SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from June 1, 1997 to March 31, 1998
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Commission file number 0-19678
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.)
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 272-6600
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
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Title of Each Class Which Registered
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Common Stock, no par value OTC (Bulletin Board)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of June 29, 1998. $ 777,686
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at June 29, 1998
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COMMON STOCK, NO PAR VALUE 16,492,043 SHARES
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts II and IV hereof.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on August 17, 1998 are incorporated by reference into Part III hereof.
<PAGE>
PART I
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Forward Looking Statements.
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This Transition Report on Form 10-K includes certain forward-looking
statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new
products and similar matters. None of the Company's statements
about the future are guarantees of future results or outcomes. The
Private Securities Litigation Reform Act of 1995 provides a safe
harbor for such 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 could significantly affect the operations,
performance, development and results of the Company's business
include, but are not limited to, the following: (i) changes in
legislative enforcement and direction; (ii) unusually bad or extreme
weather conditions; (iii) unanticipated delays in contract
execution; (iv) project delays or changes in project costs;
(v) unanticipated changes in operating expenses and capital
expenditures; (vi) sudden loss of key personnel; (vii) abrupt
changes in competition or the political or economic climate; and
(viii) abrupt changes in market opportunities.
Item 1. Business.
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Overview
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ETS International, Inc. ("ETSI"), a Virginia corporation formed in
1987, is a technology-based firm that historically has provided both
environmental and construction products and services. During the
second half of fiscal 1998, ETSI made a determination to focus on
its construction lines of business and to de-emphasize its
environmental products and services. Specifically, ETSI is
directing its efforts to the development and growth of its existing
underground infrastructure products and services related to the
installation and rehabilitation of subsurface pipelines using
trenchless technologies. Trenchless technology involves the
installation and rehabilitation of underground pipelines with
minimal surface disruption. Some of the methods used are pipe
relining, manhole construction and "pipe bursting."
As part of its refocusing effort, ETSI has, since October 1997,
undertaken a major management reorganization, sold substantially all
of the assets of its two environmental related subsidiaries,
relocated its corporate headquarters to Richmond, Virginia, where
ETSI's construction subsidiary is based, changed the names of
certain of its subsidiaries to reflect ETSI's emphasis on
infrastructure and, subject to shareholder approval, intends to
change the name of ETSI to InfraCorps Inc. ETSI also changed its
fiscal year-end from May 31 to March 31. See "Recent Developments"
below.
<PAGE>
ETSI operates its infrastructure business through two wholly-owned
affiliates: InfraCorps of Virginia, Inc. (formerly ETS Water and
Waste Management, Inc.) ("ETSW") and InfraCorps of Florida, Inc.
(formerly ETS Liner, Inc.) ("ETSL"), a subsidiary of ETSW. In
connection with its restructuring, ETSI during fiscal 1998 sold
substantially all of the assets of IC Subsidiary, Inc. (formerly
ETS, Inc.) ("ETS") and ETS Analytical Services, Inc. ("ETSAS"), as
described below. As a result of these sales, neither ETS nor ETSAS,
which are wholly-owned subsidiaries of ETSI, currently is engaged in
active business operations.
InfraCorps of Virginia, Inc. (formerly ETS Water and Waste
Management, Inc.) ("ETSW"), a Virginia corporation headquartered in
Richmond, Virginia, is ETSI's construction subsidiary. ETSW was
formed as a result of ETSI's acquisition on June 1, 1994, of Stamie
E. Lyttle Company, Inc., Lyttle Utilities, Inc. and LPS Corporation.
The three firms, the history of which dates back to 1947, were
consolidated into one corporation, ETSW. ETSW, along with its
subsidiary, InfraCorps of Florida, Inc. (formerly ETS Liner, Inc.)
("ETSL"), a Virginia corporation headquartered in Orlando, Florida,
utilizes trenchless technologies to install and rehabilitate
subsurface pipelines. ETSI's infrastructure customers include
municipalities, government agencies, Fortune 500 companies and
developers. ETSW, through its Service Division, also designed and
installed septic and irrigation systems and provided related repair
and maintenance services. As part of ETSI's effort to focus on the
infrastructure business, ETSI, in April 1998, sold the Service
Division of ETSW to a new corporation formed by Coleman S. Lyttle, a
director of ETSI and President of ETSW.
IC Subsidiary, Inc. (formerly ETS, Inc.) ("ETS"), a Virginia
corporation, was ETSI's environmental products and services
subsidiary. On March 12, 1998, ETSI completed the sale of
substantially all of the assets of ETS to ETS Acquisition, Inc. In
connection with the sale, ETSI sold a portion of its assets and
liabilities relating to the Limestone Emission Control ("LEC")
technology, including patents and licenses, to Christel Clear
Technologies, Inc. ("CCTI"). Both ETS Acquisition and CCTI are
newly formed entities owned by John D. McKenna, Arthur B. Nunn, III
and John C. Mycock, former executive officers and former directors
of ETSI.
ETS Analytical Services, Inc. ("ETSAS"), a Virginia corporation,
operated as the environmental analytical laboratory subsidiary of
ETSI. In October 1997, ETSI sold substantially all of the assets of
ETSAS to Q Enterprises, Inc., a company owned by James B. Quarles, a
former employee and Senior Vice President of ETSI. Mr. Quarles has
since become President and Chief Executive Officer of ETSI and sold
his interest in Q Enterprises, Inc.
ETSI's principal executive offices are located at 7400 Beaufont
Springs Drive, Suite 415, Richmond, Virginia 23225, and its
telephone number is (804) 272-6600.
Recent Developments
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On January 20, 1998, ETSI announced a management reorganization,
pursuant to which James B. Quarles was elected President and Chief
Executive Officer of ETSI and was appointed to its Board of
<PAGE>
Directors. Navin D. Sheth, the Chief Operating Officer of ETSW, a
wholly owned subsidiary of ETSI, was appointed Chief Financial
Officer of ETSI. John D. McKenna resigned as President and Chief
Executive Officer of ETSI on that date. Further, in connection with
on-going negotiations to purchase substantially all the assets of
ETSI's wholly owned environmental subsidiary, ETS, John D. McKenna,
Arthur B. Nunn, III and John C. Mycock resigned from ETSI's Board of
Directors effective February 2, 1998. These resignations were not
the result of a disagreement on any matter relating to ETSI's
operations, policies or practices. In light of these resignations,
James B. Quarles was elected Chairman of the Board, in addition to
his position as President and Chief Executive Officer.
The management reorganization reflects ETSI's intention to focus on
its infrastructure lines of business and to de-emphasize its
environmental products and services. New management believes that
the environmental services aspect of ETSI historically has been a
break-even business, providing little value to shareholders, while
attempts to commercialize the environmental technologies aspect of
ETSI have been a drain on ETSI's limited capital resources.
Management believes that ETSI should focus on one line of business
-- the installation and rehabilitation of subsurface pipelines for
the transmission of water, waste and natural gas -- and is seeking
to position ETSI to take advantage of perceived growth opportunities
within that industry segment. There can, however, be no assurance
that the Company's refocusing efforts will be successful.
ETSI is seeking shareholder approval at its Annual Meeting of
Shareholders, to be held on August 17, 1998, to formally change its
name to InfraCorps Inc. Pending shareholder approval of the formal
name change, ETSI has filed a fictitious name certificate to conduct
business in Virginia as InfraCorps Inc. On April 9, 1998, ETSI
relocated its headquarters to Richmond, Virginia, where its
construction subsidiary, ETSW, is based. Effective May 22, 1998,
ETSI changed the names of its wholly owned subsidiaries, ETSW and
ETS, to InfraCorps of Virginia, Inc. and IC Subsidiary, Inc.,
respectively. The name of ETSL was changed to InfraCorps of
Florida, Inc. effective May 21, 1998.
On October 31, 1997, ETSI sold substantially all of the assets and
certain liabilities of ETSAS to Q Enterprises, Inc., a company owned
by James B. Quarles, a former employee and Senior Vice President of
ETSI. Mr. Quarles has since become President and Chief Executive
Officer of ETSI and sold his interest in Q Enterprises, Inc. Since
the risks of ownership were not transferred to Q Enterprises, Inc.,
no sale was recognized for accounting purposes. Accordingly, the
assets and liabilities transferred to Q Enterprises, Inc. are shown
in the noncurrent sections of the balance sheet and are designated
as "assets of business transferred under contractual arrangements"
and "liabilities of business transferred under contractual
arrangements." ETSI received an 8.5% promissory note in the amount
of $1,000,000 with payments amortized over 30 years with a balloon
payment after 10 years. As payments of principal and interest are
received, they are being recorded as a reduction to "assets of
business transferred under contractual arrangements" until such time
as ETSI determines a sale can be recorded for accounting purposes.
At March 31, 1998, "assets of business transferred under contractual
arrangements" of $267,666 are stated net of a valuation allowance of
$858,000. The conversion of these assets to cash is dependent on
the future profitable operations of Q Enterprises, Inc. A loss on
<PAGE>
disposal of these discontinued environmental operations of $878,326
was recorded.
On March 6, 1998, ETSI Common Stock was removed from listing and
registration on the AMEX-EMC because ETSI was unable to achieve
compliance with the EMC continued listing guidelines. ETSI's Common
Stock currently is quoted on the OTC Bulletin Board under the symbol
ETSI.
On March 12, 1998, substantially all of the assets of ETS were sold
to ETS Acquisition, Inc., a newly formed firm based in Roanoke,
Virginia. In connection with this sale, ETSI sold a portion of its
assets and business relating to the LEC technology, including
patents and licenses, to CCTI, a newly formed firm based in Roanoke,
Virginia. The total purchase price was approximately $1,896,000 for
all of the aforementioned. The purchase price was paid in cash,
stock of ETSI, assumption of certain liabilities of ETS, delivery of
a 30-day note bearing 8 1/2% interest and delivery of a 10-year note
bearing 8 1/2% interest, and ETSI will receive 50% of all royalties
received by CCTI in connection with the license of the LEC
technology. While there is no indication that the LEC will be
resold by CCTI, the agreement further provides that ETSI will
receive 50% of the net sales price from a resale of the LEC
technology on or before March 12, 1999, and 25% of the net sales
price from a resale after March 12, 1999 but on or before March 12,
2000. A loss on disposal of these discontinued environmental
operations of $513,547 was recorded.
In connection with the foregoing transaction, ETSI entered into a
Management Agreement with Air Technologies, Inc. ("ATI"), a newly
formed firm based in Roanoke, Virginia, to provide management
services with respect to ETSI's contract to supply to China Steel
Corporation sulfur dioxide removal systems utilizing the LEC
technology (the "CSC Contract"). ETS Acquisition, Inc., CCTI and
ATI are owned by John D. McKenna, Arthur B. Nunn, III and John C.
Mycock, three former executive officers of ETSI and former members
of ETSI's Board of Directors.
ATI and CCTI have agreed to accept responsibility for any potential
liabilities associated with the CSC Contract and to provide their
best efforts to have the CSC Contract assigned without recourse from
ETSI to ATI. However, although negotiations are underway with China
Steel Corporation, ETSI has not yet been successful in obtaining
assignment of the CSC Contract. Accordingly, ETSI still has
potential liability under the CSC Contract which could have a
material negative impact on ETSI's business operations. Potential
issues have been brought to current management's attention regarding
the budget to meet certain of the performance specifications of the
CSC Contract and the overall viability of the LEC technology for
wide-scale commercialization. If the LEC technology does not meet
contract specifications, China Steel Corporation may seek to impose
financial penalties or attempt to recover damages or obtain other
relief under the CSC Contract, including drawing down on the
$600,000 performance bond posted by ETSI.
Business Segment Information
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During the ten-month period ended March 31, 1998 ("fiscal 1998"),
ETSI and its wholly owned affiliates provided both environmental and
infrastructure products and services. Prior to fiscal 1998 year-
<PAGE>
end, ETSI disposed of its environmental operations segments. Moving
forward, ETSI intends to specialize in infrastructure design,
construction and maintenance utilizing trenchless technologies to
install and rehabilitate subsurface pipelines.
Services and Products
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Trenchless technology refers to a family of methods, materials and
equipment that can be used for installation of new or rehabilitation
of existing underground pipelines. These methods provide minimal
disruption to surface traffic, business and other activities, as
opposed to open trenching and its associated major disruptions to
surface activities.
Both ETSW and ETSL utilize a so-called "fold and formed" trenchless
technology. Under this technology, a robotic vehicle with lights
and a video traverses the damaged line to detect blockage, offset
joints and other impediments. Any remedial work is then performed
within the existing lines, either through a point repair from the
surface or through a remote device. The pipe liner, which is
constructed specifically for the job and which is folded to fit
within the existing host pipeline, is inserted so that it extends
through the damaged length of pipe. The length of each pipe is at
least the distance from manhole to manhole. Insertion is made
through a power wench and steel cable connected to the end of the
pipe liner. Through the application of steam heat and pressure, the
pipe liner expands to fit the inside of the host pipe. The fit is
so tight that it leaves no annular space for unwanted water
migration between the pipeliner and the host pipe. The new smooth
interior maintains peak flow and inhibits build-up of foreign
material. The life of the replacement liner is the same as new
pipe.
ETSW is a party to a contract license agreement (the "License
Agreement") with Ultraliner, Inc. ("Ultraliner"), under which ETSW
has the exclusive right and license to use the ULTRALINER PVC ALLOY
(Trademark) deformed pipeline technology and process developed by
Ultraliner for the restoration, repair and rehabilitation of water
and sewer (sewage and storm) pipelines in the geographical area
lying within the principal boundaries of the counties of Frederick,
Clarke, Loudoun, Alexandria, Warren, Fauquier, Prince William, Page,
Rappahannock, Madison, Culpeper, Stafford, King George, Orange,
Spotsylvania, Caroline, Essex, Westmoreland, Richmond, Louisa,
Hanover, King William, King & Queen, Fluvanna, Goochland, Henrico,
New Kent, Cumberland, Powhatan, Amelia, Shenandoah and Chesterfield,
Virginia, and the cities of Hopewell, Colonial Heights, Richmond and
Winchester, Virginia (the "Territory"). Under the License
Agreement, Ultraliner retains the right to grant exclusive licenses
to other parties in the Territory to utilize the Ultraliner product
and services for purposes other than the repair, rehabilitation and
reconstruction of water or sewer pipelines. The License Agreement
terminates on February 1, 2001, and is renewable by ETSW for an
additional five-year term, subject to termination in the event of
specific defaults, including the failure of ETSW to meet certain
minimum performance objectives. After payment of an initial license
fee, no further royalties are due under the License Agreement.
However, if ETSW seeks to utilize the Ultraliner technology outside
of the Territory, whether or not in an area where a license for such
<PAGE>
permitted use has been granted by Ultraliner, ETSW must make an
immediate Cross-Over Payment of 25% of the gross product price of
all product sold outside of the Territory. All Cross-Over Payments
must be paid by ETSW to Ultraliner, as agent for ETSW, which then in
turn will promptly pay 20% of the Cross-Over Payment to the licensee
in whose territory the installation is performed, if any. All
licenses governing the commercialization of the Ultraliner product
within the United States provide for similar Cross-Over payments.
In fiscal 1998, ETSW comprised approximately 89.5% of ETS's
infrastructure business.
ETSL historically has operated under a contract license agreement to
use the Ultraliner technology and process throughout most of the
State of Florida, but is currently transitioning its operations to
another "fold and formed" licensor. In May, 1998, ETSL, which in
fiscal 1998 accounted for approximately 10.5% of ETS's
infrastructure business, entered into a sub-license agreement with
Miller Pipeline Corporation ("Miller") to become an exclusive sub-
licensee to use the "EX," "EX Method" and "EX Pipe" service marks
and related technology and process in water, sewer and industrial
process pipelines. ETSL's territory under the sublicense agreement
is defined as the State of Florida, excluding the counties of
Apalachicola River, Jackson, Calhoun, Gulf, Holmes, Washington, Bay,
Walton, Okaloosa, Santa Rosa and Escambia (the "ETSL Territory").
Under the sub-license agreement, if ETSL's capacity does not permit
it to install or buy a minimum of 75,000 feet of the EX Method pipe
in any twelve-month period, Miller has the right to terminate the
exclusive nature of the sub-license agreement and to grant a
nonexclusive sub-license to another entity in the ETSL Territory.
The sub-license agreement terminates on March 31, 2004, and is
renewable for an additional five-year term, subject to termination
in the event of specific defaults. After payment of the initial
license fee, ETSL must pay a royalty of 7% of the net sales price of
the internal pipelining completed and billed using the EX Method
technology and all directly associated work.
ETSL historically has not had profitable operations and is being
closely monitored by management of ETSI. If profitability is not
achieved by ETSL relatively soon, it may be divested.
Suppliers and Licenses
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ETSI's materials and equipment are generally available from several
suppliers. However, ETSI believes that Ultraliner is presently the
sole source of proprietary Ultraliner material and, therefore, ETSW
is presently dependent upon Ultraliner for its supply of Ultraliner
material. During the last three years, ETSW has not experienced any
difficulty in obtaining adequate supplies of Ultraliner tube
material. Similarly, ETSL is required to use Miller as its sole
source of supply in the ETSL Territory in connection with its EX
Method sub-license. Miller may, on a quarterly basis, adjust the
price of materials based on the manufacturers' potential variation
of the raw pipe materials from a base cost of pound of PVC. ETSL
currently has no reason to believe that obtaining necessary
materials and supplies from Miller will be a problem.
Because of the availability of alternate or similar trenchless
technology process, ETSI management does not believe that the loss
of the current licenses by ETSW or ETSL would be material to ETSI's
business operations. See "Competition" below.<PAGE>
Revenue Recognition, Contract Awards and Backlog
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ETSI recognizes revenues using the percentage-of-completion method.
The installation process generally is performed between manholes or
similar access points within a twenty-four hour period. A
rehabilitated pipeline section is considered completed work and is
generally billable to the customer. In most cases, contracts
consisting of individual line sections have a duration of less than
one year. 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.
The backlog on infrastructure contracts for the ten-month period
ended March 31, 1998, was approximately $5,527,124, as compared to
$4,770,106 for the ten-month period ended March 31, 1997. See
"Current Projects" below.
Customers
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During fiscal 1998, ETSI, through ETSW and ETSL, performed
infrastructure services under contracts with governmental
authorities, private industries and commercial entities. In each of
the last three fiscal years, more than 35% of ETSI's infrastructure
revenues came from state and local government entities -- cities,
counties, state agencies and regional authorities. For the ten-
month period ended March 31, 1998, ETSI had infrastructure contract
revenues from five customers, each of which accounted for more than
5% of contract revenues, aggregating approximately $4,718,000 or 37%
of contract revenues. These customers included two municipalities
and three commercial entities. At March 31, 1998, four customers
had accounts receivable balances which exceeded 5% of the trade
accounts receivable balance. The accounts receivable balances for
these customers totaled $883,854.
Municipal Activities. In order to bid for municipal construction
services in Virginia, ETSW 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. ETSW 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. ETSW not only bids on the basis of
the specifications contained in the Dodge Report, but is also often
<PAGE>
invited by the municipalities themselves to bid on specific
projects. ETSW selects the projects that it desires to bid based on
its 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 Commonwealth 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, ETSW 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 of contract awards in
writing, stating the time frame in which the project must be
completed. If ETSW is the low bidder, ETSW 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. ETSL engages
in similar bidding processes with respect to municipal construction
in the State of Florida.
Commercial Construction. ETSW also performs services for developers
and corporations. For residential and commercial developers, ETSW
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, ETSW
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. ETSW, in such a
situation, will design and modify the equipment to meet legal and
environmental requirements.
Competition
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The general pipeline reconstruction, rehabilitation and repair
business is highly competitive. ETSI faces competition both from
contractors employing traditional methods of pipeline replacement
and repairs and from contractors offering alternative trenchless
products and technologies.
The Ultraliner and other "fold and formed" processes compete with
traditional methods of pipe rehabilitation, including full
replacement, point of repair and sliplining. ETSI believes that the
"fold and formed" process usually offers a cost advantage over full
replacement, as well as the practical advantage of avoiding
excavation. In addition, the "fold and formed" process also offers
qualitatively better rehabilitation than traditional sliplining,
which may significantly reduce the diameter of the pipe. Grouting
is also undertaken in the United States. ETSI considers grouting a
short-term repair technique and not a long-term pipeline
rehabilitation solution competitive with the "fold and formed"
<PAGE>
process. As a practical matter, competition for ETSI typically
begins at the point that an end-user has determined to employ
trenchless technology over traditional rehabilitation methods
involving substantial excavation.
ETSI competes with alternative trenchless technologies, such as
cured-in-place pipeline rehabilitation. ETSI is aware of a number
of other trenchless technologies both under development and from
time to time introduced into the market place with mixed results.
ETSI believes that it can compete successfully with these
alternative trenchless products.
The principal areas of competition in general pipeline
reconstruction, rehabilitation and repair include the quality of the
work performed, the ability to provide a long-term solution to the
pipeline problems rather than a short-term repair, the amount of
disruption to traffic and commercial activity and the price. ETSI
believes that the "fold and formed" process competes favorably in
each of these areas with traditional replacement or repair methods.
In particular, the ability to install a "fold and formed" product
with little or no excavation at prices typically at or below
traditional open trench replacement method is a substantial
competitive advantage. Further, despite a small reduction in pipe
diameter resulting from the installation of the "fold and formed"
product against the walls of the original pipe, the smooth finished
interior reduces friction and generally increases flow capacity.
ETSI believes that the trenchless pipeline reconstruction market is
continuing to expand, with the entry of imitation and alternative
products. ETSI believes that its trenchless technology products and
services are cost-competitive.
ETSW's competition comes from many smaller and narrowly focused
companies in the Richmond and Northern Virginia areas. ETSW's major
competitor in the trenchless sewer and water main rehabilitation
business is Insituform, Inc., which is a cured-in-place technology.
ETSW believes that the "fold and formed" technology is superior and
that it can underbid Insituform on projects and still provide
adequate margins. However, Insituform has been completing projects
for municipalities for over a decade, and ETSW must first prove its
proficiency in trenchless technology to municipalities through
successful completion of small contracts before it will be chosen on
larger programs.
ETSL's competitors in Florida include many small open-cut firms, as
well as Insituform, using cured-in-place technology, and Madson-
Barr, using "fold and formed" technology.
Current Projects
----------------
As of June 26, 1998, ETSW had 27 major projects in progress,
primarily for municipalities, such projects aggregating
approximately $15 million. Most of the projects will be completed
on or before December 31, 1998.
<PAGE>
The following contracts were awarded to ETSW during the first
quarter of fiscal 1999:
KING WILLIAM SEWER IMPROVEMENTS PROJECT $ 529,975.00
CONTRACT A
Approximately 12,750 feet of 8" gravity
sewer and 5,600 feet of 4" force main
and appurtenances
Owner - King William County
NORTH TRUNK SEWER AND PUMP STATION $ 658,738.00
Approximately 3,200 feet of 10" gravity
sewer, 12,100 feet of 6" force main and
a pump station to serve commercial property
across from Colonial Downs
Owner - Delmarva Properties, Inc.
NEW KENT WATER SYSTEM IMPROVEMENTS PROJECT $ 498,305.00
Approximately 14,900 feet of 6", 8" & 12"
water main to service commercial property
across from Colonial Downs
Owner - Delmarva Properties, Inc.
STONEHOUSE SECTION VIA $ 294,613.00
Approximately 4,400 feet of 4", 6", 8"
& 10" gravity sewer main including a sewer
bridge and 2,200 feet of 4", 6" & 8" water
main to serve 34 residential lots at Stonehouse
Owner - Stonehouse, LLC
FOXFIRE SECTION 2 $ 199,107.00
Approximately 5,200 feet of 6" & 8"
gravity sewer main and 3,300 feet of
6", 8" & 12" water main to serve 49
residential lots at Foxfire
Owner - Delmarva Properties, Inc.
PETERSBURG/DINWIDDIE INTERCEPTOR SEWER $ 3,897,000.00
Replace approximately 17,000 LF of
30", 36" and 42" sanitary sewer
Bypass pumping
Owner - City of Petersburg
PETERSBURG PUMP STATION UPGRADE $ 329,770.00
Rework 3 pump stations
Owner - City of Petersburg
HIGHWOODS DISTRIBUTION CENTER $ 415,000.00
Approximately 2,500 LF of 12" sewer
Owner - Highwoods Corp.
MOTOROLLA WESTCREEK CAMPUS $ 960,000.00
Sanitary sewer, water and --------------
irrigation for plant expansion
Owner - Motorolla SPS, Inc.
TOTAL $ 7,782,508.00
<PAGE>
As of June 26, 1998, ETSL had 17 major projects in progress,
primarily for municipalities, such projects aggregating
approximately $1.2 million. Most of these projects will be
completed on or before August 1998.
See "Services and Products" above.
Supervision and Regulation
--------------------------
ETSI's infrastructure 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 Virginia Department of Health or Department of
Public Works for sewer, septic and water systems. Comparable state
agencies regulate ETSL's activities in Florida. ETSI does not
anticipate any material impediments in the use of the "fold and
formed" process arising from existing or future regulations or
requirements, including those regulating discharges of materials
into the environment.
Employees
---------
As of March 31, 1998, ETSI, ETSW and ETSL employed 5, 130 and 14
full-time personnel, respectively.
Item 2. Properties.
- ------ ----------
During a portion of fiscal 1998, ETSI occupied approximately 45,000
square feet of office and laboratory space in a modern commercial
building in Roanoke, Virginia, under lease agreements with 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, former President and Chairman of the Board of
ETSI, and Roberta Greiner, widow of Gary P. Greiner, a former
officer and director of ETSI, are partners. In connection with
ETSI's sale of ETS, the ETS lease was assigned, effective February
1, 1998, to ETS Acquisition, Inc, a Virginia corporation owned by
John D. McKenna, Arthur B. Nunn III and John C. Mycock, former
executive officers and directors of ETSI. ETSI believes that the
leases with PDJ Associates were on terms as favorable as those which
would have been available from non-affiliated parties. In
connection with the sale of ETSAS described below, the ETSAS lease
was assigned, effective October 31, 1997, to Q Enterprises, Inc., a
Virginia corporation which was owned by James B. Quarles. Mr.
Quarles , who subsequently became President and a director of ETSI
in January 1998, sold his interest in Q Enterprises, Inc. on
February 16, 1998. Lease payments made by ETSI to PDJ Associates in
fiscal 1998 totaled $164,000.
Effective in 1994, ETSW entered into a lease of its premises which
are owned by the Estate of Stamie E. Lyttle, of which Coleman S.
Lyttle, a director of ETSI is executor, at $10,500 per month for
two years. On June 1, 1997, the lease was renewed for a one-year
term with three one-year renewal options. Rent expense under this
lease was approximately $105,000 for fiscal 1998. ETSI believes
that the lease is on terms as favorable as those which would be
available from non-affiliated third parties.
<PAGE>
Item 3. Legal Proceedings.
