase of property, plant and equipment. The net cash provided by
financing activities of $879,876 includes in part proceeds from long-term
debt of $453,000, proceeds of $303,929 from issuance of common stock pursuant
to private placements, exercise of employee stock options and an increase of
notes payable to affiliates of $450,797 less cash used in financing which
includes an increase in notes payable of $96,820 and principal payments made
on long-term debt of $225,832. The cash and cash equivalents at February 28,
1997 was $49,646.
While the construction segment had an increase in revenues and was
profitable for the quarter, the third quarter of fiscal 1997 was a slow
quarter for the laboratories and the air pollution services. Steps were
taken to reduce expenses through staff and salary reductions to minimize the
bottom line loss. During February the laboratory received a contract from
the U.S. Navy for the analysis of wastewater discharges. The approximate
value of that contract over the next six months is $400,000. Results from
the study will be used to regulate discharges of toxic pollutants for Naval
vessels under the Clean Water Act. With this Navy contract, the current
schedule of the EPA sampling shipments and other currently awarded smaller
contracts, the laboratories are expected to have an improved fourth quarter
for fiscal 1997. In the field testing area, the source testing is expected
to begin to regain momentum, as proposal activity increased in the latter
half of the third quarter. Engineering activities are also expected to
improve as a result of the third quarter marketing and sales efforts.
Several engineering projects currently are expected to begin in early April
and run through the remainder of the fourth quarter. Construction services
are expected to show a profit in the fourth quarter. ETSL has grown its
backlog from $100,000 at February 28, 1997 to just over $1,000,000 at the end
of March. Currently there is an additional $454,000 in outstanding proposals
and during March and April bids for additional $1,500,000 will be submitted.
There can be no assurance, however, that such proposals and bids will be
accepted or will result in a profit. Business development efforts will
continue with the help of three full-time professional independent sales
representatives under contract with ETSL and four additional sales
representatives employed directly by Ultraliner.
The domestic environmental markets continue to be flat. However, the
Asian environmental markets appear to be healthy; therefore, the Company's
focus for environmental growth continues to be overseas. The Company has
completed a technology transfer and the training of E & C Engineering, our
Taiwan LEC licensee, and are currently initiating a proposal through them and
we have jointly entered the final phase of the China Steel proposal for our
LEC system.
New orders received for the third quarter of fiscal 1997 were
$4,951,598 compared to $6,812,038 for the third quarter of fiscal 1996.
This appears to be due to the continued softening of the market for
environmental services and products and increased competition. The new
orders for the nine month period were $17,957,276 compared to $18,870,874
for the nine months of fiscal 1996. Backlog at February 28, 1997 was
$7,784,228 compared to $7,806,827 at February 29, 1996. In addition to
the backlog, as of February 28, 1997, ETSI held open task orders from various
clients, principally government agencies. If all the work under these open
orders is authorized, the Company estimates its contract backlog would
increase by $913,144 for a total of $8,697,372 compared to a total contract
value of $9,261,443 at the end of the third quarter of fiscal 1996.
<PAGE>
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
service. 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 orders
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
Sales of Unregistered Securities During the Third Quarter Fiscal
1997
Total
Date Transaction Consideration Exemption
---- ----------- ------------- ---------
2/10/97 Sale of 285,716 $200,000 Section 4(2)
shares of common
stock plus warrants
to purchase 285,716
shares at $1.00 per
share, exercisable
for two years issued
to two existing
shareholders of the
Company, for the
purpose of obtaining
operating and working
capital.
2/24/97 Sale of 175,809 $100,000 Section 4(2)
shares of common
stock plus warrants
to purchase 175,809
shares at $1.00
per share, exercisable
for two years issued
to one of the
stockholders who
purchased in the
2/10/97 transaction,
for the purpose of
obtaining working
capital.
<PAGE>
1/21/97 20,000 shares of payment for Section 4(2)
common stock issued capital
to one overseas raising
consultant. services
2/7/97 16,000 shares of payment for Section 4(2)
common stock issued marketing
to one marketing and public
consultant. relations
services
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits
4(i) Form of 7% Convertible Debenture due February 27,
2002 (incorporated herein by reference to Exhibit
4(a) to Form 8-K dated February 28, 1997)
4(ii) Form of Common Stock Purchase Warrant (incorporated
herein by reference to Exhibit 4(b) to Form 8-K dated
February 28, 1997)
27 Financial Data Schedule
(B) Reports on Form 8-K
Report on Form 8-K dated February 28, 1997, reporting the
sale of securities of the Company pursuant to Regulation S.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this registrations statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
ETS INTERNATIONAL, INC.
DATE April 11, 1997 BY: s/John D. McKenna
-------------- -----------------------------
John D. McKenna
President and
Principal Executive Officer
DATE April 11, 1997 BY: s/John C. Mycock
-------------- -----------------------------
John C. Mycock
Secretary/Treasurer and
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTH PERIOD ENDED FEBRUARY 28, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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