- ------ -----------------
A lawsuit was served on ETSAS on or about March 18, 1998 and filed
in the Circuit Court for Chesterfield County under the caption,
Steven R. Pond v. ETS Analytical Services, Inc., Case No.
-----------------------------------------------
041CL98000254-00 (Circuit Court for Chesterfield County). In this
lawsuit, Steven R. Pond ("Pond"), a former employee of ETSAS and the
owner of premises leased to ETSAS, has asserted that ETSAS has
breached its obligations under the lease by failing to make certain
monthly payments, including late fees and interest, as well as by
causing or permitting "physical damages and waste upon the
premises." Pond is seeking judgment against ETSAS "in the sum of
$129,189.85 for accelerated rent, together with accrued late fees in
the amount of $4,579.79; compensatory damages in the amount of
$1,000.00, plus the costs of remediation and all damages, costs,
liability or expense arising from or related to environmental
contamination or environmental degradation of the premises;
prejudgment interest at the rate of 1.00%; together with the costs
of this action and award of attorney's fees and costs." On April 8,
1996, ETSAS filed a Special Plea, Grounds of Defense, and
Counterclaim, in which ETSAS asserted that it is entitled to a
set-off of any monies allegedly due and owing under the lease by
virtue of Pond's indebtedness to ETSAS, in the amount of
approximately $60,000, under a promissory note. ETSAS intends to
defend the lawsuit vigorously. The case currently is scheduled to
be set for trial at the Court's upcoming docket call on July 18,
1998, at which time it is anticipated a hearing date also will be
set for ETSAS' Special Plea. It is not possible at this stage,
however, to determine the outcome in the case or an estimate of the
range of any potential loss.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended March 31, 1998.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following
list is included as an unnumbered Item in Part I of this report in
lieu of being included in the Proxy Statement for the Annual Meeting
of Shareholders to be held on August 17, 1998.
The names, ages and positions of all of the executive officers of
ETSI as of March 31, 1998 are listed below with their business
experience for the past five years. Officers are appointed annually
by the Board of Directors at the meeting of directors immediately
following the Annual Meeting of Shareholders. There are no family
relationships among these officers, nor any agreement or
understanding between any officer and any other person pursuant to
which the officer was selected.
<PAGE>
Previous and present duties and responsibilities:
<TABLE>
<CAPTION>
<S> <C>
Position and Business
Name and Age Experience for Past Five Years
- ----------------------- -----------------------------------------------------------
James B. Quarles, 45 January 1998 to Present President and Chief
Executive Officer of ETSI
October 1997 to February 1998 Sole officer, director and
shareholder of Q
Enterprises, Inc.,
Roanoke, Virginia
(consulting)
May 1997 to October 1997 Senior Vice President of
ETSI
January 1987 to December 1996 Chairman and President of
Enviros, Inc., Seattle, WA
(biotechnical)
Navin D. Sheth, 51 January 1998 to Present Chief Financial Officer of
ETSI
June 1994 to Present Executive Vice President
of ETSW
May 1996 to Present Chief Operating Officer of
ETSW
Coleman S. Lyttle, 45 June 1994 to Present President of ETSW
Warren E. Beam, Jr., 41 April 1998 to Present Secretary of ETSI
January 1993 to January 1998 Treasurer of Spurlock
Adhesives, Inc. and
Spurlock Industries, Inc.
and their predecessors
(chemical manufacturing)
</TABLE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------
Matters.
-------
The information set forth under the caption "Market Information" on
page 4 of the 1998 Annual Report to Shareholders is incorporated
herein by reference.
In addition to the shares of ETSI Common Stock outstanding, there
were issued and outstanding as of March 31, 1998 warrants and
options to purchase shares of ETSI common stock as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Exercise Termination
Number Type Price Date
------- -------- -------- -----------------
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
33,350 Warrants $1.00 November 27, 2002
142,858 Warrants $1.00 February 10, 1999
142,858 Warrants $1.00 February 9, 1999
175,809 Warrants $1.00 February 23, 1999
1,000,000 Warrants $ .76 February 27, 2002
225,000 Warrants $ .63 October 9, 1999
350,000 Options $1.50 July 13, 1998
100,000 Options $1.37 July 19, 1998
13,200 Options $1.38 August 20, 1998
91,000 Options $1.06 April 11, 1999
343,000 Options $1.69 June, 17, 1999
75,000 Options $1.81 September 29, 2000
140,000 Options $1.75 May 8, 2000
22,000 Options $1.68 August 10, 2000
10,000 Options $1.06 May 20, 2001
23,000 Options $1.00 May 24, 2001
4,000 Options $1.00 May 24, 2001
63,000 Options $1.00 May 24, 2001
121,000 Options $ .75 July 25, 2001
85,000 Options $ .75 July 24, 2001
15,000 Options $ .75 July 24, 2001
23,000 Options $ .75 July 24, 2001
20,000 Options $ .75 July 24, 2001
20,000 Options $ .75 October 14, 2001
60,000 Options $ .75 October 14, 2001
10,000 Options $ .75 October 20, 2001
10,000 Options $ .75 October 20, 2001
20,000 Options $ .75 October 20, 2001
10,000 Options $ .75 October 20, 2001
100,000 Options $ .75 February 4, 2002
20,000 Options $ .75 February 4, 2002
25,000 Options $ .75 February 4, 2002
700,000 Options $ .75 February 4, 2002
20,000 Options $ .50 June 30, 2002
60,000 Options $. 50 November 4, 2002
350,000 Options $ .50 February 2, 2003
400,000 Options $ .27 February 11, 2003
</TABLE>
Item 6. Selected Financial Data.
- ------ -----------------------
The information set forth under the caption "Selected Financial
Data" on page 5 of the 1998 Annual Report to Shareholders is
incorporated herein by reference.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations.
---------------------
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on
pages 5 through 10 of the 1998 Annual Report to Shareholders is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Risk.
- ------- ---------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The following consolidated financial statements of ETSI and the
Independent Auditors' Report set forth on pages 11 through 39 of the
1998 Annual Report to Shareholders are incorporated herein by
reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets as of March 31, 1998 and May 31,
1997
3. Consolidated Statements of Income (Loss) for the Ten-month
Period Ended March 31, 1998 and Years Ended May 31, 1997 and
1996
4. Consolidated Statements of Stockholders' Equity (Deficit) for
the Ten-month Period Ended March 31, 1998 and Years Ended May
31, 1997 and 1996
5. Consolidated Statements of Cash Flows for the Ten-month Period
Ended March 31, 1998 and Years Ended May 31, 1997 and 1996
6. Notes to Consolidated Financial Statements as of March 31, 1998
and May 31, 1997 and Ten-month Period Ended March 31, 1998 and
Years Ended May 31, 1997 and 1996
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
For information with respect to the executive officers of the
registrant, see "Executive Officers of the Registrant" at the end
of Part I of this report. For information with respect to the
Directors of the registrant, see "Election of Directors" at pages
<PAGE>
10 and 11 of the Proxy Statement for the Annual Meeting of
Shareholders to be held August 17, 1998, which information is
incorporated herein by reference. The information with respect to
compliance with Section 16(a) of the Exchange Act, which is set
forth under the caption "Section 16(a) Beneficial Ownership
Compliance" at page 12 of the Proxy Statement for the Annual
Meeting of Shareholders to be held August 17, 1998, is incorporated
herein by reference.
Item 11. Executive Compensation.
- ------- ----------------------
The information set forth under the captions "Executive
Compensation," "Summary Compensation Table," "Option Grants in Last
Fiscal Year," "Aggregate Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values," "Board of Directors Report
on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Board of Directors and Committees,"
"Remuneration of Directors" and "Performance Graph" at pages 4
through 8 of the Proxy Statement for the Annual Meeting of
Shareholders to be held August 17, 1998, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The information pertaining to shareholders beneficially owning more
than five percent of the registrant's common stock and the security
ownership of management, which is set forth under the captions
"Stock Ownership of Certain Beneficial Owners" and "Stock Ownership
of Management" on pages 2 and 3 of the Proxy Statement for the
Annual Meeting of Shareholders to be held August 17, 1998, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
The information with respect to certain transactions with
management of the registrant, which is set forth under the caption
"Transactions with Management" at pages 9 and 10 of the Proxy
Statement for the Annual Meeting of Shareholders to be held on
August 17, 1998, is incorporated herein by reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- ------- ---------------------------------------------------------------
(a) List of documents filed as part of this report:
1. Financial statements:
All financial statements of the registrant as set forth
under Item 8 of this Report on Form 10-K.
2. Financial statement schedules:
All schedules are omitted, as the required information is
inapplicable or the information is presented in the
consolidated financial statements or related notes thereto.
<PAGE>
3. Exhibits to this Form 10-K are as follows:
Exhibit No. Description
3 (a) Articles of Incorporation, as amended, of ETS
International, Inc.
3 (b) Bylaws, as amended, of ETS International, Inc.
4 (a) Specimen copy of certificate for ETS
International, Inc. common stock, no par value
4 (b) Article II of the Bylaws of ETS International,
Inc. (included in Exhibit 3(b) hereto)
4 (c) Promissory Note dated May 1, 1998, between ETS
International, Inc. and Thomas W. Marmon, and
related Security Agreements
10 (a)* Employment Agreement dated January 20, 1998,
between James B. Quarles and ETS International,
Inc.
10 (b)* Stock Option Agreements between ETSI and James B.
Quarles
10 (c) Management Agreement dated March 12, 1998, between
Air Technologies, Inc. and ETS International, Inc.
10 (d) Contract dated September 12, 1997, between China
Steel Corporation and ETS International, Inc.
(incorporated herein by reference to Exhibit 10(a)
to Form 10-Q for the quarter ended August 31,
1997)
10 (e) Lease dated June 1, 1996, between Estate of Stamie
E. Lyttle and ETS Water and Waste Management, Inc.
(incorporated herein by reference to Exhibit 10(h)
of the Annual Report on Form 10-K/A for the fiscal
year ended May 31, 1997)
10 (f) Promissory Note dated May 1, 1998, between ETS
International, Inc. and Thomas W. Marmon, and
related Security Agreements (attached as Exhibit
4(c) hereto)
10 (g) Contract License Agreement dated September 14,
1995, between Ultraliner, Inc. and ETS Water and
Waste Management, Inc.
13 1998 Annual Report to Shareholders (such report,
except to the extent incorporated herein by
reference, is being furnished for the information
of the Commission only and is not to be deemed
filed as part of this Annual Report on Form 10-K)
21 Subsidiaries of the Company
24 Power of Attorney
27 Financial Data Schedule <PAGE>
- ----------------------------
*Management contract or compensatory plan or agreement required
to be filed as an Exhibit to this Form 10-K pursuant to Item
14(c).
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated January 20, 1998,
reporting management reorganization.
(2) Current Report on Form 8-K dated February 2, 1998,
reporting the signing of a nonbinding letter of
intent to sell ETS, Inc.
(3) Current Report on Form 8-K dated March 4, 1998,
reporting removal of the Company's common stock from
the AMEX-EMC, management of the China Steel contract
and default on certain indebtedness.
(4) Current Report on Form 8-K dated March 12, 1998,
reporting sale of substantially all of the assets of
ETS, Inc.
(5) Current Report on Form 8-K dated April 6, 1998,
reporting a change in the Company's fiscal year-end.
<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 duly authorized.
ETS INTERNATIONAL, INC.
By: /s/ James B. Quarles 7/2/98
------------------------ ------
James B. Quarles Date
President and Chief Executive
Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/James B. Quarles 7/2/98 President, Chief Executive Officer and
- -------------------------------- Director
James B. Quarles Date
/s/Navin D. Sheth 7/2/98* Chief Financial Officer, Treasurer
- -------------------------------- (Principal Financial Officer)
Navin D. Sheth Date
/s/Warren E. Beam, Jr. 7/2/98 Secretary
- -------------------------------- (Principal Accounting Officer)
Warren E. Beam, Jr. Date
/s/Coleman S. Lyttle 7/2/98* Director
- --------------------------------
Coleman S. Lyttle Date
/s/Lee A. Raver 7/2/98* Director
- --------------------------------
Lee A. Raver Date
*By /s/Warren E. Beam, Jr.
-------------------------------
Warren E. Beam, Jr.
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
3 (a) Articles of Incorporation, as amended, of ETS International,
Inc.
3 (b) Bylaws, as amended, of ETS International, Inc.
4 (a) Specimen copy of certificate for ETS International, Inc.
common stock, no par value
4 (b) Article II of the Bylaws of ETS International, Inc. (included
in Exhibit 3(b) hereto)
4 (c) Promissory Note dated May 1, 1998, between ETS International,
Inc. and Thomas W. Marmon, and related Security Agreements
10 (a)* Employment Agreement dated January 20, 1998, between James B.
Quarles and ETS International, Inc.
10 (b)* Stock Option Agreements between ETSI and James B. Quarles
10 (c) Management Agreement dated March 12, 1998, between Air
Technologies, Inc. and ETS International, Inc.
10 (d) Contract dated September 12, 1997, between China Steel
Corporation and ETS International, Inc. (incorporated herein
by reference to Exhibit 10(a) to Form 10-Q for the quarter
ended August 31, 1997)
10 (e) Lease dated June 1, 1996, between Estate of Stamie E. Lyttle
and ETS Water and Waste Management, Inc. (incorporated herein
by reference to Exhibit 10(h) of the Annual Report on Form 10-
K/A for the fiscal year ended May 31, 1997)
10 (f) Promissory Note dated May 1, 1998, between ETS International,
Inc. and Thomas W. Marmon, and related Security Agreements
(attached as Exhibit 4(c) hereto)
10 (g) Contract License Agreement dated September 14, 1995, between
Ultraliner, Inc. and ETS Water and Waste Management, Inc.
13 1998 Annual Report to Shareholders (such report, except to the
extent incorporated herein by reference, is being furnished
for the information of the Commission only and is not to be
deemed filed as part of this Annual Report on Form 10-K)
21 Subsidiaries of the Company
24 Power of Attorney
27 Financial Data Schedule
- ---------------------
*Management contract or compensatory plan or agreement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE>
Exhibit 3(a)
ARTICLES OF INCORPORATION
-------------------------
OF
--
ETS INTERNATIONAL, INC.
-----------------------
(As in effect March 31, 1998)
ARTICLE I - NAME
-----------------
The name of the Corporation is ETS International, Inc.
ARTICLE II - PURPOSE
--------------------
The purpose of this Corporation is to transact any or all lawful
business not required to be specifically stated in these Articles of
Incorporation for which corporations may be incorporated under the Virginia
Stock Corporation Act.
ARTICLE III - AUTHORIZED STOCK
(a) The aggregate number of shares which the Corporation is
authorized to issue is as follows:
Class Number of Shares Par Value
----- ---------------- ---------
Common 30,000,000 No Par Value
Preferred 5,000,000 No Par Value
(b) The Board of Directors of the Corporation (the "Board of
Directors") may, by amending these Articles of Incorporation (the "Articles")
by filing Articles of Amendment with the Virginia State Corporation
Commission, fix in whole or in part the preferences, limitations and rights,
within the limits set by law, of (i) any class of shares, before the issuance
of any shares of that class, or (ii) one or more series within a class,
before the issuance of any shares within that series.
(c) The preferred stock (including any shares of preferred
stock restored to the status of authorized but unissued preferred stock
undesignated as to series pursuant to this Article III(c)) may be divided
into one or more series and issued from time to time with such preferences,
privileges, limitations, and relative rights as shall be fixed and determined
by the Board of Directors. Without limiting the generality of the foregoing,
the Board of Directors is expressly authorized to the fullest extent
permitted from time to time by law to fix:
(i) the distinctive serial designations and the division
of shares of preferred stock into one or more series and the number of shares
of a particular series, which may be increased or decreased (but not below
the number of shares thereof then outstanding);
<PAGE>
(ii) the rate or amount (or the method of determining the
rate or amount) and times at which, the form in which, and the preferences
and conditions under which, dividends shall be payable on shares of a
particular series, the status of such dividends as cumulative, partially
cumulative, or noncumulative, the date or dates from which dividends, if
cumulative, shall accumulate, and the status of such series as participating
or nonparticipating with shares of other classes or series;
(iii) the price or prices at which, the consideration for
which, the period or periods within which and the terms and conditions, if
any, upon which the shares of a particular series may be redeemed, in whole
or in part, at the option of the Corporation or otherwise;
(iv) the amount or amounts and rights and preferences, if
any, to which the holders of shares of a particular series are entitled or
shall have upon any involuntary or voluntary liquidation, dissolution or
winding up of the Corporation;
(v) the rights and preferences over or otherwise in
relation to any other class or series (including other series of preferred
stock), as to the right to receive dividends and/or the right to receive
payments out of the net assets of the Corporation upon any involuntary or
voluntary liquidation, dissolution or winding up of the Corporation;
(vi) the right, if any, of the holders of a particular
series, the Corporation or another person to convert or cause conversion of
shares of such series into shares of other classes or series or into other
securities, cash, indebtedness or other property, or to exchange or cause
exchange of such shares for shares of other classes or series or other
securities, cash, indebtedness or other property, and the terms and
conditions, if any, including the price or prices or the rate or rates of
conversion and exchange, and the terms and conditions or adjustments, if any,
at which such conversion or exchange may be made or caused;
(vii) the obligation, if any, of the Corporation to redeem,
purchase or otherwise acquire, in whole or in part, shares of a particular
series for a sinking fund or otherwise, the terms and conditions thereof, if
any, including the price or prices and the nature of the consideration
payable for such shares so redeemed, purchased or otherwise acquired;
(viii) the voting rights, if any, including special,
conditional or limited voting rights, of the shares of a particular series in
addition to those required by law, including the number of votes per share
and any requirement for the approval by the holders of shares of all series
of preferred stock, or of the shares of one or more series thereof, or of
both, in an amount greater than a majority up to such amount as is in
accordance with applicable law or these Articles, as a condition to specified
corporate action or amendments to the Articles; and
(ix) any other preferences, limitations and relative
rights which may be so determined by resolution or resolutions of the Board
of Directors. Shares of preferred stock shall rank prior or superior to the
common stock in respect of the right to receive dividends and/or the right to
receive payments out of the net assets of the Corporation upon any
involuntary or voluntary liquidation, dissolution or winding up of the
Corporation. All shares of preferred stock redeemed, purchased or otherwise
acquired by the Corporation (including shares surrendered for conversion or
exchange) shall be canceled and thereupon restored to the status of
authorized but unissued shares of preferred stock undesignated as to series.
<PAGE>
(d) The holders of common stock, to the exclusion of any other
class of stock of the Corporation, have sole power to vote for the election
of directors except as (i) otherwise expressly provided in the serial
designation of any series of preferred stock, (ii) otherwise expressly
provided in these Articles and (iii) otherwise expressly provided by the then
existing laws of the Commonwealth of Virginia. The holders of common stock
will have one vote for each share of common stock held by them.
(e) No holder of shares of stock of any class of the
Corporation will have any preemptive or preferential right of subscription to
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, or to any obligations of the Corporation convertible into stock
of the Corporation, issued or sold, nor any right of subscription to any
thereof.
ARTICLE IV - INDEMNIFICATION OF DIRECTORS AND OFFICERS
------------------------------------------------------
A. Each Director and Officer who is or was a party to any proceeding
(including a proceeding by or in the right of the Corporation) shall be
indemnified by the Corporation against any liability imposed upon or asserted
against him (including amounts paid in settlement) arising out of conduct in
his official capacity with the Corporation or otherwise by reason of the fact
that he is or was such a Director or Officer or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, except there shall be no indemnification in relation to
matters as to which he shall have been finally adjudged to be liable by
reason of having been guilty of (i) willful misconduct or (ii) a knowing
violation of criminal law in the performance of his duty as such Director or
Officer.
B. In addition to the indemnification provided under Section A, to
the full extent permitted by the Virginia Stock Corporation Act and any other
applicable law, as they exist on the date hereof or may hereafter be amended,
the Corporation shall indemnify a Director or Officer of the Corporation who
is or was a party to any proceeding (including a proceeding by or in the
right of the Corporation) by reason of the fact that he is or was such a
Director or Officer or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise.
C. The Corporation is empowered to contract in advance to indemnify
any Director or Officer to the extent indemnification is granted under
Sections A and B. The Board of Directors is also empowered to cause the
Corporation to indemnify or contract in advance to indemnify any other person
not covered by Sections A and B who was or is a party to any proceeding, by
reason of the fact that he is or was an employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise to the same extent
as if such person were specified as one to whom indemnification is granted
under Sections A and B.
D. The Corporation may advance, pay for and/or reimburse the
reasonable expenses incurred by an Officer or Director who is a party to any
proceeding in advance of the final disposition thereof if (i) the Officer or
Director furnishes the Corporation a written statement of his good faith
belief that he has met the standard of conduct described in Sections A and/or
<PAGE>
B above, (ii) the Officer or Director furnishes the corporation a written
undertaking, executed personally or on his behalf, to repay the advance if it
is ultimately determined that he did not meet the standard of conduct, and
(iii) a determination is made that the facts then known to those making the
determination would not preclude indemnification under this Article. The
undertaking required by clause (ii) above shall be an unlimited general
obligation of the Officer or Director but need not be secured and may be
accepted without reference to financial ability to make repayment.
E. All determinations as to indemnification and advances of expenses
(including contracts with respect thereto) shall be made by a majority vote
of a quorum of disinterested Directors. In the event a quorum of
disinterested Directors cannot be obtained to make any determination as to
indemnification and advancement of expenses with respect to any claim for
indemnification made pursuant to this Article, such determinations shall be
made by special legal counsel agreed upon by the Board of Directors and the
proposed indemnitee. If the Board of Directors and the proposed indemnitee
are unable to agree upon such special legal counsel, the Board of Directors
and the proposed indemnitee each shall select a nominee, and the nominees
shall select such special legal counsel.
F. The foregoing provisions are intended to provide indemnification
with respect to those monetary damages for which the Virginia Stock
Corporation Act permits the limitation or elimination of liability. In
addition, to the full extent that the Virginia Stock Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation
or elimination of the liability of directors, a Director of the Corporation
shall not be liable to the Corporation or its stockholders for monetary
damages arising out of a single transaction, occurrence or course of conduct
in excess of the amount of cash consideration received by the Directors from
the Corporation for services as a Director during the twelve months
immediately preceding the act or omission for which liability was imposed.
G. The Corporation may purchase and maintain insurance to indemnify
it against the whole or any portion of the liability assumed by it in
accordance with this Article and may also procure insurance, in such amounts
as the Board of Directors may determine, on behalf of any person who is or
was a Director, Officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against any liability asserted against or
incurred by such person in any such capacity or arising from his status as
such, whether or not the Corporation would have power to indemnify him
against such liability under the provision of this Article.
H. The provisions of this Article shall be applicable to all
actions, claims, suits or proceedings commenced after the adoption hereof,
whether arising from any action taken or failure to act before or after such
adoption. No amendment, modification or repeal of this Article shall
diminish the rights provided hereby or diminish the right to indemnification
with respect to any claim, issue or matter in any then pending or subsequent
proceeding that is based in any material respect on any alleged action or
failure to act prior to such amendment, modification or repeal.
I. Except to the extent inconsistent with this Article, terms used
herein shall have the same meanings assigned them in the Indemnification
Article of the Virginia Stock Corporation Act as now in effect or hereafter
amended. Without limitation, it is expressly understood that reference
herein to Directors, Officers, employees or agents shall include former
Directors, Officers, employees and agents and their respective heirs,
executors and administrators.<PAGE>
Exhibit 3(b)
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
--
ETS INTERNATIONAL, INC.
-----------------------
ARTICLE I. OFFICES
-------------------
The principal office of the corporation shall be located in Richmond,
Virginia. The corporation may have such other offices, either within or
without the state of incorporation, as the Board of Directors may designate
or as the business of the corporation may require from time to time.
ARTICLE II. SHAREHOLDERS
-------------------------
SECTION 1. Annual Meeting. The annual meeting of the shareholders
--------------
shall be held in the month of July in each year at such time, day and place
as the Board of Directors may designate, for the purpose of electing
Directors and for the transaction of such other business as may come before
the meeting. If the election of Directors shall not be held on the date
designated for any annual meeting of the shareholders, or any adjournment
thereof, the Board of Directors shall cause the election to be held at a
special meeting of the shareholders as soon thereafter as conveniently may
be.
SECTION 2. Special Meetings. Special meetings of the shareholders,
----------------
for any purpose or purposes, unless otherwise prescribed by statute, may be
called by the President, the Board of Directors, and by holders of not less
than twenty percent of all the outstanding shares of the corporation entitled
to vote at the meeting.
SECTION 3. Place of Meeting. The Board of Directors may designate any
----------------
place, either within or without the state of incorporation unless otherwise
prescribed by statute, as the place of meeting for any annual meeting or for
any special meeting called by the Board of Directors. A waiver of notice
signed by all shareholders entitled to vote at a meeting may designate any
place, either within or without the state of incorporation, unless otherwise
prescribed by statute, as the place for the holding of such meeting. If no
designation is made, or if a special meeting be otherwise called, the place
of meeting shall be the principal office of the corporation.
SECTION 4. Notice of Meeting. Written or printed notice stating the
-----------------
place, day and hour of the meeting and in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not
less than ten nor more than sixty days before the date of the meeting, either
personally or by mail, by or at the direction of the President, or the
<PAGE>
Secretary, or the officer or persons calling the meeting, to each shareholder
of record entitled to vote at such meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, addressed to
the shareholder at his address as it appears on the stock transfer books of
the corporation, with postage thereon prepaid.
Notice of a shareholder's meeting to act on an amendment of the
articles of incorporation or on a reduction of stated capital or on a plan of
merger or consolidation shall be given, in the manner provided above, not
less than twenty-five nor more than sixty days before the date of the
meeting. Any such notice shall be accompanied by a copy of the proposed
amendment or plan of reduction or merger or consolidation.
SECTION 5. Closing of Transfer Books or Fixing of Record Date. For
--------------------------------------------------
the purpose of determining shareholders entitled to notice of or to vote at
any meeting of shareholders or any adjournment thereof, or shareholders
entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors of the corporation may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, seventy days.
If the stock transfer books shall be closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders,
such books shall be closed for at least ten days immediately preceding such
meeting. In lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than seventy days and, in
case of a meeting of shareholders, not less than ten days prior to the date
on which the particular action, requiring such determination of shareholders,
is to be taken. If the stock transfer books are not closed and no record
date is fixed for the determination of shareholders entitled to notice of or
to vote at a meeting of shareholders, or shareholders entitled to receive
payment of a dividend, the date on which the notice is given or the date on
which the resolution of the Board of Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination
of shareholders. When a determination of shareholders entitled to vote at
any meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof.
SECTION 6. Quorum. A majority of the outstanding shares of the
------
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted
at the meeting as originally notified. The shareholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
SECTION 7. Proxies. At all meetings of shareholders, a shareholder
-------
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the secretary of
the corporation before or at the time of the meeting.
<PAGE>
SECTION 8. Chairman and Secretary. The Chairman and Secretary of the
----------------------
Board of Directors of the corporation shall serve, respectively, as Chairman
and Secretary of all meetings of the shareholders of the corporation. The
Chairman shall preside at such meetings, and the Secretary shall be
responsible for keeping minutes thereof in one or more books provided for
that purpose.
SECTION 9. Order of Business. The order of business at stockholders'
-----------------
meetings shall be:
(a) Proof of notice of meeting,
(b) Roll call,
(c) Determination of quorum,
(d) Reading and disposal of unapproved minutes,
(e) Reports of officers and committees,
(f) Election of directors,
(g) Unfinished business,
(h) New business, and
(i) Adjournment.
SECTION 10. Voting of Shares. Each outstanding share entitled to vote
----------------
shall be entitled to one vote upon each matter submitted to a vote at a
meeting of shareholders.
SECTION 11. Voting of Shares by Certain Holders. Shares standing in
-----------------------------------
the name of another corporation may be voted by such officer, agent or proxy
as the by-laws of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted
by him, either in person or by proxy, but no trustee shall be entitled to
vote shares held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted
by such receiver without the transfer thereof into his name if authority so
to do be contained in an appropriate order of the court by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so
transferred, unless the pledge agreement provides to the contrary.
<PAGE>
Shares of its own stock belonging to the corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any
meeting, and shall not be counted in determining the total number of
outstanding shares at any given time.
SECTION 12. Voting. Unless otherwise provided by law, at each
------
election for Directors every shareholder entitled to vote at such election
shall have the right to vote, in person or by proxy, the number of shares
owned by him for as many persons as there are Directors to be elected and for
whose election he has a right to vote. A shareholder shall not have the
right to cumulate his votes.
SECTION 13. Informal Action by Shareholders. Unless otherwise
-------------------------------
provided by law, any action required to be taken at a meeting of
shareholders, or any other action which may be taken at a meeting of the
shareholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
SECTION 14. Voting List. The Secretary or agent having charge of the
-----------
stock transfer books for shares of the corporation shall make, at least ten
days before each meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address
of and the number of shares held by each. Such list, for a period of ten
days prior to such meeting, shall be kept on file at the registered office of
the corporation or at its principal place of business or at the office of its
transfer agent or registrar and shall be subject to inspection by any
stockholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any stockholder during the whole time of the
meeting.
SECTION 15. Inspectors and Judges. The Directors, in advance of any
---------------------
stockholders' meeting, may, but need not, appoint one or more inspectors of
election or judges of the vote, as the case may be, to act at the meeting or
any adjournment thereof. If an inspector or inspectors or judge or judges
are not appointed, the person presiding at the meeting may, but need not,
appoint one or more inspectors or judges. In case any person who may be
appointed as an inspector or judge fails to appear or act, the vacancy may be
filled by appointment made by the Directors in advance of the meeting or at
the meeting by the person presiding thereat. Each inspector or judge, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector or judge at such meeting
with strict impartiality and according to the best of his ability. The
inspectors or judges, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at
the meeting, the existence of a quorum, the validity and effect of proxies,
and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the result, and do
such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the person presiding at the meeting, the
inspector or inspectors or judge or judges, if any, shall make a report in
writing of any challenge, question or matter determined by him or them and
execute a certificate of any fact found by him or them.
<PAGE>
ARTICLE III. BOARD OF DIRECTORS
--------------------------------
SECTION 1. General Powers. The business and affairs of the
--------------
corporation shall be managed by its Board of Directors.
SECTION 2. Number, Tenure and Qualification. The number of directors
--------------------------------
of the corporation shall be five. Each director shall hold office until the
next annual meeting of shareholders and until his successor shall have been
elected and qualified. The number of directors may be increased or diminished
from time to time by the directors, but shall not be less than one nor more
than five.
SECTION 3. Regular Meetings. A regular annual meeting of the Board of
----------------
Directors shall be held without other notice than this by-law immediately
after, and at the same time and place as, the annual meeting of shareholders.
The Board of Directors may provide, by resolution, the time and place for the
holding of additional regular meetings without other notice than such
resolution.
SECTION 4. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by or at the request of the President of the
corporation or any Director. The person or persons authorized to call
special meetings of the Board of Directors may fix the place for holding any
special meeting of the Board of Directors called by him or them.
SECTION 5. Notice. Notice of any special meeting shall be given at
------
least two (2) days prior thereto by written notice delivered personally or
mailed to each Director at his business address, or by telegram. If mailed,
such notice shall be deemed to be delivered when deposited in the United
States mail so addressed, with postage thereon prepaid. If notice be given
by telegram, such notice shall be deemed to be delivered when the telegram is
delivered to the telegraph company. Any Director may waive notice of any
meeting. The attendance of a Director at a meeting shall constitute a waiver
of notice of such meeting, except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 6. Quorum. A majority of the Directors shall constitute a
------
quorum for the transaction of business at any meeting of the Board of
Directors, but if less than such majority is present at a meeting, a majority
of the Directors present may adjourn the meeting from time to time without
further notice.
SECTION 7. Chairman and Secretary. Unless the Board by appropriate
----------------------
action otherwise designates, the President and Secretary of the corporation
shall be Chairman and Secretary, respectively, of the Board of Directors.
The Chairman shall preside at all meetings of the Directors and shall possess
such other authority and shall perform as such other duties as the Board
shall determine. The Secretary of the Board, who need not be a director,
shall keep the minutes of the Board of Directors meetings in one or more
books provided for that purpose.
<PAGE>
SECTION 8. Audit Committee. The Audit Committee shall be comprised of
---------------
no less than two members of the Board of Directors, one of whom shall not be
an officer of or otherwise employed by the corporation. The members of the
Audit Committee shall serve at the pleasure of the Board of Directors. A
majority of the members of the Audit Committee shall constitute a quorum for
the transaction of any business.
The Audit Committee shall coordinate an annual review of the books of
account and other records of the Company, shall meet at least once annually
and shall from time to time and upon request report to the Board of Directors
regarding the finances of the corporation.
SECTION 9. Manner of Acting. Except as otherwise herein or by law
----------------
provided, the act of the majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
SECTION 10. Vacancies. Any vacancy occurring in the Board of
---------
Directors may be filled by the affirmative vote of a majority of the
remaining Directors, though less than a quorum of the Board of Directors,
unless otherwise provided by law. A Director elected to fill a vacancy shall
be elected for the unexpired term of his predecessor in office. Any
directorship to be filled by reason of an increase in the number of Directors
shall be filled by election at an annual meeting or at a special meeting of
shareholders called for that purpose.
SECTION 11. Compensation. The Board may authorize Directors' fees,
------------
and any such payments shall not preclude any Director from serving the
corporation in another capacity and receiving compensation therefor.
SECTION 12. Presumption of Assent. A Director of the corporation who
---------------------
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his or her dissent shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with
one person acting as the secretary of the meeting before the adjournment of
the meeting. Such right to dissent shall not apply to a Director who voted
in favor of such action.
SECTION 13. Meetings by Conference Telephone. Members of the Board of
--------------------------------
Directors or of any committee designated thereby may participate in a meeting
of such Board or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
SECTION 14. Action Without Meetings. Any action required to be taken
-----------------------
at a meeting of Directors, or any action which may be taken at a meeting of
Directors or of a committee of Directors, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all
of the Directors or all of the members of the committee of Directors, as the
case may be. Such consent shall have the same force and effect as a
unanimous vote.
<PAGE>
SECTION 15. Representatives and Agents. The Board of Directors may
--------------------------
appoint such representatives and agents of the corporation as it may deem
desirable. Such representatives and agents shall have such titles, powers
and duties, which may be limited to particular territories or places, and
shall serve for such terms as shall be determined by the Board of Directors.
If no term shall have been specified in the appointment of any representative
or agent, he shall serve during the pleasure of the Board. The Board of
Directors, by specific resolution, may authorize one or more of the officers
of the corporation to execute powers of attorney delegating to named
representatives or agents designated corporate powers, either with or without
power of substitution.
SECTION 16. Committees. The Board of Directors, by resolution adopted
----------
by a majority of the Directors in office, may designate one or more
committees each of which shall consist of two or more Directors, which
committees, to the extent provided in such resolution, shall have and
exercise the authority of the Board of Directors except to approve an
amendment of the Articles of Incorporation, a plan or merger or
consolidation, a sale, lease, exchange, mortgage, pledge or other disposition
of all, or substantially all, the property and assets of the corporation, the
voluntary dissolution of the corporation, or revocation of voluntary
dissolution proceedings. Other committees with limited authority may be
designated by a resolution adopted by a majority of the Directors present at
a meeting at which a quorum is present.
ARTICLE IV. OFFICERS
---------------------
SECTION 1. Number. The officers of the corporation shall be a
------
President, such Vice Presidents as may be determined by the Board of
Directors, a Treasurer and a Secretary, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers as may be
deemed necessary may be elected or appointed by the Board of Directors. Any
two or more officers may be held by the same person.
SECTION 2. Election and Term of Office. The officers of the
---------------------------
corporation shall be elected annually by the Board of Directors at its first
meeting held after each annual regular meeting of the shareholders, or as
soon thereafter as conveniently may be. Each officer shall hold office for a
term of one year or until his successor shall have been duly elected and
shall have qualified or until his death or until he shall resign or shall
have been removed in the manner hereinafter provided.
SECTION 3. Removal. Any officer or agent elected or appointed by the
-------
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the corporation would be served thereby, but
such removal shall be without prejudice to the recovery of damages for breach
of the contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create contract
rights.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise may be filled by the
Board of Directors for the unexpired portion of the term.
<PAGE>
SECTION 5. President. The President shall be a director of the
---------
corporation, shall be the chief executive officer of the corporation, and,
subject to the control of the Board of Directors, shall in general supervise
and control all of the business and affairs of the corporation. He may sign
deeds, mortgages, bonds, contracts, or other instruments, except in cases
where the signing and execution thereof shall be expressly delegated by the
Board of Directors or by these by-laws to some other officer or agent of the
corporation, or shall be required by law to be otherwise signed or executed,
and in general shall perform all duties incident to the office of president
and such other duties as may be prescribed by the Board of Directors from
time to time.
SECTION 6. Vice President. In the absence of the President, or in the
--------------
event of his death, inability or refusal of act, the Vice President, or if
there is more than one Vice President, then any Vice President, shall perform
the duties of the President, unless a particular Vice President shall have
been designated by the Board of Directors for that purpose, and when the Vice
President is so acting he shall have all the powers of and be subject to all
the restrictions upon the President. The Vice President shall perform such
other duties as from time to time may be assigned to him by the President or
by the Board of Directors.
SECTION 7. Secretary. The Secretary shall: (a) see that all notices
---------
are duly given in accordance with the provisions of these by-laws or as
required by law; (b) be custodian of the corporate records and of the seal of
the corporation if there shall be a seal and see that the seal of the
corporation is affixed to all documents, the execution of which on behalf of
the corporation under its seal is duly authorized; and (c) in general,
perform all duties incident to the office of Secretary and such other duties
as from time to time may be assigned to him by the Board of Directors. In
the absence of the Secretary, or in the event of his death, inability or
refusal to act, the Assistant Secretary, or if there is more than one
Assistant Secretary, then any Assistant Secretary, shall perform the duties
of the Secretary, unless a particular Assistant Secretary shall have been
designated by the Board of Directors for that purpose.
SECTION 8. Treasurer. If required by the Board of Directors, the
---------
Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of Directors shall
determine. He shall: (a) have charge and custody of and be responsible for
all funds and securities of the corporation; receive and give receipts for
monies due and payable to the corporation from any source whatsoever and
deposit all such monies in the name of the corporation in such banks, trust
companies or other depositaries as shall be selected in accordance with the
provisions of Article V of these by-laws; and (b) in general perform all of
the duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.
SECTION 9. Salaries. The salaries of the officers shall be fixed from
--------
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
<PAGE>
SECTION 10. Voting Upon Stocks. Unless otherwise ordered by the Board
------------------
of Directors, the President shall have full power and authority on behalf of
the corporation to attend and to act and to vote, or in the name of the
corporation to execute proxies to vote, at any meeting of shareholders of any
corporation in which the corporation may hold stock, and at any such meeting
shall possess and may exercise, in person or by proxy, any and all rights,
powers and privileges incident to the ownership of such stock. The Board of
Directors may by resolution from time to time confer like powers upon any
other person or persons.
SECTION 11. Bonds of Officers. All officers of the corporation, if
-----------------
required to do so by the Board of Directors, shall furnish bonds to the
corporation for the faithful performance of their duties, in such penalties
and with such conditions and security as the Board of Directors shall
require; and, in such case, a new bond of like character shall be given at
least every six years, so that the date of the new bond shall not be more
than six years after the date of bond immediately preceding.
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS
-------------------------------------------------
SECTION 1. Contracts. The Board of Directors may authorize any
---------
officer or officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the corporation,
and such authority may be general or confined to specific instances.
SECTION 2. Checks, Drafts, etc. All checks, drafts or other orders
-------------------
for the payment of money, notes or other evidences of indebtedness issued in
the name of the corporation shall be signed by such officer or officers,
agent or agents of the corporation and in such manner as shall from time to
time be determined by resolution of the Board of Directors.
SECTION 3. Deposits. All funds of the corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the
corporation in such banks, trust companies or other depositaries as the Board
of Directors may select.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
-------------------------------------------------------
SECTION 1. Certificates for Shares. Certificates representing shares
-----------------------
of the corporation shall be in such form as shall be determined by the Board
of Directors. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the corporation. Such
certificates shall be signed by the President and by the Secretary or by such
other persons authorized by law and by the Board of Directors so to do. If
such certificates are countersigned by a transfer agent other than the
corporation or its employee or by a registrar other than the corporation or
its employee, any other signature on the certificate may be facsimile. In
case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to
<PAGE>
be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
SECTION 2. Transfer of Shares. Transfer of shares of the corporation
------------------
shall be made only on the stock transfer books of the corporation by the
holder of record thereof or by his legal representative, who shall furnish
proper evidence of authority to transfer, or by his attorney thereunto
authorized by power of attorney duly executed, and on surrender for
cancellation of the certificate for such shares. The person in whose name
shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and canceled, except that in case of a
lost, destroyed or mutilated certificate, a new one may be issued therefor
upon such terms and indemnity to the corporation as the Board of Directors
may prescribe.
The Board of Directors, subject to the provisions of the Articles of
Incorporation and these by-laws, may make all such rules, regulations and
conditions as they may deem expedient concerning the subscription for, issue,
transfer and registration of, shares of stock.
The Board of Directors may appoint one or more transfer agents and/or
registrars of transfers, and may require all stock certificates to bear the
signatures of one of the transfer agents or of one of the registrars of
transfers so appointed, or of both.
ARTICLE VII. FISCAL YEAR
-------------------------
The fiscal year of the corporation shall be the period ending March 31
of each year, unless changed by appropriate resolution of the Board of
Directors.
ARTICLE VIII. DIVIDENDS
------------------------
The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law and its Articles of
Incorporation.
ARTICLE IX. SEAL
-----------------
The Board of Directors may authorize the use of a corporate seal but
failure to use the seal shall not affect the validity of any instrument. The
use of a facsimile of the seal of the affixing of a scroll by way of a seal
or the execution of a document containing the words importing a sealed
document shall be the same force as if actually sealed by physically affixing
an impression of a seal.
<PAGE>
ARTICLE X. BOOKS AND RECORDS
-----------------------------
The corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its Board of Directors
and committees having any of the authority of the Board of Directors. All
books and records of the corporation shall be inspected as permitted by law.
Any books, records and minutes may be in written form or in any other form
capable of being converted into written form within a reasonable time.
ARTICLE XI. AMENDMENTS
-----------------------
These by-laws may be altered, amended or repealed by the affirmative
vote of all of the Board of Directors then in office at any regular meeting
of the Board, or by a majority of the Board of Directors at any regular or
special meeting of the Board if notice of the proposed amendment shall have
been given.
Effective: April 6, 1998
Exhibit 4(a)
[SPECIMEN STOCK CERTIFICATE]
[ETS LOGO]
ETS INTERNATIONAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF VIRGINIA
Number Shares
THIS CERTIFICATE IS TRANSFERRABLE SEE REVERSE FOR
IN THE CITIES OF VANCOUVER, B.C., CERTAIN
PITTSBURGH, PA OR NEW YORK, NY DEFINITIONS
CUSIP 26924C 10 1
This Certifies that
[SPECIMEN]
is the owner of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE OF
ETS INTERNATIONAL, INC.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this certificate properly endorsed. This certificate and
the shares represented hereby are issued and shall be held subject to all of
the provisions of the Articles of Incorporation and the Bylaws of the
Corporation, as restated or amended, or as same may be restated or amended
hereafter (a copy of which are on file with the Transfer Agent and Co-
Transfer Agent), to all of which the holder hereof by acceptance hereof
agrees and assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar or the Co-Transfer Agent and Co-Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
ETS INTERNATIONAL, INC.
President Corporate Seal Secretary-
Treasurer
1987
Virginia
COUNTERSIGNED AND REGISTERED:
MONTREAL TRUST VANCOUVER,
CO-TRANSFER AGENT AND CO-REGISTRAR BRITISH COLUMBIA
By
------------------------------------------------------------------------
Authorized Officer
COUNTERSIGNED AND REGISTERED TRANSFER AGENT
MELLON BANK, N.A. AND REGISTRAR
By
-----------------------------------------------------------------------
AUTHORIZED SIGNATURE<PAGE>
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto
- -----------------------------------------------------------------------------
(Name and address of transferee)
- -----------------------------------------------------------------------------
- --------------------------------------------------------------------- shares
registered in the name of the undersigned on the books of the Corporation
named on the face of this certificate and represented hereby, and irrevocably
constitutes and appoints
- ---------------------------------------------------------------- the attorney
of the undersigned to transfer the said shares on the register of transfers
and books of the Corporation with full power of substitution hereunder.
DATED:
- --------------------------------- --------------------------------
(Signature of Witness) (Signature of Shareholder)
NOTICE: The signature of this assignment must correspond with the names
as written upon the face of the certificate, in every particular,
without alteration or enlargement, or any change whatever, and
must be guaranteed by a bank, trust company or a member of a
recognized stock exchange.
<PAGE>
Exhibit 4(c)
PROMISSORY NOTE
$3,500,000 Maximum May 1, 1998
Richmond, Virginia
FOR VALUE RECEIVED, the undersigned, ETS INTERNATIONAL, INC., a
Virginia corporation ("Maker"), promises to pay to the order of THOMAS W.
MARMON as Trustee of the THOMAS W. MARMON TRUST ("Payee"), the principal
amount equal to the aggregate amount of advances made by Payee to Maker
hereunder, which advances shall not exceed Three Million Five Hundred
Thousand Dollars ($3,500,000), together with interest on the unpaid balance
at a rate per annum of Ten Percent (10%) until maturity and Twelve Percent
(12%) after maturity.
The principal of this Note shall be paid. in full on May 1, 1999.
Accrued interest shall be paid on June 1, 1998 and on the 15th day of each
month thereafter until April 15, 1999, at which time the remaining balance of
principal and interest shall be paid in full, provided, however, that Payee
shall have the option to call this Note in full at any time upon sixty (60)
days written notice (i.e., Payee has the option to accelerate the entire
principal and interest owing and demand payment in full upon sixty (60) days
written notice). The Maker reserves the right to pre-pay this Note at any
time upon sixty (60) days written notice to Payee.
Restatement of Indebtedness. This Note restates, modifies and
extends the following:
Instrument Date Amount
---------- ---- ------
Promissory Note March 17, 1997 $2,500,000
Promissory Note November 4, 1997 $ 500,000
Promissory Note March 10, 1998 $ 160,000
Late Charge. If any installment of principal or interest is not
paid within ten (10) days of its due date, Maker will forthwith pay to the
holder of this Note a late charge in an amount equal to five percent (5%) of
the past due payment. This is in addition to the holder's other rights and
remedies for default in payment of an installment of interest when due. Maker
will pay this late charge promptly, but only once on each late payment.
Security. This Note and all obligations of Maker hereunder are
secured by certain security agreements and a guaranty dated March 17, 1997
and any and all security agreements, guaranties, mortgages, pledge agreements
assignments, and all other agreements and instruments heretofore or hereafter
given by Maker or any third party to Payee ("Security Documents"), including,
but not limited to, Security Documents given in connection with or referred
to in any prior promissory notes given to Payee and Security Documents that
secure any present or future guaranty of all or part of the indebtedness
evidenced by this Note. Payee shall have all of the rights and powers set
forth in the Security Documents and in any other written agreements
heretofore or hereafter given to Payee by Maker, as though they were fully
set forth herein. As additional security for the payment of Maker's
obligations under this Note, Maker grants to Payee a security interest in all
tangible and intangible property of Maker now or hereafter in the possession
of Payee.
<PAGE>
Default and Acceleration. Each of the following shall be an event
of default under this Note: (a) if default occurs in the payment of any
installment of principal or interest hereunder or of any late charge or out-
of-pocket expense at any time owing to Payee under this Note or in the
payment of any other indebtedness or obligation now or hereafter owing by
Maker to Payee, as and when the same shall be or become due and payable and
such failure shall continue unremedied for a period of ten (10) days; (b) if
default occurs in the performance of any other obligation to Payee under this
Note, or any Security Document or any other agreement heretofore or hereafter
entered into between Maker and Payee, or any Guarantor and Payee, or if there
occurs any other event of default under any Security Document or any such
other agreement, and any such default shall continue unremedied for a period
of ten (10) days after the sending of written notice of such default to
Maker; (c) if any warranty or representation heretofore or hereafter made to
Payee by Maker or any guarantor of all or part of the Indebtedness evidenced
by this Note ("Guarantor"), in any Security Document or in any financial
statement or other document given to Payee in connection with this Note,
shall have been false in any material respect; (d) if Maker or any Guarantor,
shall dissolve, become insolvent, or make an assignment for the benefit of
creditors; (e) if any guaranty that now or hereafter secures payment of all
or any part of the indebtedness evidenced by this Note shall be terminated or
limited for any reason without the written consent or agreement of the holder
of this Note; (f) if any part of the principal or interest of, or any other
payment of money due under, any indebtedness for borrowed money of the Maker,
including without limitation any indebtedness to banks or other financial
institutions, is not paid when due or within any grace period; (g) if any
indebtedness of Maker (including without limitation any indebtedness to banks
or other financial institutions) becomes or is declared to be due and payable
prior to the stated maturity thereof as a result of any default or event of
default occurring with respect thereto; or (h) at any time the holder of this
Note for any reason shall in good faith believe that the prospect of payment
or performance of this Note or any other indebtedness or obligation of Maker
to the holder is impaired. Upon the occurrence of any event of default, all
or any part of the indebtedness evidenced hereby and all or any part of all
other indebtedness and obligations then owing by Maker to the holder shall,
at the option of the holder, become immediately due and payable without
notice or demand. If a voluntary or involuntary case in bankruptcy,
receivership, or insolvency shall at any time be instituted by or against
Maker or any Guarantor and, in the case of an involuntary action, such action
is not discharged within thirty (30) days thereafter, or if any levy, writ of
attachment, garnishment, execution, or similar process shall be issued
against or placed upon any property of Maker or Guarantor, then all such
indebtedness shall automatically become immediately due and payable. All or
any part of the indebtedness evidenced hereby also may become, or may be
declared to be, immediately due and payable under the terms and conditions
contained in any Security Document.
Place and Application of Payments. Each payment upon this Note
shall be made to Payee at the following address: Thomas W. Marmon as Trustee
of the Thomas W. Marmon Trust, c/o Ceres Corporation, 4390 Airwest Drive SE,
Grand Rapids, Michigan 49512 or at such other place as the holder hereof may
direct in writing. Any payment upon this Note shall be applied first to any
expenses (including expenses of collection) then due and payable to Payee
hereunder, then to any unpaid late charges, then to any accrued and unpaid
interest hereunder, and then to the unpaid principal balance. If Maker at
any time owes the holder of this Note any indebtedness or obligation in
addition to the indebtedness evidenced by this Note, and if any indebtedness
owed by Maker to the holder is then in default, Maker shall have no right to
<PAGE>
direct or designate the particular indebtedness or obligation upon which any
payment made by, or collected from, Maker or from any Guarantor or other
security shall be applied. Maker hereby waives any such right and agrees that
the manner of application of any such payment, as between or among such
indebtedness and obligations, shall be determined solely by the holder.
Setoff. The holder of this Note shall have the right at any time
to set off any indebtedness that the holder then owes to Maker against any
indebtedness evidenced by this Note that is then due and payable.
Remedies The holder of this Note shall have all rights and
remedies provided by law and by agreement of Maker. Any requirement of
reasonable notice with respect to any sale or other disposition of collateral
shall be met if the holder sends the notice at least 5 days prior to the date
of sale or other disposition. Maker agrees to pay any and all expenses,
including reasonable attorney fees and legal expenses, paid or incurred by
the holder in protecting and enforcing the rights of and obligations to the
holder under any provision of this Note or any Security Document.
Environmental Compliance. Maker represents and warrants to, and
agrees with, Payee that: (a) none of Maker's real or personal property is,
and Maker will not permit it to become, unlawfully contaminated by any
substance that is now or hereafter regulated by or subject to any present or
future law or regulation that establishes liability for the removal or
clean-up of, or damage caused by any environmental contamination; (b)
Maker's operations, activities, and real and personal properties are, and
Maker shall cause them to continue to be, in compliance with each such law
and regulation in all material respects; (c) if the indebtedness evidenced by
this Note is not paid at maturity, then at any time thereafter the holder of
this Note may, but shall not be obligated to, conduct or obtain an
environmental investigation or audit of any or all of Maker's properties, and
Maker shall reimburse the holder for all costs and expenses incurred by the
holder in connection with the investigation or audit, and (d) Maker shall
indemnify and hold harmless the holder with respect to all claims, damages
losses, liabilities, and expenses (including reasonable attorney fees)
asserted against or incurred by the holder by reason of any failure to comply
with, or any inaccuracy in, any of the agreements, representations, and
warranties contained in this paragraph.
Waivers. No delay by the holder of this Note in the exercise of
any right or remedy shall operate as a waiver thereof. No single or partial
exercise by the holder of any right or remedy shall preclude any other or
future exercise thereof or the exercise of any other right or remedy. No
waiver by the holder of any default or of any provision hereof shall be
effective unless in writing and signed by the holder. No waiver of any right
or remedy on one occasion shall be a waiver of that right or remedy on any
future occasion.
Maker waives demand for payment, presentment, notice of dishonor,
and protest of this Note and consents to any extension or postponement of
time of its payment, to any substitution, exchange, or release of all or any
part of any security given to secure this Note, to the addition of any party
hereto, and to the release, discharge, waiver, modification, or suspension of
any rights and remedies against any person who may be liable for the
indebtedness evidenced by this Note,
Maker agrees that the interest rate on this Note is not usurious,
and Maker waives any defense or cause of action related to usury.
<PAGE>
General. In this Note, "maturity" means such time as the entire
remaining unpaid principal balance shall be or shall become due and payable
for any reason, including acceleration as provided above.
Applicable Law and Jurisdiction. This Note shall be governed by
and interpreted according to the laws of the Commonwealth of Virginia,
without giving effect to principles of conflict of laws, Maker irrevocably
agrees and consents that any action against Maker for collection or
enforcement of this Note may be brought in any state or federal court that
has subject matter jurisdiction and is located in, or whose district
includes, Kent County, Michigan, and that any such court shall have personal
jurisdiction over Maker for purposes of such action.
ETS INTERNATIONAL, INC.
(d/b/a InfraCorps Inc.)
By s/James B. Quarles
----------------------
Its President
----------------
Address: 7400 Beaufont Springs Drive
Suite 415
Richmond, Virginia 23225
<PAGE>
Exhibit 4(c)
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of March 17, 1997, by and between
ETS INTERNATIONAL, INC, a Virginia corporation, of 1401 Municipal Road, N.W.,
Roanoke, Virginia 24012 ("Owner"), and THOMAS W. MARMON, as Trustee of the
THOMAS W. MARMON TRUST, with a mailing address of Thomas W. Marmon, Trustee
of the Thomas W. Marmon Trust, c/o Ceres Corporation, 4390 Airwest Drive SE,
Grand Rapids, Michigan 49512 ("Secured Party");
1. Grant of Security Interest. Owner grants to Secured Party a
continuing security interest in:
all equipment (including vehicles), machinery and fixtures, wherever
located, now owned and in the future acquired by Owner, and all chattel
paper evidencing any past, present, or future leasing of the equipment,
machinery or fixtures;
all inventory, wherever located, now owned and in the future acquired
by Owner, any and all bills of lading, warehouse receipts, and other
documents of title evidencing inventory, any and all rights of stoppage
in transit of inventory, and all chattel paper evidencing any past,
present, or future leasing of inventory;
all accounts, contract rights, chattel paper, instruments, and general
intangibles, wherever located, now owned and in the future acquired by
Owner;
together with (i) all proceeds of the foregoing, including, without
limitation, all cash, checks, drafts, accounts receivable, chattel paper,
leases, and instruments received by Owner in connection with any sale, lease,
exchange, or disposition of any of the foregoing, and (ii) all books, records
(including computer software), and documents at any time evidencing or
relating to any of the foregoing or any proceeds of the foregoing. All of
the foregoing properties and assets of Owner are referred to collectively in
this Agreement as the "Collateral."
2. Indebtedness Secured. The foregoing security interest is given
to secure payment and performance of all obligations and indebtedness of
Owner now and in the future owing to Secured Party, including, but not
limited to, all future advances and all obligations and indebtedness of Owner
to Secured Party under this Agreement and under all other security
agreements, loan agreements, pledge agreements, assignments, mortgages,
guaranties, notes, leases, and other agreements, instruments, and documents,
that have been or are in the future signed by Owner, and all extensions,
modifications or renewals of such indebtedness and obligations. The
indebtedness and obligations now owing by Owner to Secured Party include, but
are not necessarily limited to, the obligations and indebtedness evidenced by
the following instrument, document, or agreement which has been executed by
Owner unless otherwise specified under the heading "Maker":
Instrument, Document,
or Agreement Date Amount Maker
- -------------------- ---- ------ -----
Promissory Note March 17, 1997 $2,500,000
<PAGE>
This security interest secures all indebtedness and obligations now and in
the future owing to Secured Party by Owner, regardless of whether any such
indebtedness or obligation is (a) not presently intended or contemplated by
Owner or Secured Party, (b) indirect, contingent, or secondary, (c) unrelated
to the Collateral or to any financing of the Collateral by Secured Party, (d)
of a kind or class that is different from any indebtedness or obligation now
owing to Secured Party by Owner, (e) is now or in the future evidenced by a
note or other document that does not refer to this security interest or this
Agreement, or (f) not listed above.
3. Warranties, Representations, and Agreements. Owner warrants and
represents to, and agrees with, Secured Party as follows:
(a) Except for the permitted liens listed on Exhibit A (the
"Permitted Liens"), Owner is the owner of the Collateral, and none of
the Collateral is subject to any lien, security interest, encumbrance,
or claim in favor of any third party, and no financing statement is on
file in any public office covering any of the Collateral, except in
favor of Secured Party.
(b) This Agreement is the valid and binding obligation of
Owner, enforceable in accordance with its terms.
(c) All information that Owner has furnished or in the future
furnishes to Secured Party concerning Owner or the Collateral,
including, without limitation, all financial statements and all
information concerning the condition, quality, or value of the
Collateral, is and will be correct and complete in all material
respects.
(d) Owner is a corporation, and is organized and validly
existing in good standing under the laws of the Commonwealth of
Virginia; Owner has full power and authority to enter into and perform
its obligations under this Agreement; the signing, delivery and
performance of this Agreement have been duly authorized by all
necessary action of Owner's board of directors and will not violate
Owner's articles of incorporation.
(e) None of the Collateral is, and Owner will not permit any of
the Collateral to be, contaminated in excess of legal levels or the
source of unlawful contamination of any other property, by any
substance that is now or in the future regulated by or subject to any
past, present, or future federal, state, local, or foreign law,
ordinance, rule, regulation, or order that regulates or is intended to
protect public health or the environment or that establishes liability
for the investigation, removal, or cleanup of, or damage caused by, any
environmental contamination, including, without limitation, any law,
ordinance, rule, regulation, or order that regulates or prescribes
requirements for air quality, water quality, or the disposition,
transportation, or management of waste materials or toxic substances.
Owner will store, operate and maintain the Collateral in compliance
with all of those laws and regulations in all material respects.
(f) Owner's address set forth on the face of this Agreement is
the location of Owner's sole place of business.
(g) Any part of the Collateral consisting of accounts or
chattel paper does and will evidence bona fide sales or leases to the
parties named in Owner's books, and no defense to any account or
chattel paper does or will exist.
<PAGE>
4. Agreements of Owner. Owner agrees that:
(a) Except for the Permitted Liens and purchase money security
interest liens, Owner shall not cause or permit any lien, security
interest, or encumbrance to be placed on any Collateral, except in
favor of Secured Party, and Owner shall not sell, assign, or transfer
any Collateral or permit any Collateral to be transferred by operation
of law, except that, as long as there shall not have occurred an event
of default as defined in this Agreement, Owner may sell inventory in
the ordinary course of Owner's business. A sale in the ordinary course
of business does not include a transfer in partial or complete
satisfaction of a debt.
(b) Owner shall maintain all records concerning the Collateral
at Owner's address appearing on the first page of this Agreement and
will keep all tangible Collateral at the present location or locations
of the Collateral.
(c) Owner shall furnish Secured Party with all information
regarding the Collateral that Secured Party shall from time to time
reasonably request (including without limitation, the names and
addresses of Owner's account debtors and the amount owed by each) and
shall allow Secured Party at any reasonable time to inspect the
Collateral and Owner's records regarding the Collateral.
(d) Owner shall sign, file, record, or obtain from third
persons, all financing statements, subordination agreements, and other
documents, and take all other action, that Secured Party may consider
necessary or appropriate to perfect, to continue perfection of, or to
maintain first priority of, Secured Party's security interest in the
Collateral subject only to the Permitted Liens and purchase money
security interest liens, and Owner shall place upon the Collateral
and/or documents evidencing the Collateral any notice of Secured
Party's security interest that Secured Party may from time to time
require.
(e) Secured Party may file a photocopy of this Agreement as a
financing statement evidencing Secured Party's security interest in the
Collateral.
(f) Owner shall immediately notify Secured Party in writing of
any change in Owner's name, identity, or corporate structure, and of
any change in the location of Owner's place of business and of the
location of each additional place of business established by Owner.
(g) Owner shall indemnify Secured Party with respect to all
losses, damages, liabilities, and expenses (including reasonable
attorney fees) incurred by Secured Party by reason of any failure of
Owner to comply with any of Owner's obligations under this Agreement or
by reason of any warranty or representation made by Owner to Secured
Party in this Agreement being false in any material respect.
(h) Secured Party may from time to time contact Owner's account
debtors for the purpose of verifying the existence, amount, and
collectibility of, and other information regarding, any part of the
Collateral at any time consisting of accounts, chattel paper,
instruments, or general intangibles.
<PAGE>
(i) Owner shall maintain all tangible Collateral in good
condition and repair, ordinary wear and tear excepted, and maintain
fire and extended coverage insurance covering all tangible Collateral
in the amounts and against the risks that is customarily maintained by
similar businesses. Each insurance policy shall provide that its
proceeds shall be payable to Secured Party to the extent of Secured
Party's interest in the Collateral and that the policy shall not be
canceled, and the coverage shall not be reduced, without at least 10
days' prior written notice by the insurer to Secured Party. Owner shall
provide Secured Party with evidence of that insurance coverage. Owner
agrees that Secured Party may act as agent for Owner in obtaining,
adjusting, and settling that insurance and endorsing any draft
evidencing proceeds of it.
(j) Owner shall pay, before they become delinquent, all taxes
and assessments upon the Collateral or for its use or operation, and
pay and perform when due all indebtedness and obligations under all
leases, land contracts, or other agreements under which Owner has
possession of any real property upon which any of the Collateral shall
at any time be located and under any mortgage or mortgages at any time
covering that real property.
5. Secured Party's Right to Perform. If Owner fails to perform any
obligation of Owner under this Agreement, Secured Party may, without giving
notice to or obtaining the consent of Owner, perform that obligation on
behalf of Owner. (This may include, for example, obtaining insurance
coverage for Collateral, paying off liens on Collateral, or cleaning up
environmental contamination of, or caused by, Collateral.) Owner will
reimburse Secured Party on demand for any expense that Secured Party incurs
in performing the obligation and will pay to Secured Party interest on each
expense, from the date the expense was incurred by Secured Party, at an
annual rate equal to twelve percent (12%) per annum. Secured Party is not
required to perform an obligation that Owner has failed to perform. If
Secured Party does so, that will not be a waiver of Secured Party's right to
declare the Indebtedness immediately due and payable by reason of Owner's
failure to perform.
6. Events of Default and Acceleration. Any part or all of the
Indebtedness shall, at the option of Secured Party, become immediately due
and payable without notice or demand upon the occurrence of any event of
default under the Promissory Note executed by Owner and dated March 17, 1997.
7. Secured Party's Rights and Remedies. Secured Party shall have
all rights and remedies of a secured party under applicable laws. Without
limiting these rights and remedies:
(a) Upon the occurrence of an event of default, as defined in
Paragraph 6 above, (i) without notice or demand to Owner, Secured Party
shall be entitled to notify Owner's account debtors and obligors to
make all payments directly to Secured Party, and Secured Party shall
have the right to take all actions that Secured Party considers
necessary or desirable to collect upon the Collateral, including,
without limitation, prosecuting actions against, or settling or
compromising disputes and claims with, Owner's account debtors and
obligors, (ii) without notice or demand to Owner, Secured Party may
receive, open, dispose of, and notify the postal authorities to change
the address of, mail directed to Owner, and (iii) upon demand by
<PAGE>
Secured Party, Owner shall immediately deliver to Secured Party, at the
place that Secured Party shall designate, all proceeds of the
Collateral and all books, records, agreements, leases, documents, and
instruments evidencing or relating to the Collateral.
(b) If all or any part of the Indebtedness is not paid at
maturity, Owner, upon demand by Secured Party, shall deliver the
Collateral and proceeds of Collateral to Secured Party at the place
that Secured Party shall designate, and Secured Party may dispose of
the Collateral in any commercially reasonable manner. Any notification
required to be given by Secured Party to Owner regarding any sale or
other disposition of Collateral shall be considered reasonable if
mailed at least 10 days before the sale or other disposition.
(c) If all or any part of the Indebtedness is not paid at
maturity, Secured Party shall have the right (but no obligation) to
continue or complete the manufacturing, or processing of, or other
operations in connection with, any part of the Collateral, and, for
that purpose, to enter and remain upon or in any land or buildings that
are possessed by Owner or that Owner has the right to possess. Owner
will reimburse Secured Party on demand for any expense that Secured
Party incurs in connection with those activities and will pay to
Secured Party interest on each expense, from the date the expense was
incurred by Secured Party, at the rate specified in Paragraph 5 of this
Agreement.
(d) The proceeds of any collection or disposition of Collateral
shall be applied first to Secured Party's reasonable attorney fees and
expenses, as provided in Paragraph 8 of this Agreement, and then to the
Indebtedness, and Owner shall be liable for any deficiency remaining.
All rights and remedies of Secured Party shall be cumulative and may be
exercised from time to time.
8. Expenses. Owner shall reimburse Secured Party on demand for all
reasonable attorney fees, legal expenses, and other expenses that Secured
Party incurs in protecting and enforcing its rights under this Agreement.
This includes fees and expenses incurred in trying to take possession of
Collateral from Owner, a trustee or receiver in bankruptcy or any other
person. Secured Party may apply any proceeds of collection or disposition of
Collateral to Secured Party's reasonable attorney fees, legal expenses, and
other expenses.
9. Amendments and Waivers. No provision of this Agreement may be
modified or waived except by a written agreement signed by Secured Party.
Secured Party will continue to have all of its rights under this Agreement
even if it does not fully and promptly exercise them on all occasions.
Secured Party may, at its option, waive any default, defer an action on any
default; extend or modify the time or manner of payment of the Indebtedness
or waive or modify any term or condition relating to the Indebtedness;
release Collateral or other security for the Indebtedness; release any person
liable for any of the Indebtedness, including any borrower or Guarantor; or
make advances or other extensions of credit secured by this Agreement; all
without giving Owner notice or obtaining Owner's consent. Any such action by
Secured Party will not release or impair its security interest in the
Collateral or Owner's obligations under this Agreement. Secured Party's
security interest in the Collateral and Owner's obligations under this
Agreement will not be released or impaired if Secured Party fails to obtain,
perfect, or secure priority of any other security for the Indebtedness that
<PAGE>
is agreed to be given, or is given, by anyone else. Secured Party is not
required to sue upon or otherwise enforce payment of the Indebtedness or any
other security before exercising its rights under this Agreement.
10. Notices. Any notice to Owner or to Secured Party shall be
considered to be given if and when mailed, with postage prepaid, to the
respective address of Owner or Secured Party appearing on the first page of
this Agreement, or if and when delivered personally.
11. Other. In this Agreement, "maturity" of any of the Indebtedness
means the time when that Indebtedness has become due and payable, for
whatever reason (including, for example, acceleration due to default or
bankruptcy). This Agreement will be governed by, and interpreted according
to, Virginia law.
12. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of Owner and Secured Party and their respective successors,
and assigns.
Owner and Secured Party have signed this Security Agreement as of the
date stated on the first page.
ETS INTERNATIONAL, INC.
By s/John McKenna
------------------------
Its CEO
---------------------
"Owner"
s/Thomas W. Marmon
----------------------------
Thomas W. Marmon, as Trustee of the
Thomas W. Marmon Trust
"Secured Party"
<PAGE>
Exhibit 4(c)
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of March 17, 1997 by and between ETS
WATER AND WASTE MANAGEMENT, INC., (d/b/a Stamie E. Lyttle Company), a
Virginia corporation, of 2210 Belt Blvd. at Hopkins Road, Richmond, Virginia
23224 ("Owner"), and THOMAS W. MARMON, as Trustee of the THOMAS W. MARMON
TRUST, whose mailing address is Thomas W. Marmon, Trustee of the Thomas W.
Marmon Trust, c/o Ceres Corporation; 4390 Airwest Drive, S.E., Grand Rapids,
Michigan 49512 ("Secured Party");
1. Grant of Security Interest. Owner grants to Secured Party a
continuing security interest in:
all equipment (including vehicles), machinery and fixtures, wherever
located, now owned and in the future acquired by Owner, and all chattel
paper evidencing any past, present, or future leasing of the equipment,
machinery or fixtures;
all inventory, wherever located, now owned and in the future acquired
by Owner, any and all bills of lading, warehouse receipts, and other
documents of title evidencing inventory, any and all rights of stoppage
in transit of inventory, and all chattel paper evidencing any past,
present, or future leasing of inventory;
all accounts, contract rights, chattel paper, instruments, and general
intangibles wherever located, now owned and in the future acquired by
Owner;
together with (i) all proceeds of the foregoing, including, without
limitation, all cash, checks, drafts, accounts receivable, chattel paper,
leases, and instruments received by Owner in connection with any sale, lease,
exchange, or disposition of any of the foregoing, and (ii) all books, records
(including computer software), and documents at any time evidencing or
relating to any of the foregoing or any proceeds of the foregoing. All of the
foregoing properties and assets of Owner are referred to collectively in this
Agreement as the "Collateral."
2. Indebtedness Secured. The foregoing security interest is given
to secure payment and performance of the indebtedness and obligations owing
to Secured Party by Owner that are evidenced by the instruments, documents,
or agreements listed below, including any and all modifications, extensions,
and renewals of it.
Instrument, Document,
or Agreement Date
-------------------- ----
Guaranty signed by Owner March 17, 1997
and other corporations
The indebtedness and obligations that are secured by this security interest
are collectively called the "Indebtedness."
<PAGE>
3. Warranties, Representations, and Agreements. Owner warrants
and represents to, and agrees with, Secured Party as follows:
(a) Except for the permitted liens listed on Exhibit A (the
"Permitted Liens"), Owner is the owner of the Collateral, and none of
the Collateral is subject to any lien, security interest, encumbrance,
or claim in favor of any third party, and no financing statement is on
file in any public office covering any of the Collateral, except in
favor of Secured Party.
(b) This Agreement is the valid and binding obligation of Owner,
enforceable in accordance with its terms.
(c) All information that Owner has furnished or in the future
furnishes to Secured Party concerning Owner or the Collateral,
including, without limitation, all financial statements and all
information concerning the condition, quality, or value of the
Collateral, is and will be correct and complete in all material
respects.
(d) Owner is a corporation, and is organized and validly existing in
good standing under the laws of the Commonwealth of Virginia; Owner has
full power and authority to enter into and perform its obligations
under this Agreement; the signing, delivery and performance of this
Agreement have been duly authorized by all necessary action of Owner's
board of directors and will not violate Owner's articles of
incorporation or bylaws.
(e) None of the Collateral is, and Owner will not permit any of the
Collateral to be, contaminated in excess of legal levels or the source
of unlawful contamination of any other property, by any substance that
is now or in the future regulated by or subject to any past, present,
or future federal, state, local, or foreign law, ordinance, rule,
regulation, or order that regulates or is intended to protect public
health or the environment or that establishes liability for the
investigation, removal, or cleanup of, or damage caused by, any
environmental contamination, including, without limitation, any law,
ordinance, rule, regulation, or order that regulates or prescribes
requirements for air quality, water quality, or the disposition,
transportation, or management of waste materials or toxic substances.
Owner will store, operate and maintain the Collateral in compliance
with all of those laws and regulations in all material respects.
(f) Owner's address set forth on the face of this Agreement is the
location of Owner's sole place of business.
(g) Any part of the Collateral consisting of accounts or chattel
paper does and will evidence bona fide sales or leases to the parties
named in Owner's books, and no defense to any account or chattel paper
does or will exist.
4. Agreements of Owner. Owner agrees that:
(a) Except for the Permitted Liens and purchase money security
interest liens, Owner shall not cause or permit any lien, security
interest, or encumbrance to be placed on any Collateral, except in
favor of Secured Party. Owner shall not sell, assign, or transfer any
Collateral or permit any Collateral to be transferred by operation of
<PAGE>
law, except that, as long as there shall not have occurred an event of
default as defined in this Agreement, Owner may sell inventory in the
ordinary course of Owner's business. A sale in the ordinary course of
business does not include a transfer in partial or complete
satisfaction of a debt.
(b) Owner shall maintain all records concerning the Collateral at
Owner's address appearing on the first page of this Agreement and will
keep all tangible Collateral at the present location or locations of
the Collateral.
(c) Owner shall furnish Secured Party with all information regarding
the Collateral that Secured Party shall from time to time request
(including without limitation, the names and addresses of Owner's
account debtors and the amount owed by each) and shall allow Secured
Party at any reasonable time to inspect the Collateral and Owner's
records regarding the Collateral.
(d) Owner shall sign, file, record, or obtain from third persons, all
financing statements, subordination agreements, and other documents,
and take all other action, that Secured Party may consider necessary or
appropriate to perfect, to continue perfection of, or to maintain first
priority of, Secured Party's security interest in the collateral
subject to the Permitted Liens and purchase money security interest
liens, and Owner shall place upon the Collateral and/or documents
evidencing the Collateral any notice of Secured Party's security
interest that Secured Party may from time to time require.
(e) Secured Party may file a photocopy of this Agreement as a
financing statement evidencing Secured Party's security interest in the
Collateral.
(f) Owner shall immediately notify Secured Party in writing of any
change in Owner's name, identity, or corporate structure, and of any
change in the location of Owner's place of business and of the location
of each additional place of business established by Owner.
(g) Owner shall indemnify Secured Party with respect to all losses,
damages, liabilities, and reasonable expenses (including attorney fees)
incurred by Secured Party by reason of any failure of Owner to comply
with any of Owner's obligations under this Agreement or by reason of
any warranty or representation made by Owner to Secured Party in this
Agreement being false in any material respect.
(h) Secured Party may from time to time contact Owner's account
debtors for the purpose of verifying the existence, amount, and
collectibility of, and other information regarding, any part of the
Collateral at any time consisting of accounts, chattel paper,
instruments, or general intangibles.
(i) Owner shall maintain all tangible Collateral in good condition
and repair, ordinary wear and tear excepted, and maintain fire and
extended coverage insurance covering all tangible Collateral in the
amounts and against the risks that is customarily maintained by similar
businesses, or as Secured Party may reasonably request. Each insurance
policy shall provide that its proceeds shall be payable to Secured
Party to the extent of Secured Party's interest in the Collateral and
<PAGE>
that the policy shall not be canceled, and the coverage shall not be
reduced, without at least 10 days' prior written notice by the insurer
to Secured Party. Owner shall provide Secured Party with evidence of
that insurance coverage. Owner agrees that Secured Party may act as
agent for Owner in obtaining, adjusting, and settling that insurance
and endorsing any draft evidencing proceeds of it.
(j) Owner shall pay, before they become delinquent, all taxes and
assessments upon the Collateral or for its use or operation, and pay
and perform when due all indebtedness and obligations under all leases,
land contracts, or other agreements under which Owner has possession of
any real property upon which any of the Collateral shall at any time be
located and under any mortgage or mortgages at any time covering that
real property.
5. Secured Party's Right to Perform. If Owner fails to perform any
obligation of Owner under this Agreement, Secured Party may, without giving
notice to or obtaining the consent of Owner, perform that obligation on
behalf of Owner. (This may include, for example, obtaining insurance coverage
for Collateral, paying off liens on Collateral, or cleaning up environmental
contamination of, or caused by, Collateral.) Owner will reimburse Secured
Party on demand for any expense that Secured Party incurs in performing the
obligation and will pay to Secured Party interest on each expense, from the
date the expense was incurred by Secured Party, at an annual rate equal to
twelve percent (12%) per annum. Secured Party is not required to perform an
obligation that Owner has failed to perform. If Secured Party does so, that
will not be a waiver of Secured Party's right to declare the Indebtedness
immediately due and payable by reason of Owner's failure to perform.
6. Events of Default and Acceleration. Any part or all of the
Indebtedness shall, at the option of Secured Party, become immediately due
and payable without notice or demand upon the occurrence of any event of
default under the Promissory Note dated March 17, 1997, made by ETS
International, Inc.
7. Secured Party's Rights and Remedies. Secured Party shall have
all rights and remedies of a secured party under applicable laws. Without
limiting these rights and remedies:
(a) Upon the occurrence of an event of default, as defined in
Paragraph 6 above, (i) without notice or demand to Owner, Secured Party
shall be entitled to notify Owner's account debtors and obligors to
make all payments directly to Secured Party, and Secured Party shall
have the right to take all actions that Secured Party considers
necessary or desirable to collect upon the Collateral, including,
without limitation, prosecuting actions against, or settling or
compromising disputes and claims with, Owner's account debtors and
obligors, (ii) without notice or demand to Owner, Secured Party may
receive, open, dispose of, and notify the postal authorities to change
the address of, mail directed to Owner, and (iii) upon demand by
Secured Party, Owner shall immediately deliver to Secured Party, at the
place that Secured Party shall designate, all proceeds of the
Collateral and all books, records, agreements, leases, documents, and
instruments evidencing or relating to the Collateral.
(b) If all or any part of the Indebtedness is not paid at maturity,
Owner, upon demand by Secured Party, shall deliver the Collateral and
proceeds of Collateral to Secured Party at the place that Secured Party
shall designate, and Secured Party may dispose of the Collateral in any
<PAGE>
commercially reasonable manner. Any notification required to be given
by Secured Party to Owner regarding any sale or other disposition of
Collateral shall be considered reasonable if mailed at least 10 days
before the sale or other disposition.
(c) If all or any part of the Indebtedness is not paid at maturity,
Secured Party shall have the right (but no obligation) to continue or
complete the manufacturing, or processing of, or other operations in
connection with, any part of the Collateral, and, for that purpose, to
enter and remain upon or in any land or buildings that are possessed by
Owner or that Owner has the right to possess. Owner will reimburse
Secured Party on demand for any reasonable expense that Secured Party
incurs in connection with those activities and will pay to Secured
Party interest on each expense, from the date the expense was incurred
by Secured Party, at the rate specified in Paragraph 5 of this
Agreement.
(d) The proceeds of any collection or disposition of Collateral shall
be applied first to Secured Party's reasonable attorney fees and
expenses, as provided in Paragraph 8 of this Agreement, and then to the
Indebtedness, and Owner shall be liable for any deficiency remaining.
All rights and remedies of Secured Party shall be cumulative and may be
exercised from time to time.
8. Expenses. Owner shall reimburse Secured Party on demand for all
reasonable attorney fees, legal expenses, and other expenses that Secured
Party incurs in protecting and enforcing its rights under this Agreement.
This includes fees and expenses incurred in trying to take possession of
Collateral from Owner, a trustee or receiver in bankruptcy or any other
person. Secured Party may apply any proceeds of collection or disposition of
Collateral to Secured Party's reasonable attorney fees, legal expenses, and
other expenses.
9. Amendments and Waivers. No provision of this Agreement may be
modified or waived except by a written agreement signed by Secured Party.
Secured Party will continue to have all of its rights under this Agreement
even if it does not fully and promptly exercise them on all occasions.
Secured Party may, at its option, waive any default; defer an action on any
default; extend or modify the time or manner of payment of the Indebtedness
or waive or modify any term or condition relating to the Indebtedness;
release Collateral or other security for the Indebtedness; release any person
liable for any of the Indebtedness, including any borrower or Guarantor; or
make advances or other extensions of credit secured by this Agreement; all
without giving Owner notice or obtaining Owner's consent. Any such action by
Secured Party will not release or impair its security interest in the
Collateral or Owner's obligations under this Agreement. Secured Party's
security interest in the Collateral and Owner's obligations under this
Agreement will not be released or impaired if Secured Party fails to obtain,
perfect, or secure priority of any other security for the Indebtedness that
is agreed to be given, or is given, by anyone else. Secured Party is not
required to sue upon or otherwise enforce payment of the Indebtedness or any
other security before exercising its rights under this Agreement.
10. Notices. Any notice to Owner or to Secured Party shall be
considered to be given if and when mailed, with postage prepaid, to the
respective address of Owner or Secured Party appearing on the first page of
this Agreement, or if and when delivered personally.
<PAGE>
11. Other. In this Agreement, "maturity" of any of the Indebtedness
means the time when that Indebtedness has become due and payable, for
whatever reason (including, for example, acceleration due to default or
bankruptcy). This Agreement will be governed by, and interpreted according
to, Virginia law.
12. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of Owner and Secured Party and their respective successors,
and assigns.
Owner and Secured Party have signed this Security Agreement as of
the date stated on the first page.
ETS WATER AND WASTE
MANAGEMENT, INC.
(d/b/a Stamie F. Lyttle Company)
By s/John D. McKenna
----------------------------
Its CEO
----------------------------
"Owner"
s/Thomas W. Marmon
-------------------------------
Thomas W. Marmon, as Trustee of the
Thomas W. Marmon Trust
"Secured Party"
<PAGE>
Exhibit 4(c)
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of March 17, 1997 by and between ETS
LINER, INC., (d/b/a Pipeliner Installers), a Virginia corporation, of 1401
Municipal Road, N.W., Roanoke, Virginia 24012 ("Owner"), and THOMAS W.
MARMON, as Trustee of the THOMAS W. MARMON TRUST, whose mailing address is
Thomas W. Marmon, Trustee of the Thomas W. Marmon Trust, c/o Ceres
Corporation 4390 Airwest Drive, S.E., Grand Rapids, Michigan 49512 ("Secured
Party");
1. Grant of Security Interest. Owner grants to Secured Party a
continuing security interest in:
all equipment (including vehicles), machinery and fixtures, wherever
located, now owned and in the future acquired by Owner, and all chattel
paper evidencing any past, present, or future leasing of the equipment,
machinery or fixtures;
all inventory, wherever located, now owned and in the future acquired
by Owner, any and all bills of lading, warehouse receipts, and other
documents of title evidencing inventory, any and all rights of stoppage
in transit of inventory, and all chattel paper evidencing any past,
present, or future leasing of inventory;
all accounts, contract rights, chattel paper, instruments, and general
intangibles, wherever located, now owned and in the future acquired by
Owner;
together with (i) all proceeds of the foregoing, including, without
limitation, all cash, checks, drafts, accounts receivable, chattel paper,
leases, and instruments received by Owner in connection with any sale, lease,
exchange, or disposition of any of the foregoing, and (ii) all books, records
(including computer software), and documents at any time evidencing or
relating to any of the foregoing or any proceeds of the foregoing. All of
the foregoing properties and assets of Owner are referred to collectively in
this Agreement as the "Collateral."
2. Indebtedness Secured. The foregoing security interest is given
to secure payment and performance of the indebtedness and obligations owing
to Secured Party by Owner that are evidenced by the instruments, documents,
or agreements listed below, including any and all modifications, extensions,
and renewals of it.
Instrument, Document,
or Agreement Date
- -------------------- ----
Guaranty signed by Owner March 17, 1997
and other corporations
The indebtedness and obligations that are secured by this
security interest are collectively called the "Indebtedness."
<PAGE>
3. Warranties, Representations, and Agreements. Owner warrants and
represents to, and agrees with, Secured Party as follows:
(a) Except for the permitted liens listed on Exhibit A (the
"Permitted Liens"), Owner is the owner of the Collateral, and
none of the Collateral is subject to any lien, security interest,
encumbrance, or claim in favor of any third party, and no
financing statement is on file in any public office covering any
of the Collateral, except in favor of Secured Party.
(b) This Agreement is the valid and binding obligation of
Owner, enforceable in accordance with its terms.
(c) All information that Owner has furnished or in the future
furnishes to Secured Party concerning Owner or the Collateral,
including, without limitation, all financial statements and all
information concerning the condition, quality, or value of the
Collateral, is and will be correct and complete in all material
respects.
(d) Owner is a corporation, and is organized and validly
existing in good standing under the laws of the Commonwealth of
Virginia; Owner has full power and authority to enter into and
perform its obligations under this Agreement; the signing,
delivery and performance of this Agreement have been duly
authorized by all necessary action of Owner's board of directors
and will not violate Owner's articles of incorporation or bylaws.
(e) None of the Collateral is, and Owner will not permit any of
the Collateral to be, contaminated in excess of legal levels or
the source of unlawful contamination of any other property, by
any substance that is now or in the future regulated by or
subject to any past, present, or future federal, state, local, or
foreign law, ordinance, rule, regulation, or order that regulates
or is intended to protect public health or the environment or
that establishes liability for the investigation, removal, or
cleanup of, or damage caused by, any environmental contamination,
including, without limitation, any law, ordinance, rule,
regulation, or order that regulates or prescribes requirements
for air quality, water quality, or the disposition,
transportation, or management of waste materials or toxic
substances. Owner will store, operate and maintain the Collateral
in compliance with all of those laws and regulations in all
material respects.
(f) Owner's address set forth on the face of this Agreement is
the location of Owner's chief executive offices. Owner also has a
place of business at the following address: 2551 N.W. 15th Court,
Pompano Beach, Florida 33069.
(g) Any part of the Collateral consisting of accounts or
chattel paper does and will evidence bona fide sales or leases to
the parties named in Owner's books, and no defense to any account
or chattel paper does or will exist.
4. Agreements of Owner. Owner agrees that:
(a) Except for the Permitted Liens and purchase money security
interest liens, Owner shall not cause or permit any lien,
security interest, or encumbrance to be placed on any Collateral,
<PAGE>
except in favor of Secured Party. Owner shall not sell, assign,
or transfer any Collateral or permit any Collateral to be
transferred by operation of law, except that, as long as there
shall not have occurred an event of default as defined in this
Agreement, Owner may sell inventory in the ordinary course of
Owner's business. A sale in the ordinary course of business does
not include a transfer in partial or complete satisfaction of a
debt.
(b) Owner shall maintain all records concerning the Collateral
at Owner's address appearing on the first page of this Agreement
and will keep all tangible Collateral at the present location or
locations of the Collateral.
(c) Owner shall furnish Secured Party with all information
regarding the Collateral that Secured Party shall from time to
time reasonably request (including without limitation, the names
and addresses of Owner's account debtors and the amount owed by
each) and shall allow Secured Party at any reasonable time to
inspect the Collateral and Owner's records regarding the
Collateral.
(d) Owner shall sign, file, record, or obtain from third
persons, all financing statements, subordination agreements, and
other documents, and take all other action, that Secured Party
may consider necessary or appropriate to perfect, to continue
perfection of, or to maintain first priority of, Secured Party's
security interest in the Collateral subject to the Permitted
Liens and purchase money security interest liens, and Owner shall
place upon the Collateral and/or documents evidencing the
Collateral any notice of Secured Party's security interest that
Secured Party may from time to time require.
(e) Secured Party may file a photocopy of this Agreement as a
financing statement evidencing Secured Party's security interest
in the Collateral.
(f) Owner shall immediately notify Secured Party in writing of
any change in Owner's name, identity, or corporate structure, and
of any change in the location of Owner's place of business and of
the location of each additional place of business established by
Owner.
(g) Owner shall indemnify Secured Party with respect to all
losses, damages, liabilities, and reasonable expenses (including
attorney fees) incurred by Secured Party by reason of any failure
of Owner to comply with any of Owner's obligations under this
Agreement or by reason of any warranty or representation made by
Owner to Secured Party in this Agreement being false in any
material respect.
(h) Secured Party may from time to time contact Owner's account
debtors for the purpose of verifying the existence, amount, and
collectibility of, and other information regarding, any part of
the Collateral at any time consisting of accounts, chattel paper,
instruments, or general intangibles.
(i) Owner shall maintain all tangible Collateral in good
condition repair, ordinary wear and tear excepted, and maintain
<PAGE>
fire and extended coverage insurance covering all tangible
Collateral in the amounts and against the risks that is
customarily maintained by similar businesses, or as Secured Party
may reasonably request. Each insurance policy shall provide that
its proceeds shall be payable to Secured Party to the extent of
Secured Party's interest in the Collateral and that the policy
shall not be canceled, and the coverage shall not be reduced,
without at least 10 days' prior written notice by the insurer to
Secured Party. Owner shall provide Secured Party with evidence of
that insurance coverage. Owner agrees that Secured Party may act
as agent for Owner in obtaining, adjusting, and settling that
insurance and endorsing any draft evidencing proceeds of it.
(j) Owner shall pay, before they become delinquent, all taxes
and assessments upon the Collateral or for its use or operation,
and pay and perform when due all indebtedness and obligations
under all leases, land contracts, or other agreements under which
Owner has possession of any real property upon which any of the
Collateral shall at any time be located and under any mortgage or
mortgages at any time covering that real property.
5. Secured Party's Right to Perform. If Owner fails to perform any
obligation of Owner under this Agreement, Secured Party may, without giving
notice to or obtaining the consent of Owner, perform that obligation on
behalf of Owner. (This may include, for example, obtaining insurance coverage
for Collateral, paying off liens on Collateral, or cleaning up environmental
contamination of, or caused by, Collateral.) Owner will reimburse Secured
Party on demand for any expense that Secured Party incurs in performing the
obligation and will pay to Secured Party interest on each expense, from the
date the expense was incurred by Secured Party, at an annual rate equal to
twelve percent (12%) per annum. Secured Party is not required to perform an
obligation that Owner has failed to perform. If Secured Party does so, that
will not be a waiver of Secured Party's right to declare the Indebtedness
immediately due and payable by reason of Owner's failure to perform.
6. Events of Default and Acceleration. Any part or all of the
Indebtedness shall, at the option of Secured Party, become immediately due
and payable without notice or demand upon the occurrence of any event of
default under the Promissory Note dated March 17, 1997, made by ETS
International, Inc.
7. Secured Party's Rights and Remedies. Secured Party shall have all
rights and remedies of a secured party under applicable laws. Without
limiting these rights and remedies:
(a) Upon the occurrence of an event of default, as defined in
Paragraph 6 above, (i) without notice or demand to Owner, Secured
Party shall be entitled to notify Owner's account debtors and
obligors to make all payments directly to Secured Party, and
Secured Party shall have the right to take all actions that
Secured Party considers necessary or desirable to collect upon
the Collateral, including, without limitation, prosecuting
actions against, or settling or compromising disputes and claims
with, Owner's account debtors and obligors, (ii) without notice
or demand to Owner, Secured Party may receive, open, dispose of,
and notify the postal authorities to change the address of, mail
directed to Owner, and (iii) upon demand by Secured Party, Owner
<PAGE>
shall immediately deliver to Secured Party, at the place that
Secured Party shall designate, all proceeds of the Collateral and
all books, records, agreements, leases, documents, and
instruments evidencing or relating to the Collateral.
(b) If all or any part of the Indebtedness is not paid at
maturity, Owner, upon demand by Secured Party, shall deliver the
Collateral and proceeds of Collateral to Secured Party at the
place that Secured Party shall designate, and Secured Party may
dispose of the Collateral in any commercially reasonable manner.
Any notification required to be given by Secured Party to Owner
regarding any sale or other disposition of Collateral shall be
considered reasonable if mailed at least 10 days before the sale
or other disposition.
(c) If all or any part of the Indebtedness is not paid at
maturity, Secured Party shall have the right (but no obligation)
to continue or complete the manufacturing, or processing of, or
other operations in connection with, any part of the Collateral,
and, for that purpose, to enter and remain upon or in any land or
buildings that are possessed by Owner or that Owner has the right
to possess. Owner will reimburse Secured Party on demand for any
reasonable expense that Secured Party incurs in connection with
those activities and will pay to Secured Party interest on each
expense, from the date the expense was incurred by Secured Party,
at the rate specified in Paragraph 5 of this Agreement.
(d) The proceeds of any collection or disposition of Collateral
shall be applied first to Secured Party's reasonable attorney
fees and expenses, as provided in Paragraph 8 of this Agreement,
and then to the Indebtedness, and Owner shall be liable for any
deficiency remaining.
All rights and remedies of Secured Party shall be cumulative and may be
exercised from time to time.
8. Expenses. Owner shall reimburse Secured Party on demand for all
reasonable attorney fees, legal expenses, and other expenses that Secured
Party incurs in protecting and enforcing its rights under this Agreement.
This includes fees and expenses incurred in trying to take possession of
Collateral from Owner, a trustee or receiver in bankruptcy or any other
person. Secured Party may apply any proceeds of collection or disposition of
Collateral to Secured Party's reasonable attorney fees, legal expenses, and
other expenses.
9. Amendments and Waivers. No provision of this Agreement may be
modified or waived except by a written agreement signed by Secured Party.
Secured Party will continue to have all of its rights under this Agreement
even if it does not fully and promptly exercise them on all occasions.
Secured Party may, at its option, waive any default, defer an action on any
default; extend or modify the time or manner of payment of the Indebtedness
or waive or modify any term or condition relating to the Indebtedness;
release Collateral or other security for the Indebtedness; release any person
liable for any of the Indebtedness, including any borrower or Guarantor; or
make advances or other extensions of credit secured by this Agreement; all
without giving Owner notice or obtaining Owner's consent. Any such action by
Secured Party will not release or impair its security interest in the
Collateral or Owner's obligations under this Agreement. Secured Party's
security interest in the Collateral and Owner's obligations under this
<PAGE>
Agreement will not be released or impaired if Secured Party fails to obtain,
perfect, or secure priority of any other security for the Indebtedness that
is agreed to be given, or is given, by anyone else. Secured Party is not
required to sue upon or otherwise enforce payment of the Indebtedness or any
other security before exercising its rights under this Agreement.
10. Notices. Any notice to Owner or to Secured Party shall be
considered to be given if and when mailed, with postage prepaid, to the
respective address of Owner or Secured Party appearing on the first page of
this Agreement, or if and when delivered personally.
11. Other. In this Agreement, "maturity" of any of the Indebtedness
means the time when that Indebtedness has become due and payable, for
whatever reason (including, for example, acceleration due to default or
bankruptcy). This Agreement will be governed by, and interpreted according
to, Virginia law.
12. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Owner and Secured Party and their respective successors, and
assigns.
Owner and Secured Party have signed this Security Agreement as of
the date stated on the first page.
ETS LINER, INC.
(d/b/a Pipeliner Installers)
By s/John D. McKenna
---------------------------
Its CEO
-------------------------
"Owner"
s/Thomas W. Marmon
-------------------------------
Thomas W. Marmon, as Trustee of the
Thomas W. Marmon Trust
"Secured Party"
<PAGE>
Exhibit 10(a)
ETS INTERNATIONAL, INC.
- ------------------------------------------------------------------------
ETSI Proudly serving industry and Providing: Environmental and
government since 1947. infrastructure products and
services
January 20, 1998
Mr James B. Quarles
Goose Creek Valley Farm
Rural Route 1 Box 191-B
Montvale, VA 24122
Dear Jim:
We are pleased to offer you the position of Director, President and Chief
Executive Officer of ETS International, Inc., effective immediately. The
term of office will be for a minimum of six (6) months with compensation to
include a salary of $11,000.00 per month ($132,000.00 per year), four weeks
paid vacation (to be taken as one week at the end of each fiscal quarter) and
other standard benefits as provided to ETS International officers and other
employees. You will receive full reimbursement of your business-related
expenses. You are hereby provided the opportunity to purchase 400,000 shares
of ETS International at $.27 per share in the form of a private placement.
In addition, you will be provided the option to acquire up to 350,000 shares
of ETS International Inc. at $. 50 per share. These options are good for
five (5) years and exercisable at anytime during that period.
ETS International is aware that you currently serve as President and Chairman
of Q Enterprises, Inc.), which includes investments in Q BioChem, Q Microbial
and Q Organics. We understand that upon your acceptance of this offer, you
will appoint an attorney and an accountant to serve as trustees of Q
Enterprises in order to manage that entity on your behalf.
Please indicate your acceptance of this offer by signing below. We very much
look forward to your re-joining ETS International.
Sincerely,
ETS International, Inc,
s/Thomas W. Marmon s/Coleman S. Lyttle s/Navin D. Sheth s/Arthur B. Nunn, III
- ------------------ ------------------- ---------------- ---------------------
Director Director Director Director
s/John C. Mycock s/John D. McKenna
- ------------------ ------------------- ----------------
Director Director Director
Acceptance:
s/James B. Quarles
- -------------------------
James B. Quarles 1/20/98
<PAGE>
Exhibit 10(b)
James B. Quarles, President and Chief Executive Officer of ETSI, is
a party to stock option agreements under the Company's Non-Statutory Stock
Option Plan, all in the form attached, as follows:
Date of Agreement Option Shares Exercise Price Term
- ----------------- ------------- -------------- ----
11-4-97 60,000 $.50 5 years
2-2-98 350,000 $.50 5 years
2-12-98 400,000 $.27 5 years
<PAGE>
Exhibit 10(b)
ETS INTERNATIONAL, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
Stock Option Agreement (the "Agreement") made this 2nd day of February,
1998 between ETS INTERNATIONAL, INC., a Virginia Corporation located at 1401
Municipal Road, NW, Roanoke, VA 24012-1309 (hereinafter called the "Company")
and James B. Quarles, an Employee for the Company (hereinafter called the
"Holder").
WHEREAS, a Non-Statutory Stock Option Plan was approved at a meeting of
directors of the Company held on April 11, 1995 (the "Plan") and the Company
desires to provide the Holder with an opportunity to acquire a proprietary
interest in the business of the Company and through stock ownership, and
increase personal interest in its continued success and progress:
NOW, THEREFORE, in consideration of the premises, the mutual covenants
hereinafter set forth and other good and valuable considerations, the Company
and Holder agree as follows:
1. Grant Of Option. The Company hereby grants to the Holder, as
compensation of services pursuant to Financial Consulting Agreement, the
option to purchase an aggregate of Three Hundred Fifty Thousand (350,000)
shares of the Company's Common Stock ("Shares"), on the terms and conditions
hereinafter set forth, at the purchase price of Fifty Cents ($0.50) per share
(the "Option") for a term of five years ("Option Term").
2. Stock Option Plan. It is understood that the Plan is
incorporated herein by reference and is made part of the Agreement as if
fully set forth herein. The Plan shall control in the event there is any
conflict between the Plan and the Agreement, and on such matters as are not
contained in the Agreement.
3. Exercise of Options.
(a) The Option shall become immediately exercisable, but not as to
less than Fifty (50) Shares or a multiple thereof, or the remaining Shares
covered by the Option. Notice shall be given to the Company by the Holder of
such exercise of the Option as provided below, and in a form similar to
Appendix A to the Agreement.
(b) Anything herein contained to the contrary notwithstanding, the
purchase price of any shares as to which the Option shall be exercised shall
be paid in full at the time of exercise of the Option with respect to such
shares. Upon payment in full at the time of such exercise, such shares shall
be issued as fully paid and nonassessable shares.
(c) Anything herein contained to the contrary notwithstanding, this
Option shall expire and may not be exercised, after the end of the fifth year
of the date of grant.
4. Restrictions on Option Transfer. The Option may not be assigned,
transferred, pledged, or hypothecated in any way (whether by operation of law
or otherwise), and shall not be subject to execution, attachment, property
settlement in divorce or marital separation or similar process. In the event
of any attempted assignment, transfer, pledge, hypothecation, or other
<PAGE>
disposition of the Option contrary to the provisions hereof, or of the levy
of any attachment, judicial order or similar process upon the option, the
Company shall have the right to terminate the Option by notice to the person
then entitled to exercise the Option; provided, however, that termination of
the Option hereunder shall not prejudice any rights or remedies which the
Company or a subsidiary corporation may have under the Agreement or
otherwise.
5. Procedure for Exercise. Subject to the terms and conditions of
the Agreement, the Option shall be exercisable by notice to the Company.
Each such notice shall:
(i) state the election to exercise the option and the number of
shares in respect of which it is being exercised,
(ii) state that the shares in respect of which the Option is being
exercised are being paid for in full,
(iii)be signed by the person or persons exercising the Option and, in
the event that the Option is being exercised by any person or
persons other that the Holder, be accompanied by proof,
satisfactory to counsel for the Company, of the right of such
person or persons to exercise the Option, and
(iv) be accompanied by a check payable to the order of the Company in
an amount equal to the purchase price of the shares in respect of
which the Option is being exercised.
The Option shall not be deemed to have been exercised unless all the
preceding provisions of this paragraph shall have been complied with, and for
all purposes of the Agreement the date of the exercise of the Options with
respect to any particular shares shall be the date on which such notice,
proof (if required), and check shall have all been mailed by registered mail
or delivered to the Company. The certificate or certificates for the shares
as to which the Option shall have been so exercised shall be registered in
the name of the person or persons so exercising the Option and shall be
delivered to or upon the written order of the person or persons exercising
the option within fifteen days after receipt by the Company of such notice,
proof (if required), and check. Such delivery shall be made at the principal
office of the Company, or at such other place as the Company shall have
designated by notice.
6 Restrictions on Stock Transfer. The Option Shares provided
pursuant to this agreement has been registered with the Securities and
Exchange Commission pursuant to Stock Option Plan dated April 11, 1995 and
are not restricted.
7. Notices. Each notice relating to the Agreement shall be in
writing and delivered in person or by registered mail to the Chief Financial
Officer of the company at its principal office at 1401 Municipal Road, NW,
Roanoke, VA 24012-1309. All notices to the Holder or other person or persons
then entitled to exercise the Option shall be delivered to the Holder or such
other person or persons at the Holder's address below specified.
<PAGE>
8. Dispute Resolution. Any dispute or disagreement which shall
arise under, as a result of, or in any way relate to the interpretation or
construction of the Agreement shall be determined by the Committee appointed
by the Board of Directors of the Company (or any successor corporation) under
the Option or, in the event the Plan shall at the time be administered by the
Board of Directors of the Company (or any successor corporation), then by
such Board of Directors. Any such determination made hereunder shall be
final, binding, and conclusive for all purposes.
9 Governing Law. The Agreement shall be governed by the laws of
the State of Virginia.
10. Successors In Interest. The Agreement shall inure to the benefit
of and be binding upon each successor and assign of the Company. All
obligations imposed upon the Holder, and all rights granted to the Company,
hereunder or as stipulated in the Plan shall be binding upon the Holder's
heirs, legal representatives, and successors.
IN WITNESS WHEREOF, the Company has caused the Agreement to be executed
in its name by its President or one of its Vice Presidents and its corporate
seal to be hereunto affixed and attested by its Secretary or one of its
Assistant Secretaries on the day and year first above written, and the Holder
has hereunto set his hand and seal on the day and year specified below.
ETS INTERNATIONAL, INC.
By: s/Navin D. Sheth
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Its: Chief Financial Officer
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Holder: s/James B. Quarles
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(Signature)
Address: 3801 Goose Creek Valley Road
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Montvale, VA 24122
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Date: February 2, 1998
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Exhibit 10(c)
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (herein the "Agreement"), entered into this
12th day of March, 1998 (herein the "Effective Date") is by and between ETS
INTERNATIONAL, INC. (herein the "Contractor"), a corporation duly organized
and existing under the laws of the Commonwealth of Virginia, having its
principal place of business at 1401 Municipal Road, NW, Roanoke, Virginia
24012-1309, the party of the first part, and AIR TECHNOLOGIES, INC. (herein
the "Manager"), a corporation duly organized and existing under the laws of
the Commonwealth of Virginia, having its principal place of business at 1401
Municipal Road, NW, Roanoke, Virginia 24012, party of the second part.
RECITALS:
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This Agreement is being entered into in connection with that certain
Asset Purchase Agreement dated March 12, 1998, by and among Contractor, ETS,
Inc., Manager, ETS Acquisition, Inc., and Christel Clear Technology, Inc.
(the "Purchase Agreement"). Contractor and China Steel Corporation (herein
"CSC") have entered into a Contract dated September 12, 1997 (herein the "CSC
Contract") pursuant to which Contractor agreed to design, engineer and supply
3 Sets of Flue Gas Desulfurization (FGD) System and Auxiliaries (herein
collectively the "Systems") for operation at CSC's Kaohsiung Steel Works in
Taiwan, Republic of China;
Contractor pursuant to the CSC Contract, a copy of which is attached
hereto and designate Exhibit A, also agreed to furnish various services in
connection with the Systems including training of CSC personnel;
Contractor desires and intends to obtain certain management and
engineering services as are specified herein relative to its performance of
the various terms of the CSC Contract and Manager desires to perform such
management and engineering services; and
Contractor and Manager mutually desire an arrangement that:
(a) facilitates consistency of service in all engineering, training
and supervision for the erection and commissioning required for the
installation, maintenance and operation of the Systems;
(b) facilitates timely construction, testing and completion of each
System;
(c) facilitates prompt payment of all subcontractors, materialmen and
others (herein "Third Parties") who furnish service or materials
related to the CSC Contract, except the Manager shall not be entitled
to compensation for its services except as otherwise provided herein;
and
(d) facilitates prompt payment by CSC for all services and materials
provided to CSC.
<PAGE>
TERMS OF AGREEMENT.
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IN CONSIDERATION of the mutual promises of the Contractor and Manager
in this Agreement and in the Purchase Agreement and other good and valuable
consideration, the receipt and adequacy all of which is hereby acknowledged,
the parties hereto agree as follows:
1. Incorporation by reference.
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1.1 Recitals. The recitals are incorporated by reference and made a
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part of this Agreement.
1.2 CSC Contract. The CSC Contract and all exhibits, drawings,
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specifications and attachments thereto are incorporated by reference and made
a part of this Agreement.
1.3 Assignment of CSC Contract. Manager agrees to use its best
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efforts to obtain CSC's consent to the assignment of the CSC Contract to
Manager. Upon such assignment and release of Contractor, this Agreement
shall terminate. In the event CSC consents to such assignment and release
subject to either continuing the $600,000.00 performance bond or obtaining a
new $600,000.00 performance bond then Contractor will agree to permit the
$600,000.00 at Crestar Bank to remain or deposit to service such performance
bond. In that event, CCTI and ATI shall execute and deliver a promissory
note payable to the order of Contractor in the principal amount of
$600,000.00. The note shall bear interest at 8.5% per annum and be secured
by all assets of CCTI. Additionally, ATI will assign its Management Fee, if
any, under the assigned contract to further serve the aforesaid note.
Principal and interest shall be paid in monthly installments based on a
thirty (30) year amortization with a balloon payment on March 12, 2008 of all
unpaid amounts due hereunder. The first payment on such note shall be one
month after the earlier of all $600,000.00 being drawn down or completion of
the CSC Contract. For purposes of this Agreement, the CSC Contract shall
include all subcontracts executed in connection therewith.
2. Appointment and Authority.
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2.1 Appointment. Contractor hereby appoints Manager as its agent for
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the management and administration of the CSC Contract and other services
specified therein related to Contractor's supervisory services for designing,
engineering and constructing the Systems.
2.2 Authority of Manager. Consistent with the terms of this
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Agreement and the CSC Contract, the Manager shall have the responsibility and
commensurate authority to supervise all Third Parties and to place
appropriate orders for Contractor to secure materials and services from Third
Parties necessary to satisfy all obligations and responsibilities of
Contractor under the terms of the CSC Contract. Manager shall not have the
authority to modify the CSC Contract or any subcontract in a manner that
would have the effect of increasing Contractor's liability without
Contractor's prior consent.
<PAGE>
2.3 Authority to make and accept payments. All payments for "daily
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rate work per working man-day" as that term is defined in the CSC Contract
made by CSC after the effective date of this Agreement under the terms of the
CSC Contract shall be delivered to Manager promptly upon receipt in order for
Manager to make pay necessary expenses and costs incurred in connection with
performing under the terms of this Agreement and the CSC Contract. Payments
referenced in the preceding sentence may include payments to Manager for
services performed in connection with the CSC Contract and/or expenses
necessary to performance under the terms of the CSC Contract. All payments
which are not "daily rate work per working man-day" or the Taiwan Portion
made by CSC after the effective date of this Agreement under the terms of the
CSC Contract shall be deposited in a account at Crestar Bank in the name of
the Contractor and Manager. Such account may only be drawn on by drafts
signed by both Contractor and Manager.
It is the express understanding of the parties that all funds in such
joint account will be used first to pay for services and/or materials which
are related to the CSC Contract, then to reimburse Contractor for any
Shortfall as hereinafter defined, then to reimburse Contractor for any draw
against the $600,000.00 performance bond and then to Manager as a Management
Fee. The parties agree to cooperate to make payments on a timely basis.
In order to make a payment for services or materials in connection with
performance of the China Steel Contract, a written request for payment from
Manager to Contractor shall be responded to within no more than five (5)
business days by Contractor either signing a check drawn on the joint account
for such payment as requested and delivering it to Manager or delivering to
Manager a written explanation detailing the reason(s) for refusing to sign
the check as requested. Payments from the joint account will be for
materials and/or services furnished by Third Parties in connection with the
CSC Contract and may also include payments to Manager for services performed
in connection with the CSC Contract and this Agreement which shall include,
but not be limited to its actual costs of providing monthly reporting as
required by the CSC Contract, its actual costs of providing on-going
engineering services, reasonable out-of-pocket expenses incurred by Manager
which are necessary to performing such engineering services and negotiating
terms of various subcontracts pursuant to Paragraph 4.4 of this Agreement.
In the event suit or arbitration of a claim by a subcontractor is initiated
or threatened in writing, the Contractor may request payment hereunder.
Manager agrees to provide Contractor with a detailed statement of such
amounts with such request.
After receipt of the final payment from CSC and its deposit to the
joint account referenced above, Contractor and Manager will execute checks
from such joint account to first repay all unpaid advances made by Contractor
pursuant to paragraph 4.2 of this Agreement then to reimburse Contractor for
any amounts drawn against the $600,000.00 performance bond and then to the
Management Fee to Manager pursuant to paragraph 5.1 of this Agreement.
Contractor and Manager agree to cooperate with one another generally in
regard to performance by Contractor under the terms of the CSC Contract and
specifically in connection with providing appropriate invoices, documentation
or other information which may be required by CSC in order to obtain timely
payments from CSC under the terms of the CSC Contract.
<PAGE>
During the term of this Agreement, Manager is authorized to operate
Contractor's "fixed place of business" as that term is defined in the CSC
Contract. Contractor will execute any and all required documentation to
enable Manager to operate and manage Contractor's "fixed place of business"
in Taiwan. During the term of this Agreement Contractor will not cause any
business to be performed in its "fixed place of business" in Taiwan except
such business directly required to be performed by Contractor under the terms
of the CSC Contract. The Taiwan Portion of all payments made by CSC shall be
used to maintain the "fixed place of business" in Taiwan, the cost of the
office on the site in Taiwan, to pay Taiwan subcontractors and to pay local
taxes. The Taiwan Portion of all payments shall be under the exclusive
direction and control of the Manager during the term of this Agreement and
reports to Contractor of all payments from Taiwan shall be made within five
(5) days following such payment.
2.4 Authority of Contractor. Contractor will be solely responsible
for performance of its contractual obligations to CSC. This Agreement shall
in no way be construed to mean or suggest that Contractor has assigned the
CSC Contract to Manager.
3. Manager's Covenants.
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3.1 General Design to Completion. Manager will perform the design
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work required in connection with the construction of the Systems. Such
design work will include:
(a) Basic LEC design
(b) Civil work
(i) Foundation design
(ii) Structural design
3.2 Detailed Design Review. Manager will perform the detailed design
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review in connection with the construction of the Systems which will include:
(a) System GA review
(b) Equipment spec review
(c) Process control review
(i) PLC logic review
(ii) Wiring diagram review
(iii) Connection diagram review
(d) Drawings review
3.3 Procurement Review and Coordination. Manager will perform the
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procurement review and coordination in connection with the construction of
the Systems which will include:
(a) Vendor quote review and coordination
(b) Select vendor review and coordination
(c) Procure equipment review and coordination
(i) Local equipment review
(ii) Foreign equipment review
3.4 Fabrication Inspection. Manager will perform fabrication
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inspections in connection with the construction of the Systems which will
include:
<PAGE>
(a) Structural fab inspection
(b) #6, #7 and #8 reactor fab inspection
(c) Conveyor's fab inspection
(d) #6, #7 and #8 outlet duct fab inspection
(e) Silo fab inspection
3.5 Site Supervision. Manager will perform site supervision in
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connection with construction of the Systems which will include supervision
of:
(a) Silo installation
(b) Structural installation
(c) Conveyor installation
(d) Unloading house
(e) Reactor #6, #7 and #8, including supervision of:
(i) Move ESP
(ii) Reactor installation
(iii) Electrical work
(iv) Instrument work
(v) Paint and finish
(vi) System tie-in
(vii) Start-up and shake down
(viii) Performance test
(f) Work related to final punch list and close of job
3.6 Training. Manager will provide training pursuant to the terms of
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the CSC Contract which will include:
(a) Classroom/Shop training
(b) Onsite training
(c) PLC and software training
3.7 Confidentiality. Except as may be required by law, Manager and
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its employees, agents, directors and officers shall not disclose any
confidential information regarding. Contractor's business methods,
procedures, techniques, or trade secrets or other knowledge or processes
developed by Contractor or any other confidential information relating to or
dealing with the activities of Contractor, made known to Manager or learned
or acquired by Manager hereunder.
3.8 Warranties and Guarantees. Manager does not assume and
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responsibility for any warranties and/or guarantees made by Contractor to
CSC. Manager does covenant to perform its duties hereunder in a timely and
proper fashion provided payments as described herein are timely received by
Manager.
3.9 Damages. Manager will be responsible for losses, claims and
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damages arising out of any negligent acts by it in the course of performing
its duties hereunder and any loss due to a default under the CSC Contract
which is not caused by Contractor.
3.10 Compliance with Law. Manager shall perform all of its duties
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hereunder in accordance with all applicable laws, rules, orders, ordinances
and regulations.
<PAGE>
3.11 Performance. Manager warrants to Contractor that the services to
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be provided hereunder shall be performed (i) in a professional manner by
qualified and trained personnel, and (ii) in accordance with the standards
generally observed in the industry for the performance of similar services.
3.12 Reports. Manager agrees to provide Contractor with periodic
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reports and information regarding the CSC Contract as may be reasonably
requested by Contractor. In the event of litigation (including threatened
litigation) regarding the CSC Contract, Manager agrees to provide reasonable
assistance to Contractor, including but not limited to access to the contract
records, technical support, access to the LEC technology and related
information.
4. Contractor's Covenants.
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4.1 Payments. During the term of this Agreement, Contractor agrees
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to promptly deliver to Manager all payments received from CSC paid for daily
rate work related to the CSC Contract. In the event this Agreement is
terminated prior to completion of the CSC Contract, Contractor will pay to
Manager all sums received from CSC related to daily rate work performed by
Manager.
4.2 Cash Flow. During the term of this Agreement the parties expect
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that payments will be due subcontractors and/or materialmen prior to receipt
of adequate funds from CSC (the "Shortfall"). Manager agrees that Christel
Clear Technologies, Inc. will provide payment of the first $300,000 of the
Shortfall which will not be subject to repayment. If this amount is not
fully used, payment shall be made to Contractor. Thereafter, Contractor
acknowledges that it may be required to advance Six Hundred Thousand Dollars
($600,000.00) in order for the CSC Contract to be fully and timely performed.
All monies advanced by Contractor will be repaid without interest upon
receipt of adequate funds from CSC.
4.3 Cooperation. Contractor will cooperate with Manager to provide
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CSC any information, documentation and/or other materials necessary for CSC
to make payments called for under the terms of the CSC contract to or for the
benefit of Contractor.
4.4 Performance by Third Parties. Contractor authorizes Manager to
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negotiate the terms of various subcontracts with Third Parties to perform
services and/or provide materials to construct the Systems. Contractor
understands and agrees that terms of payment to such Third Parties may
necessitate payments from Contractor to such Third Parties as described in
paragraph 4.2 of this Agreement.
4.5 Limitation on Damage. Contractor agrees that Manager shall not
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be liable for any consequential, indirect or punitive damages arising out of
any breach, delay or default in performance of this Agreement. Manager
agrees that Contractor shall not be liable for any consequential, indirect or
punitive damages arising out of any breach, delay or default in performance
of this Agreement.
<PAGE>
4.6 Standard of Performance. Contractor agrees that the standard of
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performance for Manager is a reasonable man standard in connection with those
management decision required of the Manager in its performance under this
Agreement. In the course of performance of the duties of Manager hereunder,
it is recognized that Manager will perform certain technical work which
requires engineering skills. In connection with such technical work.
Manager shall be held to that standard of care applicable to engineers who
perform such services.
4.7 Confidentiality. Except as may be required by law, Contractor
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and its employees, directors and officers shall not disclose any confidential
information regarding Manager's business methods, procedures, techniques, or
trade secrets or other knowledge or processes developed by Manager or any
other confidential information relating to or dealing with the activities of
Manager, made known to Contractor or learned or acquired by Contractor
hereunder.
5. Management Fee.
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5.1 Amount of Management Fee. All sums other than "daily rate per
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working man-day" due to be paid by CSC to Contractor pursuant to the CSC
Contract will be paid over to Third Parties for services and/or materials in
or about the construction of the Systems. To the extent that such payments
exceed the amounts due Third Parties upon completion of the CSC Contract such
excess shall be paid to Manager as a management fee, provided all advances
made by Contractor pursuant to paragraph 4.2 of this Agreement have been
repaid and Contractor has been reimbursed for any draw against the
$600,000.00 performance bond. In the event such payments are equal to or less
than the sums due Third Parties upon completion of the CSC Contract, then
Manager will receive no management fee. The sums due to be paid are more
specifically described in the CSC Contract and at paragraph 2.3 of this
Agreement.
5.2 Failure to Timely Pay. If any payment made by CSC to Contractor
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for "daily rate per working man-day" is not received by Manager within five
(5) calendar days after the date of such payment by CSC, then Manager will
have the right to cancel this Agreement in its entirety. If any other
foreign payment made by CSC to Contractor is not deposited in the joint
account at Crestar Bank as provided in paragraph 2.3 of this Agreement within
five (5) calendar days after the date of such payment by CSC, then Manager
will have the right to cancel this Agreement in its entirety.
6. Term and Termination.
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6.1 Term. This Agreement shall be effective as of the Effective Date
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and for the period up to and including completion of construction of the
Systems and upon Contractor's receipt of final acceptance in writing from CSC
following successful execution of the performance test and receipt by Manager
of all funds due from CSC to Contractor then the term of this Agreement shall
end.
<PAGE>
6.2 Termination. This Agreement shall not be terminated by either
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party without the agreement of the other party until the work required under
the terms of the CSC Contract has been completed. Notwithstanding the
preceding sentence, the Contractor may terminate this Agreement upon
Manager's failure to cure a material breach of this Agreement provided
Contractor provides Manager with written notice of such breach and Manager
fails to cure such breach within ten (10) business days following receipt of
such notice. In the event such breach cannot by its nature be reasonably
cured within ten (10) business days then Manager shall have such time as may
be reasonable to cure the breach provided Manager works diligently to cure
such breach. Notwithstanding any terms of this Agreement to the contrary,
Manager may terminate this Agreement upon Contractor's failure to cure a
material breach of this Agreement provided Manager provides Contractor with
written notice of such breach and Contractor fails to cure such breach within
ten (10) business days following receipt of such notice. In the event such
breach cannot by its nature be reasonably cured within ten (10) business days
then Contractor shall have such time as may be reasonable to cure the breach
unless such breach be for nonpayment in which event Contractor shall only
have ten (10) business days following receipt of such notice to cure.
6.3 Effect of Termination. Upon termination of this Agreement, as
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hereinabove provided, neither party shall have any further obligation
hereunder except for (i) obligations accruing prior to the date of
termination, and (ii) obligations, promises or covenants set forth herein
that are expressly made to extend beyond the term of this Agreement,
including, without limitation, confidentiality and fees for work performed
prior to termination which provisions shall survive the expiration or
termination of this Agreement. Notwithstanding the foregoing, if Contractor
or Manager terminate this Agreement as set forth in Paragraph 6.2, then
Contractor shall be automatically granted a license to use the LEC Patents
(as defined in the Purchase Agreement) and related technology to allow
Contractor to continue to perform the CSC Contract. Manager agrees to
cooperate with Contractor in the event of any such termination and provide
access to all of Manager's and CCTI's books and records relating to the CSC
Contract.
7. Indemnification. Manager and Christel Clear Technology, Inc. (herein
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"CCTI") agree to hold Contractor, its successors, assigns, shareholders,
directors, officers and employees harmless from damages, losses or expenses
suffered or paid as a result of any liabilities which arise from the CSC
Contract. The obligation which Manager and CCTI have to indemnify Contractor
is subject to Contractor performing all of its obligations under the terms of
this Agreement.
In the event Contractor has performed its obligations under this
Agreement but nevertheless a default occurs under the CSC Contract which is
chargeable to Contractor, then Contractor will provide Manager and CCTI
written notice of such default. Manager and CCTI shall have thirty (30) days
following receipt of such notice to cure the default provided CSC permits
Contractor a similar opportunity to cure. In the event CSC does not permit
Contractor an opportunity to cure, then Manager and CCTI shall have thirty
(30) days following receipt of such notice to pay over to Contractor a dollar
amount necessary to hold Contractor harmless from such default.
<PAGE>
Should Manager and CCTI fail to cure an event of default and/or pay
over to Contractor the dollar amount necessary to hold Contractor harmless,
John D. McKenna, Arthur B. Nunn, III, and John Mycock agree to forfeit all
options to purchase Contractor's common stock which they possess as of March
12, 1998. Additionally, to the extent that monies have been advanced by
Contractor pursuant to paragraph 4.2 of this Agreement and have not been
repaid, CCTI will pay all royalties generated from the Limestone Emission
Control Technology ("LEC Royalties") to Contractor until all advances are
repaid. Furthermore, in the event that CSC or any other party draws down
any amount from the Letter of Credit issued by Crestar Bank in the amount of
$600,000.00 in connection with Contractor's Performance Bond for the CSC
Contract, CCTI will pay all LEC Royalties to Contractor until all sums drawn
down are repaid. Finally, in the event of any further loss or damage to
Contractor arising out of a default under the terms of the CSC Contract, upon
that loss being liquidated, CCTI will pay all LEC Royalties to Contractor
until such loss is repaid. In the event of such loss and prior to such loss
being liquidated, all LEC Royalties in excess of amounts due Contractor under
separate agreements, shall be held in escrow by an escrow agent mutually
agreed to by CCTI and Contractor.
8. Miscellaneous.
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8.1 Independent Relationship. It is mutually understood and agreed
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that Contractor and Manager, in performing their respective duties and
obligations under this Agreement, are at all times acting and performing as
independent contractors with respect to each other, and nothing in this
Agreement is intended not shall be construed to create an employer/employee
relationship or a joint venture relationship.
8.2 Notices. Any notice, demand or communication require, permitted
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or desired to be given shall be deemed effectively given (i) when personally
delivered, (ii) upon receipt when delivered by telephonic document transfer,
(iii) three (3) business days next following the day the notice is, mailed by
prepaid certified mail, return receipt requested, or (iv) the next business
day following deposit with a reputable overnight courier, addressed as
follows:
Contractor ETS International, Inc.
P.O. Box 311
Montvale, Virginia 24122
Facsimile No. (540)947-5033
Manager Air Technologies, Inc.
1401 Municipal Road, N.W.
Roanoke, Virginia 24012
Facsimile No. (540)265-0082
or such other address, and to the attention of such other person or officer
as any party may designate, with copies thereof to the respective counsel
thereof as notified by such party. Rejection or other refusal to accept or
the inability to deliver because of a changed address of which no notice was
given in accordance with the provisions hereof, shall be deemed to be receipt
of the notice sent.
<PAGE>
8.3 Further Assurances. The parties agree to execute and deliver all
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such further documents, instruments and agreements as may be reasonably
necessary to consummate the transactions contemplated by this Agreement.
8.4 Third Party Beneficiaries. This Agreement is made and entered
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into for the sole protection and benefit of the parties hereto, and no other
person, persons, entity or entities shall have the right of action hereon,
right to claim any right or benefit from the terms contained herein, or be
deemed a third party beneficiary hereunder.
8.5 Severability. If any provision of this Agreement or if any
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covenant, obligation or agreement contained herein is determined to be
invalid or unenforceable, such determination shall not affect any other
provision, covenant, obligation or agreement, each of which shall be
construed and enforced as if such invalid or enforceable portion were not
contained herein. Such invalidity or unenforceability shall not affect any
valid and enforceable application thereof. Each such provision, covenant,
obligation or agreement, shall be deemed to be effective, operative, made,
entered into or taken in the manner and to the full extent consistent with
this Agreement.
8.6 Arbitration. Any controversy or claim arising out of, or
-----------
relating to, this Agreement, or the making, performance, or interpretation
thereof, shall be settled by arbitration in Roanoke, Virginia, in accordance
with the Rules of the American Arbitration Association then existing, and
judgment on the arbitration award may be entered in any court having
jurisdiction over the subject matter of the controversy.
8.7 Assignment. This Agreement is not assignable except upon the
----------
written consent of both parties.
8.8 Waiver. No failure on the part of a party to exercise, and no
------
delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by a party preclude any other or further exercise thereof or
the exercise of any right, power or remedy.
8.9 Entire Agreement. This Agreement contains the entire
----------------
understanding between the parties hereto with respect to the transactions
contemplated hereby, all prior negotiations and agreements between the
parties hereto are superseded by this Agreement, and there are no
representations, warranties, understandings or agreements other than those
expressly set forth herein, except as modified in writing concurrently
herewith or subsequent hereto, which writing shall be executed by duly
authorized officers of the parties, respectively.
8.10 Governing Law. This Agreement shall be governed in accordance
-------------
with the law of the Commonwealth of Virginia.
<PAGE>
8.11 Headings. The descriptive headings of the various paragraphs of
--------
this Agreement are for convenience only and shall not be used to construe or
interpret the meaning of any of the provisions hereof.
8.12 Use of the Term "Party". The use of the term "party" is
-----------------------
generally used to denote any party to this Agreement, and such term shall be
interpreted to mean any signatory to this Agreement.
8.13 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be regarded as an original, and all of
which shall constitute but one and the same instrument.
8.14 No Construction Against the Drafter. This Agreement shall be
-----------------------------------
interpreted to give fair meaning, and any ambiguity shall not be construed
against either party.
IN WITNESS WHEREOF, Contractor and Manager have executed this Agreement
in counterparts as of the day and year first above written.
Contractor: ETS International, Inc.
By: s/James B. Quarles
------------------------
President
Manager: Air Technologies, Inc.
By: s/John Mycock
------------------------
President
Christel Clear Technology, Inc. joins in this Agreement for the sole
purpose of acknowledging and agreeing to the provisions of this Agreement at
paragraph 7 which require indemnification by Christel Clear Technology, Inc.
and repayment to Contractor as provided in Paragraph 4.2 of this Agreement.
Christel Clear Technology, Inc.
By: s/John Mycock
---------------------------
President
<PAGE>
The undersigned join in this Agreement solely to evidence their consent
and agreement to the forfeiture of their stock options for common stock of
ETS International, Inc. as provided in this Agreement.
s/John D. McKenna
-----------------------
John D. McKenna
s/Arthur B. Nunn, III
-----------------------
Arthur B. Nunn, III
s/John Mycock
-----------------------
John Mycock
<PAGE>
Exhibit 10(g)
CONTRACTOR LICENSE AGREEMENT
This CONTRACTOR LICENSE AGREEMENT is made and entered into as of the
14th day of September 1995 by and between ULTRALINER, INC., a corporation
organized and existing under the laws of the State of Alabama (hereinafter
referred to as the "Licensor"), and ETS WATER AND WASTE MANAGEMENT, INC. dba
STAMIE E. LYTTLE COMPANY, a Virginia corporation, doing business under the
laws of Virginia (hereinafter referred to as the "Contractor").
RECITALS:
WHEREAS, the Licensor has conducted research and development with
respect to certain methods, apparatus and materials used in the
rehabilitation of water and sewer pipelines by the insertion of a folded PVC
alloy pipe liner into the pipeline to be rehabilitated; and
WHEREAS, the foregoing research and development have resulted in
substantial and valuable know-how, inventions and techniques proprietary to
the Licensor, and the possession by the Licensor of valuable information with
respect thereto; and
WHEREAS, the Contractor is desirous of gaining knowledge of such
inventions, know-how, techniques, and information and an exclusive right and
license within and throughout the Territory to use the same together with any
Patent Rights, Trademark Rights, and Copyrights relating thereto;
NOW THEREFORE, in consideration of these recitals and the mutual
covenants and undertakings set forth herein, the parties hereto do enter into
this agreement.
ARTICLE I - DEFINITIONS
As employed herein:
1.01 "Affiliate" shall mean any person or entity controlling,
controlled by or under common control with the person or entity referenced.
1.02 "Apparatus" shall mean and include, but not be limited to, any
and all tools, equipment, instruments, machines, and devices, other than the
Materials, whether patented or unpatented, developed for use in the practice
of the Subject Matter.
1.03 "Change in Control" shall mean a change of the Contractor
occurring after the date of execution of this Agreement of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1914, whether or not
the Contractor is then subject to such reporting requirement; provided,
however, that without limitation, such a Change in Control shall be deemed to
have occurred if any "person" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of more than 50% of the outstanding shares of any
class or series of securities entitled to elect more than one-half of the
board of directors or other governing body of the Contractor.
1.04 "Commencement Date" means the first day when the Products are
received from the manufacturer.
1.05 "Confidential Material" shall mean the information furnished to a
Receiving Party, whether before or after the date hereof, by a Disclosing
Party, or acquired, received, developed or learned by a Receiving Party in
the course of its relations with a Disclosing Party, or relating to the
Subject Matter, the Know-How, the Copyrights or the proprietary plans,
policies, business or affairs of a Disclosing Party, including, without
<PAGE>
limitation, data, drawings, materials and other communications concerning any
manufacturing or production or other process or any research and development
or marketing and/or sales plans or results related to the business of a
Disclosing Party; provided, however, that the term "Confidential Material"
shall not include information which: (i) becomes or has become generally
available to the public other than as a result of a disclosure by a Receiving
Party, (ii) was available to a Receiving Party on a non-confidential basis
prior to its disclosure to the Receiving Party by a Disclosing Party, or
(iii) becomes available to a Receiving Party on a non-confidential basis from
a source other than a Disclosing Party, provided that such source is not
bound by a confidentiality agreement with a Disclosing Party.
1.06 "Contract Year" means the calendar year with the exception of the
first year, which shall commence on 1st of February, 1996, and shall end on
the 1st of February, 1997.
1.07 "Contractor" means ETS WATER AND WASTE MANAGEMENT, INC. dba
STAMIE E. LYTTLE COMPANY.
1.08 "Copyrights" shall mean and include any and all copyrights at
common and/or statutory law within the Territory which relate to plans,
brochures, instructions or other means of expression, including, but not
limited to, photographs, software, firmware, diagrams and other visual
presentations, having to do with the Subject Matter or useful in connection
with the commercialization thereof, which the Licensor has, or hereinafter
acquires the right to license others.
1.09 "Cross-over Payment" shall mean the amounts, payable by the
Contractor to the Licensor under Sections 3.03 and 3.04 hereof, at the times
hereinafter set forth, equivalent to twenty-five percent (25%) of the Gross
Product Price of all ULTRALINER, INC. materials shipped outside of the
Territory.
1.10 "Customer(s)" means any public, private, corporate or other legal
entity that has been contacted by Contractor, has expressed an interest in
the System, Process or Know-how, or that has utilized or benefitted from the
use of the System, Process or Know-how.
1.11 "Disclosing Party" shall mean a party hereto, together with its
Affiliates and their respective officers, directors, employees, agents and
representatives, disclosing Confidential Material.
1.12 "Effective Date" means the date of execution of this Agreement.
1.13 "Gross Product Price" shall mean the price published by Licensor
from time-to-time for Product.
1.14 "Know-how" means any and all most up-to-date confidential,
valuable and proprietary information, whether technical, economic or
commercial experiences, operating and/or executing techniques and other
knowledge and all physical matters such as drawings, specifications,
computations, analyses, data, designs, pipe lining installation procedures
and the like relating to or in respect of the Process, Equipment, Tools and
Material herein defined which are substantially or relevant necessary to
enable the Contractor to practice the Process hereinafter defined properly
and efficiently to a standard and quality similar to the standard and quality
of the internal pipe lining specified by the Licensor and which Licensor now
possesses or may possess hereafter during the term of this Agreement.
1.15 "Licensor" means ULTRALINER, INC. a corporation created under the
laws of the State of Alabama, United States of America.
1.16 "License Fee" shall mean the non-refundable amount as set forth
under Section 3.02 hereof, payable by the Contractor to the Licensor upon the
execution and delivery of this agreement.
1.17 "Materials" shall mean and include any and all compositions,
products, components and other materials, without limitation, whether
patented or unpatented, developed for use in the practice of the Subject
Matter and supplied to the Contractor.
<PAGE>
1.18 "Patent Rights" shall mean and include all patents and patent
applications relating to the Subject Matter whether owned now or hereafter
acquired or controlled by the Licensor.
1.19 "Performance Objectives" shall mean the minimum lengths of
pipeline, identified and segregated by reference to size, proposed to be
rehabilitated by the Contractor during the Term, as determined pursuant to
Section 4.03 hereof.
1.20 "Permitted Uses" shall mean the application, in accordance with
the specifications of the Licensor of Product in connection with the repair,
rehabilitation or reconstruction of water and sewer pipelines. The Licensor
and the Contractor hereby acknowledge and agree that, notwithstanding any
other provision of this Agreement, neither the right and license granted
under Section 2.01 hereof, nor the Permitted Uses, shall extend to any
utilization of the Know-how or the Patent Rights or practice of any
inventions relating to the Subject Matter in the manufacture of any
Materials.
1.21 "Process" means the deformed pipe lining technology and process
developed by ULTRALINER, INC. for the restoration of repair and
rehabilitation of water and sewer (sewage & storm pipelines through the
application of pipe lining material manufactured of PVC Alloy materials with
all its modifications. The words Process or ULTRALINER PVC ALLOY PIPELINER
SYSTEMS (Trademark) shall also mean and include any and all methods, Know-
how, methodology and technology which have application to the System and are
deemed proprietary and confidential by Licensor.
1.22 "Product" means deformed pipe lining made or designed in
accordance with the system.
1.23 "Project(s)" means pipe restoration construction projects where
the System, Process or Know-how are, or will be used.
1.24 "System" means ULTRALINER PVC ALLOY (Trademark) deformed pipe
lining using the Process developed by ULTRALINER, INC.
1.25 "Receiving Party" shall mean a party hereto, together with its
Affiliates and their respective officers, directors, employees, agents and
representatives, receiving Confidential Material.
1.26 "Restoration" means lining and reopening of pipe at lateral by
remote control internal cutter.
1.27 Subject Matter" shall mean and include all presently existing and
subsequently acquired methods. Apparatus and Materials used in the repair,
rehabilitation or reconstruction of water and sewer pipelines by using the
PRODUCT.
1.28 "Term" shall mean the period commencing on the date hereof and
shall continue for 5 years or the expiration of the last extension, unless
sooner terminated as hereinafter provided. For the purposes of the agreement
between these parties, the Contractor is hereby granted the right to extend
the term for 5 additional years, on the terms and conditions set out in
ARTICLE II hereof.
1.29 "Territory" shall mean that geographical area lying within the
political boundaries of the Counties of Frederick, Clarke, Loudoun,
Alexandria, Warren, Fauquier, Prince William, Page, Rappahannock, Madison,
Cullpepper, Stafford, King George, Orange, Spotsylvania, Caroline, Essex,
Westmoreland, Richmond, Louisa, Hanover, King William, King and Queen,
Fluvanna, Goochland, Henrico, New Kent, Cumberland, Powhatan, Amelia,
Shenandoah, and Chesterfield, and the cities of Hopewell, Colonial Heights,
Richmond, Winchester, and any other cities lying within the geographic
boundaries of this territory being a political sub-division of Virginia.
1.30 "Tools" means any and all special equipment, apparatus or
materials used in the Process.
1.31 "Trademark" means ULTRALINER and ULTRALINER PVC ALLOY PIPELINER
and ULTRALINER PVC ALLOY PIPELINER SYSTEM and such other trademarks as may be
adopted by Licensor.
<PAGE>
1.32 "Trademark Rights" means certain trademarks, service marks and
trade names including, without limitation, the Trademark, which have been
adopted and used by ULTRALINER, INC. and which have been promoted and are
becoming favorably known to and recognized by the pipe lining industry.
1.33 "ULTRALINER PVC ALLOY PIPELINER SYSTEM (Trademark)" means a
deformed pipe lining system developed by ULTRALINER, INC. for installation in
accordance with the specifications of the Process.
ARTICLE II - GRANT OF LICENSE, TERM AND EXTENSION
2.01 Grant of License.
(a) In consideration of the License Fee and the other covenants and
agreements of the Contractor hereunder, the Licensor hereby grants the
Contractor an exclusive right and license within and throughout the Territory
during the Term:
(i) to utilize in the Territory, the Know-how, Equipment,
Materials, Tools and the Products to practice the inventions of the
Patent Rights relating to the Subject Matter, and to sell and to
install products incorporating the Subject Matter to customers of its
choice, in each case solely in and for the Permitted Uses but only by
Contractor through Contractor's direct employees and not through or by
any other entity (such as non-owned installers), unless expressly
authorized by Licensor;
(ii) to use any and all Copyrights only as an adjunct to the
practice of such methods and the commercialization thereof as permitted
by this Agreement; and
(iii) subject to Sections 2.02 and 4.04 hereof, to use and
display ULTRALINER PVC ALLOY PIPELINER (Trademark) and ULTRALINER PVC
ALLOY PIPELINER SYSTEM (Trademark) as a service mark and trademark in
connection with each and every aspect of the commercial exploitation of
the Subject Matter in the Permitted Uses.
(b) The exclusivity of the license is subject to and limited by the
right heretofore granted by Licensor to John Boatman, personally acting
solely through his company, as long as he owns 100% of Boatman Construction
Company, to sell and install Product within the Territory.
(c) In the event the Licensor, in its sole but reasonable discretion,
determines that the Subject Matter may be commercialized in the Territory in
connection with the repair, rehabilitation or reconstruction of pipelines and
other passageways, the Licensor and the Contractor may agree to enter into an
agreement to license Contractor to sell and install the Subject Matter for
such uses. Without this subsequent agreement, the Licensor and Contractor
hereby agree and acknowledge that notwithstanding any other provision of this
Agreement, neither the right and license granted under Section 2.01 hereof,
nor the Permitted uses, shall extend to any utilization of the Know-how or
the Patent Rights or practice of any inventions relating to the Subject
Matter in the use, manufacture or promotion of any materials.
Notwithstanding any other provision contained in this paragraph (b),
the Licensor shall not be obligated to commercialize the Subject Matter in
any application described under this paragraph.
2.02 Use of Service Mark and Trademark
(a) The Contractor hereby acknowledges that, except as described in
2.01(b), only the Licensor or its designated licensees have the right within
the Territory to use the name ULTRALINER PVC ALLOY PIPELINER (Trademark) and
ULTRALINER PVC ALLOY PIPELINER SYSTEM (Trademark) as a service mark or
trademark, and such other trademarks, service marks, trade names and
copyrights as may presently exist or be acquired by the Licensor and licensed
for use by the Contractor, along with all ancillary signs, symbols or other
indicia used in connection or conjunction with said marks. The Contractor
further acknowledges that valuable goodwill is attached to all such
<PAGE>
trademarks, service marks, trade names, and copyrights, and that it will use
same in the manner and to the extent specifically licensed by this Agreement.
The Licensor, in its sole discretion, has the right itself to operate
businesses under said trademarks, service marks, trade names and copyrights
and (subject to paragraph (a), (b), and (c) of Section 2.01 hereof) to grant
other licenses in, to and under such trademarks, service marks, tradenames
and copyrights, on any terms the Licensor deems fit; except for the Permitted
Uses in the Territory (and subject, in all respects, to the final sentence of
Section 2.03). The Contractor expressly recognizes that any and all goodwill
associated with said trademarks, service marks, trade names, and copyrights,
including any goodwill which might be deemed to have arisen through the
Contractor's activities, inures directly and exclusively to the benefit of
the Licensor, except as otherwise provided herein. The Licensor covenants
that any subsequent license to a third party (which may be an Affiliate of
the Licensor) for ULTRALINER PVC ALLOY PIPELINER (Trademark) application of
the Subject Matter in the Territory other than in the Permitted Uses shall
provide that any trademarks, service marks, tradenames and copyright covered
by such license (which may include ULTRALINER PVC ALLOY PIPELINER
(Trademark)) shall be adequately distinctive in form from the trademarks,
service marks, tradenames and copyrights licensed hereunder.
(b) All Apparatus, Materials, letterheads, invoices, advertising
signs of all types and printed material utilized by the Contractor in the
exercise of its rights under this Agreement shall bear appropriate insignia
acknowledging such products Materials or Apparatus as under exclusive license
from the Licensor.
2.03 Rights Reserved to Licensor.
It is specifically understood and agreed that the grant of this
exclusive license for the Territory during the Term is based upon the size
and ability of the Contractor to provide and/or exploit the demand for the
Subject Matter within the Territory in the Permitted Uses, and the nature and
scope of the Territory has been determined accordingly. The Contractor
further understands and agrees that the Licensor retains the right to grant
exclusive licenses to other Contractors in other territories and to grant
exclusive licenses to other parties in the Territory to utilize the Subject
Matter for purposes other than in the Permitted Uses. The Licensor reserves
the right to vary or otherwise modify the nature and scope of subsequent
licenses granted to subsequent licensees to accommodate specific
applications, territories, population considerations and other factors. The
Contractor acknowledges and agrees that the Licensor shall not be obligated
to prevent other of its licensees for the Permitted Uses from exploiting the
Subject Matter in the Territory in the Permitted Uses.
2.04 TERMS AND EXTENSIONS.
(a) The Term of this Agreement shall commence on the date of this set
out in the opening paragraph hereof and shall terminate at midnight on the
1st day of February, 2001, unless the termination date is extended in
accordance with the following paragraph.
(b) The Contractor is granted the right to extend the termination date
for five (5) years provided that the Contractor is not in default on any of
its obligations to Licensor under the terms hereof or otherwise created and
the financial condition of the Contractor to maintain a bonding capacity, is
adequate to allow Contractor to perform its obligations hereunder during the
extended term.
ARTICLE III - LICENSE FEE AND CROSS-OVER PAYMENT
3.01 ADEQUACY OF CONSIDERATION
It is specifically understood and agreed that the License Fee, and the
other terms and conditions hereinafter described shall be deemed adequate
consideration for the exclusive license defined in Article II above relating
to the Territory during the Term.
<PAGE>
3.02 License Fee
Concurrently with the execution and delivery of this Agreement, the
Contractor shall pay to Licensor the amount of $65,000.00 US (Sixty-Five
Thousand Dollars US), which shall not be refundable in part or whole at any
time after execution of this Agreement.
3.03 Purchase
All orders by Contractor for Product shall be only on the terms set out
in the Licensor's written acceptance of Contractor's written order.
3.04 Cross-Over Payment
(a) The Contractor shall, during the Term, exploit the Subject Matter
in the Territory in the Permitted Uses for the mutual benefit of the
Contractor, the Licensor, and the customers and potential customers of the
Contractor, in order to fulfill the Contractor's obligations under Section
4.03 hereof, and the Contractor shall ensure that the customers of the
Contractor are provided such information, warranties, and services by the
Contractor as shall assure that such obligations are met. In so exploiting
the Subject Matter in the Permitted Uses, the Contractor shall be required to
make significant financial investments, necessary for market development, in
capital and equipment, in marketing and promotion, and in providing
information and services.
(b) In order to compensate the Licensor's licensees in other
territories for the making of such investments, and to induce them to do so,
should the Contractor seek to exploit the Subject Matter outside of the
Territory in any of the Permitted Uses, whether or not in an area where an
exclusive license for such Permitted Uses has been granted by the Licensor,
the Contractor shall make an immediate Cross-Over Payment of twenty-five
percent (25%) of the Gross Product Price of all Product so exploited outside
the Territory. All Cross-Over Payments shall be paid by the Contractor to
the Licensor, as agent for the Contractor, who shall in turn promptly pay
twenty percent (20%) of such Cross-Over Payment to the Licensee in whose
territory the installation was performed, if any. Should the Contractor fail
to make a Cross-Over Payment to the Licensor within the time applicable for
payment, no further Product will be shipped to the Cross-Over Contractor and
such failure shall be a material breach of this Agreement; it being
understood and agreed that nothing contained in this Agreement shall obligate
the Licensor to take any collection action with respect to any Cross-Over
Payment.
(c) All licenses governing the commercialization of the Subject Matter
for the Permitted Uses within the United States of America shall provide for
a similar cross-over payment, in the amount of twenty-five percent (25%) of
the Gross Product Price for installations utilizing the Subject Matter for
any of the Permitted Uses within the Territory, to be paid by the Licensee
who commits the cross-over thereunder to the Licensor, as agent for such
licensee, who shall in turn promptly pay such cross-over payment to the
Contractor into whose Territory the cross-over has been committed, if any,
less five percent (5%) deduction.
(d) Notwithstanding any other provision contained in this Agreement,
any utilization of the Subject Matter within the Territory for the Permitted
Uses by another licensee of the Licensor shall be attributable to the
Contractor for purposes of determining achievement by the Contractor of its
Performance Objectives.
(e) In addition to all other obligations of the Contractor hereinafter
set forth, in order to assure top product quality and to meet all products
liability and health and safety requirements it shall be the responsibility
of the Contractor, should it perform work outside the Territory to assure
satisfactory arrangements are made to provide full and complete after-sales
service and warranty protection for the job involved, including specifically,
but not limited to, the ability to rapidly deploy a repair crew to the site
of any such job.
<PAGE>
3.05 Reports and Payments. The Contractor shall submit and deliver to
the Licensor separate written reports at the times hereinafter set forth and
in such form as may be reasonably required and as may be amended, from time
to time by the Licensor as follows:
(a) No later than one month prior to the commencement of each calendar
quarter of the Term, the Contractor shall deliver to the Licensor a report
containing the Contractor's forecast of product requirements, in linear feet
by diameter, for each month of the immediately following calendar quarter and
each of the next two (2) calendar quarters.
(b) Within three (3) weeks after the end of each calendar quarter of
the Term, the Contractor shall deliver to the Licensor a report of work
performed by the Contractor utilizing the Subject Matter for the Permitted
Uses during such calendar quarter, whether or not invoiced or paid, the total
amount invoiced, the Gross Contract Price and terms for the work performed,
and any Cross-Over Payment due to the Licensor, as agent for the Contractor,
and such other information as the Licensor may reasonably require to enable
the Licensor to evaluate computation of any Cross-Over Payments and the
Contractor's achievement of the Performance Objectives. Such report shall be
accompanied by payment in full of all Cross-Over Payments not paid and due
the Licensor, as agent for the Contractor, with respect to such calendar
quarter.
3.06 Default in Payment.
Should the Contractor fail to pay the License Fee or any Cross-Over
Payment as aforesaid, or fail to pay for Materials, to the Licensor, arising
from or in connection with this Agreement, when validly due, or fail to
deliver any report due under Section 3.04 hereof, this Agreement shall,
pursuant to Article VI hereof (and subject, without limitation, to the
applicable notice and cure periods therein) terminate.
3.07 PLACE AND METHOD OF PAYMENT.
All payments required under this Agreement shall be made in Oxford,
Alabama or such other location within the United States as shall be
identified by the Licensor. Payments are to be paid in U.S. Dollars or Gold.
ARTICLE IV - GENERAL COVENANTS
4.01 Information Sharing.
With a view to avoiding unnecessary duplication of research and
development work in relation to the System and/or the Products as far as
possible, both the Licensor and the Contractor shall have the right to
discuss with each other fully and openly at half-year intervals relevant
research and development projects which they have in hand or which are
planned.
4.02 Financial Covenants.
To assure the financial ability of the Contractor to meet obligations
hereunder, the Contractor shall provide a semi-annual balance sheet to the
Licensor with an officer's certificate, notarized, certifying that such
balance sheet has been prepared in accordance with generally accepted
accounting principles applied consistently with the prior six months and
presents fairly the financial position of such party for the six months then
ended. The Contractor's obligation under this Section 4.02 shall be deemed
met in the event guaranteed by an Affiliate of the Contractor which itself
also complies with this Section 4.02.
4.03 Performance Objectives. Performance objectives are the minimum
quantities of Product that the Contractor is required to order from Licensor
within the time period specified. The parties recognize and agree that the
covenant of the Contractor that it will achieve these Performance Objectives
is a material term of this agreement and its representation that it has and
will dedicate the necessary financial and manpower resources, to this
specific obligation, as well as its other duties hereunder, have been and
will continue to be relied upon by Licensor in entering into this agreement
and performing thereunder. <PAGE>
(a) For the first contract year, Contractor shall not be assigned any
performance objective.
(b) For the contract year beginning February 1, 1997, Contractor shall
order (only valid order is that accepted and paid for) not less than twenty
thousand feet (20,000) of Product.
(c) Contract Years subsequent to 1997, Performance Objectives shall be
established by the Licensor and Contractor taking into consideration the
following factors:
(i) reconstruction budget line items of major municipalities
in the territory;
(ii) major projects planned in the Territory for the
performance period;
(iii) the Contractor's actual performance in prior years;
(iv) distorting impact of major programs, Acts of God and
events beyond the Contractor's control in prior year's performance;
(v) territory population;
(vi) population of realistic potential markets in the
territory;
(vii) Contractor forecasts;
(viii)Contractor backlogs;
(ix) sales activities of competitive methods and volume of work
lost or delayed due to competitor's activities;
(x) political and economic conditions in the territory;
(xi) new markets and applications and diameters for which
products will be available and compatible;
(xii) environmental concerns
(xiii)product availability and price; and
(xiv) maintenance of product exclusivity.
(d) Contractor shall develop and provide Licensor such information as
is described above and such other data and information which the Contractor
believes to be pertinent and relevant to establishment of Performance
objectives.
(e) Within 90 days prior to the end of a Contract Year, and following
good faith negotiations with the Contractor on the basis of the foregoing
criteria, Performance Objectives applicable to, shall be announced by
Licensor and Contractor as agreed upon, for next Contract Year.
(f) Commencing February 1st, 1997, and on a quarterly basis thereafter
the Contractor and the Licensor shall consult to determine the Contractor's
progress during the preceding calendar quarter in achieving the Performance
objectives then applicable. Licensor shall consider the criteria set out in
the foregoing section and the following criteria when conducting its
evaluation of Contractor's performance to determine if the Contractor has
failed to achieve its Performance Objectives:
(i) major governmental agency or industrial buyer decisions
relating to the Subject Matter, as well as delays in releasing
contracts for bids;
(ii) Contractor's overall satisfactory business performance in
all diameters;
(iii) competitor's adverse activities in the Territory;
(iv) Contractor's long-term investment in business under the
License, both capital and human resources;
(v) sales activity and effort to promote the product.
(g) The Licensor hereby agrees that, subject to the notices and for the
period hereinafter specified, the Contractor shall not be deemed to have
failed to achieve any Performance Objective for a particular year if
prevented by a material failure of performance by the Licensor that is not
caused by the fault of the Contractor (including those excuses for
nonperformance as are herein afforded to Contractor); by federal, state or
municipal action or regulations; by strikes or other labor trouble or
stoppage; by fire, damage to, or destruction in whole or in part of
merchandise or plant; by lack of, or inability to obtain, raw materials,
labor, fuel or supplies; by war, riot or revolution; by Acts of God; by
perils of the sea; by shortage of cars; or by any other unavoidable cause
beyond the control of Contractor, in each case, under this sentence, except
if caused by the negligence or design of the Contractor. In the occurrence
of any such event, and after receiving written notice from the Contractor
thereof, Licensor shall, for as long as such event shall continue to prevent
such achievement, reduce any Performance Objective so affected by a
proportion that reasonably accounts for such event. The Contractor shall
promptly deliver written notice to the Licensor that such event shall have
ceased. <PAGE>
(h) The parties understand and agree that the provisions of this
Section 4.03 shall in no manner operate to limit any obligation of the
Contractor contained elsewhere in this Agreement.
(i) It is specifically understood and agreed that nothing herein
provided shall be construed as requiring the Operator to operate in
accordance with any designated marketing plan or system, which, except for
the maintenance of high standards of quality with respect to the Subject
Matter and its usage, the exercise of diligence and the performance in
accordance with the terms and conditions hereof, are left to the
determination of the Operator.
4.04 Disclosure and Training.
Promptly upon execution of this Agreement, and continuing throughout
the Term, the Licensor thereupon shall fully disclose to the Contractor all
Know-how, and any Patent Rights and Copyrights, intended to be utilized in
the practice of the methods of the Subject Matter for the Permitted Uses.
Promptly after the commencement of the Term, the Contractor, at its expense,
but with no fee or payment to the Licensor, shall require its principal sales
personnel to attend an installation demonstration and training session
conducted by the Licensor. Further, promptly after the commencement of the
Term (and in all events prior to any application by the Contractor of the
Subject Matter), the Contractor, at its expense, shall require an adequate
number of supervisory personnel who will be involved in installations
utilizing the Subject Matter to be trained by the Licensor specifically in
the utilization of the Subject Matter; and no such installations shall be
initiated by the Contractor unless and until such supervisory personnel are
certified by the Licensor as qualified to utilize the Subject Matter for the
Permitted Uses. The Licensor shall thereafter provide an adequate continuing
technical and engineering support capability to support the efforts of the
Contractor, the content, extent, and frequency of which shall be solely at
the discretion of the Licensor; except that the Licensor will conduct an
annual training seminar with respect to application of the Subject Matter in
the Permitted Uses, and the Contractor agrees to have, at its expense, at
least one supervisory representative in attendance. The Contractor shall not
be obligated to pay any fees or other charges to the Licensor in exchange for
the foregoing training. At the request of the Contractor and subject to
availability, the Licensor will provide a technician experienced in the
operation of the Subject Matter to assist and render advice to the Contractor
subject to payment by the Contractor of all reasonable direct traveling and
hotel expenses and a reasonable per diem rate which shall be agreed upon
between the parties at a location agreed upon by both parties.
4.05 Insurance
The Contractor agrees to procure at its expense, a policy or policies
of insurance from an insurance company or companies reasonably satisfactory
to the Licensor and Contractor's customers, providing coverage for the
operations of the Contractor, including product and completed operations,
with amounts not less than $1,000,000 single limit liability for injury to
persons and damage to property. The Contractor also agrees to have the
Licensor named as an additional named insured under the above described
policy or policies and to cause the Licensor to be furnished with a
Certificate of Insurance which shall contain a requirement that the Licensor
be notified 30 days prior to any cancellation or any reduction in coverage
limits. The insurance required above shall commence prior to the time the
Contractor commences operations under this Agreement and shall continue in
force throughout the Term.
4.06 Taxes; Compliance with Laws.
The Contractor shall promptly pay when due all taxes and assessments
against the premises or the equipment used in connection with the
Contractor's business, and all liens or encumbrances of every kind or
character created or placed upon or against any of said property, and all
accounts and other indebtedness of every kind incurred by the Contractor in
<PAGE>
the conduct of said business, the failure to pay which would have a
materially adverse effect on the ability of the Contractor to perform its
obligations hereunder. The Contractor shall have the right to contest the
validity or amount of any assessment, tax, lien or encumbrance, provided that
the Contractor shall: (1) give the Licensor notice of its intention to
contest; (2) diligently prosecute such contest; and (3) at all times
effectively stay or prevent any official or judicial sale of such property or
any thereof by reason of the non-payment of any lien, encumbrance, tax, or
assessment. The Contractor shall comply with all applicable federal, state,
county and municipal laws and regulations, now in effect or hereinafter
enacted, including, without limitation, all environmental laws and all
occupational safety and health laws, the failure to comply with which would
have a materially adverse effect on the ability of the Contractor to perform
its obligations hereunder, and shall timely obtain any and all permits,
certificates, or licenses necessary for the full and proper conduct of its
business.
4.07 Standards and Inspection.
The Contractor shall maintain a high standard of quality in all
installations made and in all other activities under the Service Mark or
Trademark. To ensure the maintenance of such standards, the Licensor may
periodically inspect the Contractor's practice of the methods of the Subject
Matter at the Licensor's own expense and without unreasonable inconvenience
to the Contractor. The Contractor shall cooperate fully with the Licensor in
any such inspections in its practices of the methods of the Subject Matter
made by the Licensor. At all times the Contractor shall exert diligent
effort to practice the methods and techniques included in the Subject Matter
in accordance with the best available technical information and advice
received from the Licensor. The Contractor hereby agrees that failure by the
Licensor to exercise any right of inspection or any other right under this
Section 4.08 shall not operate subsequently to preclude exercise by the
Licensor of this right, and that failure of the Contractor to permit such
inspections or to maintain such standards shall constitute a material breach
of this Agreement and shall form the basis of termination hereof, but solely
in accordance with the notice and cure provisions of Article VI hereof.
ARTICLE V - IMPROVEMENTS; SECRECY
5.01 Commercialization of Improvements.
The Contractor recognizes and agrees that from time to time hereafter
the Licensor may, in its discretion, change or modify the Subject Matter
and/or adopt and use new or modified trade names, trademarks, service marks
or copyrighted materials with respect thereto, and that the Contractor, at
the election of the Licensor, will accept, use and display for the purpose of
this Agreement any such changes and such new or modified trade names,
trademarks, servicemarks or copyrighted materials, as if they were part of
this Agreement at the time of execution hereof. The Contractor shall furnish
such cooperation as such changes or modifications may reasonably require, and
do so within a reasonable time.
5.02 Title to Improvements.
(a) The Contractor hereby assigns, and shall cause its officers,
directors, agents, employees and representatives to assign, to the Licensor
the entire right, title and interest in and to any and all inventions, trade
secrets, improvements, plans and specifications (i) which the Contractor, or
its officers, directors, agents, employees or representatives, alone or in
conjunction with others, may make, conceive or develop during the Term; and
(ii) which constitute or derive from the Subject Matter. The Contractor
further agrees that it will promptly disclose, and cause its officers,
directors, agents, employees and representatives promptly to disclose, fully
to the Licensor the aforesaid inventions, trade secrets, improvements, plans
<PAGE>
and specifications and will at any time render, and cause its officers,
directors, agents, employees and representatives to render, to the Licensor
such cooperation and assistance (excluding financial assistance) as the
latter may reasonably deem to be advisable in order to obtain copyrights or
patents, as the case may be, on or otherwise perfect or defend the Licensor's
rights in each such invention, trade secret, improvement, plan or
specification, including, but not limited to, the execution of any and all
applications for copyrights or patents, assignments of copyrights or patents
and other instruments in writing which the Licensor, its officers or
attorneys may deem necessary or desirable, and the aforesaid obligation shall
be binding on the assigns, executors, administrators and other legal
representatives of the Contractor.
(b) Without prejudice to any right or remedy available to the
Contractor against third parties, which shall be exercised in consultation
with and subject to the Licensor's approval, which approval shall not
unreasonably be withheld, the Contractor hereby constitutes and appoints the
Licensor the attorney for the Contractor, with full power of substitution,
for it and in its name and stead or otherwise, but at the sole expense and on
behalf of and for the benefit of the Licensor, to institute and prosecute
from time to time, any proceedings at law, in equity or otherwise, that the
Licensor may deem proper in order to assert or enforce any claim, right or
title of any kind in and to the inventions, trade secrets and improvements
described under paragraph (a) immediately preceding, to defend and compromise
any and all actions, suits or proceedings in respect of any said inventions,
trade secrets and improvements, and generally to do any and all such acts and
things in relation thereto as the Licensor shall deem advisable, including,
but not limited to, the execution of any and all applications, assignments
and instruments contemplated under such paragraph. The Contractor declares
that the appointment hereby made and the powers hereby granted are coupled
with an interest and shall be irrevocable by the undersigned.
(c) The Licensor hereby agrees that, during the Term, it shall be
obliged to disseminate at no charge to all of its licensees, for their mutual
benefit to be used subject to the terms of their respective license
agreements, such of its inventions, trade secrets, plans, specification,
improvements or modifications which are necessary to utilize the System.
5.03 Secrecy.
Each Receiving Party shall, and shall instruct all of its officers,
directors, employees, agents or representatives to, hold in absolute secrecy
and treat confidentially all Confidential Material of a Disclosing Party, and
not disclose, reproduce, publish, distribute or by any other means
disseminate, in whole or in part, any such Confidential Material, except as
shall be specifically necessary for the Receiving Party to disclose such
Confidential Material to its employees in order to exercise its rights under
this Agreement. Neither the Receiving Party nor any of its employees, agents
or representatives may in any manner use for its benefit or for the benefit
of others any such Confidential Material except as shall be specifically
necessary for the Receiving Party to exercise its rights authorized under
this Agreement.
5.04 Remedies.
(a) Without in any manner limiting the obligation of either party to
cause its officers, directors, agents, employees and representatives to
comply with the provisions of Section 5.02 and 5.03 hereof, as applicable,
each party shall cause each of its officers, directors and key employees to
execute an agreement in a form prescribed by Licensor and, except as set
forth in the next succeeding sentence, all other employees which have access
to Confidential Material or information constituting or derived from the
Subject Matter to execute an agreement in any form prescribed by Licensor.
<PAGE>
(b) In view of the irreparable harm and damage which would be incurred
by a party in the event of any violation by the other party or any of its
officers, directors, employees, agents or representatives of any of the
provisions of Sections 5.02 or 5.03 hereof, as applicable, each party hereby
consents and agrees that, if it or any of its officers, directors, employees,
agents or representatives violate any such provision, the other party shall
be entitled to an injunction or similar equitable relief to be issued by any
court of competent jurisdiction restraining the said party and its employees,
agents and representatives from committing or continuing any such violation.
(c) The provisions of Sections 5.02 and 5.03 and 5.04 shall, in
accordance with their respective terms, survive the Term and this Agreement,
notwithstanding any termination or expiration thereof. Without limiting the
generality of any other provision hereof, each party shall enforce the
provisions of such sections insofar as they relate to its employees, agents
and representatives; provided, however, that neither party shall be liable
for the acts of its employees, agents and representatives which are not
within the scope of their employment.
ARTICLE VI - TERMINATION
6.01 Termination by Contractor.
The Contractor may terminate this Agreement at any time by service of
written notice to such effect on the Licensor 30 days in advance of the
effective date thereof and by complying with the applicable terms and
conditions of this Article VI. During such period after notice but prior to
actual termination, the Contractor shall not bid or accept any additional
jobs (except those outstanding bids with bid bonds that have not been
awarded) which will require the utilization of the Subject Matter from the
Licensor under the Patent Rights or the Know-How without the written consent
of the Licensor, which consent shall not unreasonably be withheld.
6.02 Termination by Licensor.
(a) This Agreement and the rights of the Contractor hereunder may be
terminated by the Licensor in the event the Contractor:
(i) becomes insolvent or a petition in bankruptcy is filed by
or against the Contractor and not removed within 20 days thereafter, or
a receiver is appointed for the Contractor; or
(ii) utilizes the Subject Matter in any application outside of
the Permitted Uses; or
(iii) fails to achieve the Performance Objectives described in
Section 4.03 hereof in a particular Contract Year, without any excuse
provided by this agreement;
(iv) fails to pay when validly due any sum owed to the Licensor
or any of its Affiliates arising from or in connection with this
Agreement and such failure shall continue for a period of 30 days after
written notice the Licensor to the Contractor; or
(v) fails to perform any other material term or condition of
this Agreement and fails to correct the same within 30 days after
written notice from the Licensor to the Contractor, or if not
reasonably capable of correction within such period, fails to commence
such correction within such period and thereafter fails to diligently
proceed to make such correction; or
(vi) fails to submit and deliver to the Licensor any written
report required under paragraph (a) of Section 3.05 hereof when due and
such failure shall continue for a period of 30 days after written
notice from the Licensor to the Contractor.
(b) In the event the Contractor fails to pay the License Fee or any
cross-over payment in accordance with Article III hereof, or fails to provide
any written report required under paragraph (b) of Section 3.05 hereof in
accordance with such provision and, in the case of the first such breach in
<PAGE>
any calendar year, such failure shall continue for a period of 30 days after
written notice from the Licensor to the Contractor, then in any such event,
this Agreement shall automatically terminate.
(c) No termination under this Section 6.02 shall limit or affect any
other right or remedy of the Licensor, including the right to damages
resulting from the Contractor's breach.
6.03 Consequences of Expiration or Termination.
(a) Upon expiration or termination of this Agreement, the Contractor
shall promptly pay the Licensor all amounts then due under this Agreement,
terminate all use by it of any service mark, tradenames, trademark,
certification mark or corporate name that includes any of the forgoing words;
avoid all subsequent use of all service marks, tradenames, trademarks,
certification marks or corporate names likely to be confused with ULTRALINER
as well as all stationery, invoices, signs or other visual devices displaying
or otherwise associated with ULTRALINER; terminate all use of the Subject
Matter and the Licensor's Confidential Material, as well as the use and sale
of any products under any Patent Rights or Copyrights or the Know-how; and
assign to the Licensor free of charge, any and all rights and claims to any
and all rights arising from the use of ULTRALINER, or any combination
involving ULTRALINER, the above mentioned Corporate rights in the Territory;
and return to the Licensor all Confidential Material in its possession, and
any copies which it has made of the same. Following termination, the
Contractor shall continue to be obligated to provide all after sales services
for which it has theretofore contracted, including the honoring of all
contract warranties. Should the Contractor fail to fulfill such obligations,
and should the Licensor, in its reasonable discretion after notice to the
Contractor, whether for reason of preserving product goodwill or otherwise,
choose to perform any such obligations (this paragraph in no way to be
construed as an assumption by the Licensor of any obligations for which it is
not specifically contractually responsible), then the Contractor shall
promptly reimburse the Licensor the reasonable charges issued by the Licensor
to the Contractor of performing such obligations of the Contractor. If the
Contractor is a corporation having the word ULTRALINER as a part of its
corporate name, the Contractor shall, within 60 days of termination, amend
its corporate name to remove the word ULTRALINER therefrom.
(b) Each party hereto shall promptly pay to the other party all
damages, costs and expenses, including reasonable attorney's fees, incurred
by such other party by reason of default on the part of such party hereto,
whether or not such default occurred prior to or subsequent to the
termination or expiration of this Agreement, and said sum shall include all
costs and expenses, including reasonable attorney's fees, incurred by such
other non-defaulting party in obtaining injunctive or other relief to enforce
the provisions of this Agreement. Notwithstanding the foregoing, in any
dispute under this agreement, the ultimate prevailing party shall be entitled
to recover from the other party its reasonable attorney's fees. No right or
remedy herein conferred upon or reserved to either party is exclusive of any
other right or remedy herein or by law or equity provided or permitted; but
each shall be cumulative of every right or remedy given hereunder. In
addition to whatever remedy or remedies a party may have by way of damages
for violation of the provisions of this Agreement and/or expiration or
termination of the same, such party shall also have the right to injunctive
relief to enforce the provisions of this Agreement.
(c) In the event of the termination of this Agreement by the Licensor
or Contractor as a consequence of any event described under sub-paragraphs
(i), (iii), or (iv) or Paragraph (a) of Section 6.02 or 6.01 hereof, the
Licensor shall thereafter assist the Contractor in disposing of any Materials
or Apparatus then in the possession of the Contractor, including but not
limited to the sale of excess inventory to other qualified Licensees, subject
in such case to the constraints of the Licensor's business and its other
obligations.
<PAGE>
(d) Licensor shall supply to the Contractor, at the current rates and
prices, any and all materials or apparatus Contractor may need to complete
any outstanding projects or projects that may have been bid prior to the
termination, but not awarded, and a bid bond was provided by the Contractor,
provided the Contractor is not in default of any provision of Section 6.02.
ARTICLE VII - WARRANTIES; INDEMNIFICATION
7.01 Limited Subject Matter Warranty
(a) The Licensor represents and warrants that the Product can
successfully rehabilitate many types of sewer (sewerage and storm) and water
pipelines within the Permitted Uses when installation is properly performed.
Every reasonable precaution will be taken by the Licensor in compiling all
data, and offering instructions in the methods of use of the Product
purchased from the Licensor for operation hereunder, to assure compliance
with the Licensor's exacting standards and that the use of the Subject Matter
for the Permitted Uses in accordance with the terms and conditions of the
Agreement maintains a high standard of quality. To the best of the
Licensor's knowledge, all information given will be correct in all material
respects. However, it is impossible to anticipate every possible variation
in the manner of use or the conditions under which the Contractor will apply
the Product and Licensor makes no warranty or representation of results which
the Contractor will attain, and, except as stated above, shall under no
circumstances be held responsible for any such results that occur as a
consequence of a departure from the instructions provided by the Licensor or
from negligence or malfeasance on the part of the Contractor.
(b) Licensor does warrant that the Product will comply with Licensor's
standard specifications and will perform in the Permitted Uses as described
herein and for a period of one year, or as may be required by customers for a
particular project, from the date of sale will not fail in the performance in
such uses on account of manufacturing defects. In the event of any such
failure, the liability of the Licensor shall be limited to the replacement of
the product that has failed.
THE FOREGOING WARRANTY IS IN LIEU OF AND EXCLUDES ALL OTHER WARRANTIES
NOT EXPRESSLY SET FORTH HEREIN, WHETHER EXPRESSED OR IMPLIED BY OPERATION OF
LAW OR OTHERWISE, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OF
FITNESS FOR ANY PURPOSE OTHER THAN AS IS CONTEMPLATED BY THIS AGREEMENT.
LICENSOR SHALL NOT BE LIABLE FOR EXEMPLARY, PUNITIVE, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF
PROFITS OR REVENUES, LOSS OF USE OF GOODS OR EQUIPMENT, DAMAGE TO PROPERTY,
COST OF CAPITAL, COST OF SUBSTITUTION OF GOODS OR COVER, LIQUIDATED DAMAGES,
CLAIMS BY PURCHASERS FROM CONTRACTOR. LICENSOR'S LIABILITY TO CONTRACTOR IS
LIMITED TO REPLACEMENT OF GOODS NOT COMPLYING WITH THE AGREEMENT, OR, AT
LICENSOR'S ELECTION, TO THE REFUNDING OR CREDITING OF THE PRICE PAID FOR THE
GOODS, WHETHER THE CLAIM ASSERTED IS IN CONTRACT OR TORT.
The Licensor makes no representation nor warranty that ULTRALINER PVC
ALLOY (Trademark) or ULTRALINER PVC ALLOY PIPELINER (Trademark) or ULTRALINER
PVC ALLOY PIPELINER SYSTEM (Trademark) is available for use as a service
mark, tradename, trademark, and/or certificate mark in the United States.
Further, except as expressly set forth in this Article VII, the
Licensor shall not be held responsible for use by the Contractor of any
Product, Materials, Apparatus, Know-how, Patents Rights or Confidential
Material in such manner as to infringe any patent, trademark or copyright
owned by another. The Licensor warrants that it has rights to the patents
pertaining to the Materials subject to no lien, encumbrance or charge
whatsoever.
<PAGE>
7.02 Forbearance by Contractor.
The Contractor expressly covenants that during the Term and after the
expiration or termination thereof, the Contractor shall not, directly or in-
directly, contest or aid in contesting the validity, or the ownership or
licensing by the Licensor, of the Subject Matter, the Know-how, any Patent
Rights and any Copyrights, as well as any trademarks, service marks, trade
names, and copyrights described under Section 2.02, or the limitation of the
Contractor's right with respect to the Subject Matter by the terms and
provisions of this Agreement. The Contractor agrees promptly to notify the
Licensor of any claim, demand, suit or litigation based upon or arising from,
or of any attempt by any other person, firm or corporation, to use the
Subject Matter, the Know-how, the Patent Rights, any Copyrights or any such
other service and/or trademarks, tarde names, copyrights licenses hereunder
without the consent of the Licensor, or any other Confidential Material or
trademark, servicemark, symbol, trade name, copyright or variation thereof,
in which the Licensor has a proprietary interest. The Contractor agrees also
promptly to notify the Licensor of any material litigation instituted by the
Contractor, or by any person, firm, corporation or governmental agency
against the Contractor. In the event the Licensor, pursuant to the terms of
this Agreement hereinafter set forth, undertakes the defense or prosecution
of any litigation except in the case of the Contractor, the Contractor agrees
to execute any and all documents and do such acts and things which may, in
the opinion of counsel for the Licensor, be necessary or of assistance to
carry out such defense or prosecution, either in the name of the Licensor or
in the name of the Contractor, as the Licensor shall elect and to cooperate
with the Licensor in its efforts to protect the Copyrights, as well as any
trademarks, service marks, trade names, and copyrights described under
Section 2.02.
7.03 Defense of Patent Rights and Trademarks.
Notwithstanding any other provision herein, the Licensor does hereby
agree, at its expense, to defend Patent Rights, if any, and the servicemarks
and trademarks herein described by such means as it in its sole discretion
may determine appropriate, including but not limited to, patent or trademark
infringement suits, as the case may be.
The Licensor reserves, however, the exclusive right to determine
whether a patent infringement has occurred, and whether a trademark
infringement has occurred, and whether litigation or other action is
appropriate or feasible. Subject to approval by the Licensor and control by
the Licensor of any and all proceedings initiated as a result thereof, the
Contractor, with its own counsel reasonably acceptable to the Licensor, may,
at its option and expense, take steps to defend the Patent Rights, any
service mark or trademark and the Contractor's rights thereunder.
7.04 Indemnification by Contractor.
The Contractor agrees to indemnify, defend and hold the Licensor
harmless from any and all claims, including, without limitation, for bodily
injury (including death), personal injury and damage to property of the
Contractor, the Licensor and/or others, which arise from the alleged
negligence or malfeasance of the Contractor or from the existence or use of
Materials and/or Apparatus acquired from sources other than the Licensor or
which are produced by the Contractor.
ARTICLE VIII - LIMITED ARBITRATION PROCEDURES
8.00 Limited Arbitration Procedures.
Any controversy or claim arising out of or relating to the subject
matter of this contract, or the breach thereof, shall be submitted to
arbitration in accordance with the rules of the American Arbitration
Association, and the results thereof shall be binding on the parties.
<PAGE>
ARTICLE IX - INDEPENDENT CONTRACTORS
9.00 Independent Contractors.
This Agreement does not constitute either party as an agent, legal
representative, joint venturer, partner, employee, or servant of the other
party for any purpose whatsoever; and it is understood between the parties
hereto that each party is an independent contractor and is in no way
authorized to make any contract, agreement, warranty or representation on
behalf of the other party, or to create any obligation, express or implied,
on behalf of the other party. The Contractor shall prominently display in
its place of business a certificate from the Licensor stating that said
business is operated by the Contractor as a licensee of the Licensor, and not
as an agent thereof.
ARTICLE X - TRANSFER OR ASSIGNMENT OF LICENSE.
10.00 Transfer or Assignment of License.
Subject to the requirements of the immediately succeeding sentence, the
Contractor, if not in default under this Agreement, shall have the right to
sell and assign its rights hereunder.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, with the specific
understanding and requirement that the Contractor, without the Licensor's
prior written consent, which consent shall not unreasonably be withheld,
shall not, by operation of law or otherwise, sell, assign, transfer, convey,
subcontract, give away, or encumber to any person, firm or corporation, its
interest in this Agreement, or its interest in the license granted hereby,
nor offer, permit, or suffer the same. Any such assignment permitted by the
Licensor to any Affiliate of the Contractor shall be made on the express
condition that the assignor guarantees the performance of its assignee
strictly in accordance with the terms and provisions hereof. In the event
that the Contractor is a corporation or partnership, should beneficial
ownership of an amount of the outstanding capital stock or other interest, as
the case may be, or other indicia of ownership in the Contractor be conveyed
so as to effect a Change in Control of the Contractor, whether by sale,
conveyance, operation of law or otherwise, without have first obtained the
written consent of the Licensor to transfer the license, which consent shall
not unreasonably be withheld, the Licensor shall at its option have the right
to immediately terminate this Agreement or enter into a new Agreement with
the Change in Control. Any purported assignment, transfer, conveyance or
subcontract of this Agreement not having the aforesaid consent shall be null
and void and shall constitute a material default hereunder. If any event has
occurred or fact or circumstance exists which, but for the giving of notice
passage of time or otherwise, would constitute a default hereunder, the
Contractor shall so advise any proposed transferee hereunder.
Upon approval of any assignment, transfer, or conveyance of the
Agreement by the Licensor, the assignment, transfer, or conveyance shall be
completed without additional License fees or other costs being assessed to
the Contractor.
ARTICLE XI - MISCELLANEOUS
11.01 Notices.
Any notice required or permitted to be given or served upon either
party hereto pursuant to this Agreement shall be sufficiently given or served
if sent to such party by United States registered mail, postage prepaid
addressed to such party as set forth below is signature at the foot hereof
and/or to such other address as it shall designate by written notice to the
other party.
<PAGE>
11.02 Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, subject to the
terms set out in Article X.
11.03 Exclusivity of License.
If, despite the Licensor's efforts to maintain the exclusivity of the
license granted hereunder, such exclusivity should be terminated for any
reason whatsoever, and the Agreement is continued, but amended, the
Contractor is nevertheless obligated to comply in full with each and every
term and condition of this Agreement, including but not limited to, the
maintenance of high standards of quality and service.
11.04 Exclusions.
It is the intention of the Licensor and the Contractor that the
provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of each jurisdiction in which
enforcement is sought, but that the unenforceability of any provisions of
this Agreement shall not render unenforceable, or impair, the remainder of
this Agreement. In the event that any one or more of the provisions of this
Agreement is, or are, held to be invalid, it is agreed between the parties
that, if legally practical said provision or provisions shall be considered
never to have been contained herein and this Agreement shall otherwise
continue in force and effect. To the extent that the provisions of this
Agreement provide for periods of notice less than those required by
applicable law, or provide for termination, cancellation, non-renewal or the
like other than in accordance with applicable law, such provisions shall, to
the extent such are not in accordance with applicable law, not be effective,
and the Licensor shall comply with applicable law in connection with each of
these matters. References in this Agreement to the materiality of any terms
hereof are not intended to be exhaustive of all such material terms, and
shall not preclude any other provision from construction as or constituting a
material provision hereof.
11.05 Entire Agreement.
This Agreement constitutes the entire agreement between the parties
hereto with respect to the Subject Matter hereof and supersedes all prior
oral and written understandings and agreements between the parties hereto
concerning the Subject Matter. The article headings of this Agreement are
for convenience only and have no other significance. The Provisions of this
Agreement shall not be waived, modified or amended, except by a subsequent
writing signed by both parties.
11.06 Gender.
Words of the neuter gender utilized in this Agreement shall be deemed
to be of the masculine or feminine gender where the context requires. Words
of the singular number utilized in this Agreement shall be deemed to be
plural where the context requires and vice versa.
11.07 Applicable Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Alabama.
11.08 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed as original and both of which or a photocopy thereof shall constitute
one and the same agreement.
11.09 Standard of Dealing.
The parties shall perform such further acts and deeds as shall be
necessary to effectuate the purposes of this Agreement and shall, in their
respective performance hereunder, at all times deal in the utmost good faith
with each other.
<PAGE>
11.10 Most Favored Licensee.
In the event the Licensor subsequently enters into any license
agreement for the Subject Matter in the Permitted Uses within the United
States or its territories, and such license contains terms materially more
favorable to the licensee thereunder than are contained herein with respect
to the Contractor, then, at the option of the Contractor, this agreement
shall be amended to incorporate such more favorable terms.
IN WITNESS HEREOF, THE PARTIES HERETO HAVE CAUSED THIS CONTRACTOR LICENSE
AGREEMENT TO BE SIGNED AND DELIVERED BY THEIR AUTHORIZED REPRESENTATIVES ON
THE DATE SET OUT IN THE OPENING PARAGRAPH.
ATTEST: ETS WATER AND WASTE
MANAGEMENT, INC., dba
STAMIE E. LYTTLE COMPANY
By: s/Navin D. Smith By: s/Coleman S. Lyttle
---------------------- ------------------------
Navin D. Smith Coleman S. Lyttle
Its: Exec. V. P. Its: President
---------------------- -----------------------
ATTEST: ULTRALINER, INC.
By: By:
-------------------- ---------------------------
Richard H. Cater Luther D. Whittle
Its: Its:
-------------------- ---------------------------
Secretary President
STATE OF VIRGINIA
CITY OF RICHMOND
I, the undersigned Notary Public, do hereby certify that on this 5th day of
February, 1996, personally appeared before me Coleman S. Lyttle who, being by
me first duly sworn, declared that he is the President, that he signed the
foregoing CONTRACTOR LICENSE AGREEMENT as President of ETS Water and Waste
Management, Inc., dba Stamie E. Lyttle Co., and with full authority, executed
same voluntarily for and as the act of said Corporation.
s/Verna L. Wells
--------------------------
Notary Public
(SEAL) My Commission Expires: May 31, 1997
<PAGE>
STATE OF ALABAMA
CALHOUN COUNTY
I, the undersigned Notary Public, do hereby certify that on this day
of , 199 , personally appeared before me, Luther D. Whittle
and Richard H. Cater, who, being by me first duly sworn, declared that they
are the President and Secretary of ULTRALINER, Inc., that they signed the
foregoing CONTRACTOR LICENSE AGREEMENT as President and Secretary of the
corporation, and with full authority, executed same voluntarily for and as
the act of said Corporation.
--------------------------------
Notary Public
(SEAL) My Commission Expires:
---------
<PAGE>
ADDENDUM TO
CONTRACTOR LICENSE AGREEMENT
THIS ADDENDUM TO CONTRACTOR LICENSE AGREEMENT is made and entered into as of
the date set out at the foot hereof, by and between ULTRALINER, INC.
(Licensor), and ETS WATER and WASTE MANAGEMENT, INC., dba STAMIE E. LYTTLE
COMPANY (Contractor).
RECITALS
1. The parties hereto have entered into a CONTRACTOR LICENSE AGREEMENT of
even date herewith, which is hereinafter described by the term "Agreement".
2. The parties have agreed to modify certain of the terms and conditions of
the Agreement and desire to memorialize those changes in writing.
3. For the consideration described in the Agreement and in the following
provisions, the parties hereto do enter into this ADDENDUM TO CONTRACTOR
LICENSE AGREEMENT.
AMENDMENTS AND ADDITIONAL TERMS AND CONDITIONS
1. Section 1.20 is amended to add as additional Permitted Uses, the repair,
rehabilitation, or reconstruction of liquid carrying conduits and/or other
use to which the Licensor and Contractor might agree.
2. Section 1.28 is amended to change the term of the Agreement from three
years to five years.
3. Section 2.04(b) is amended to read as follows, italics indicating the
added or amended language:
(b) The Contractor is granted the right to extend the termination date
for five years provided that the Contractor is not in default on any of
its obligations to Licensor under the terms hereof or otherwise created
and the financial condition of the Contractor, as interpreted in good
faith by the Licensor under the Contract and as is indicated by
Contractor's then current bonding capacity, is adequate to allow
Contractor to perform its obligations hereunder during the extended
term.
4. Section 4.05 is amended to read as follows, italics indicating amended or
added language:
4.05. Insurance. The Contractor agrees to procure at its expense, a
policy or policies of insurance from an insurance company or companies
reasonably satisfactory to the Licensor, providing coverage for the
operations of the Contractor, including product and completed
operations, with amounts not less than $1,000,000 single limit
liability for injury to persons and damage to property. The Contractor
also agrees to have the Licensor named as an additional named insured
under the above described policy or policies and to cause the Licensor
to be furnished with a Certificate of Insurance which shall contain a
requirement that the Licensor be notified 30 days prior to any
cancellation or any reduction in coverage or limits. The insurance
required above shall commence prior to the time the Contractor
commences operations under this Agreement and shall continue in force
<PAGE>
throughout the Term. This requirement may be satisfied in part by any
insurance procured by Contractor in compliance with its contract with
the owner of any project that utilizes Product.
5. Section 6.01 is amended to reduce the time for prior notice of
termination by the Contractor from 180 days to 30 days.
6. The terms of this ADDENDUM TO CONTRACTOR LICENSE AGREEMENT are to be
effective as of the effective date of the CONTRACTOR LICENSE AGREEMENT.
7. All terms and conditions of the CONTRACTOR LICENSE AGREEMENT that are not
specifically amended herein, remain in full force and effect.
IN WITNESS HEREOF, ULTRALINER, INC. and ETS WATER AND WASTE MANAGEMENT, INC.,
dba STAMIE E. LYTTLE COMPANY have caused this ADDENDUM TO CONTRACTOR LICENSE
AGREEMENT to be executed and deliver by their authorized representatives on
the 31st day of January, 1996.
WITNESS: ULTRALINER, INC.
BY
- ---------------------- -------------------------------
LUTHER D. WHITTLE, ITS PRESIDENT
WITNESS: ETS WATER AND WASTE MANAGEMENT, INC.
dba STAMIE E. LYTTLE COMPANY
s/Donna J. Eatsey BY s/Coleman S. Lyttle
- ---------------------- --------------------------------
Coleman S. Lyttle
ITS President
-------------------------
<PAGE>
ETS INTERNATIONAL, INC.
----------------------------------------------------------------
1998
ANNUAL
REPORT
TO
SHAREHOLDERS
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225 - (804) 272-6600
<PAGE>
1998 ANNUAL REPORT
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
Message to Shareholders......................................................1
Company Profile..............................................................3
Market Information...........................................................4
Selected Financial Data......................................................5
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................5
Independent Auditors' Report................................................11
Consolidated Balance Sheets.................................................12
Consolidated Statements of Income (Loss)....................................14
Consolidated Statements of Stockholders' Equity (Deficit)...................15
Consolidated Statements of Cash Flows.......................................16
Notes to Consolidated Financial Statements..................................18
Directors and Officers......................................................40
Shareholder Information....................................................41
FORWARD LOOKING STATEMENTS
This Annual Report includes certain forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products and similar matters. None of the
Company's statements about the future are guarantees of future results or
outcomes. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for such 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 could significantly
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (i) changes in
legislative enforcement and direction; (ii) unusually bad or extreme weather
conditions; (iii) unanticipated delays in contract execution; (iv) project
delays or changes in project costs; (v) unanticipated changes in operating
expenses and capital expenditures; (vi) sudden loss of key personnel; (vii)
abrupt changes in competition or the political or economic climate; and (viii)
abrupt changes in market opportunities.
<PAGE>
MESSAGE TO SHAREHOLDERS
Dear Shareholders:
ETS International ("ETSI") had a very difficult fiscal 1998 and is
capital deficient. This was a result primarily of its investing heavily in an
attempt to commercialize the patented Limestone Emission Control ("LEC") system
on an international level and failing to raise additional funds with which to go
forward in a weak environmental marketplace. By mid-year, it was clear that the
environmental technology development strategy pursued by your Company was no
longer viable. The financial position has deteriorated to the point that ETSI
common stock was delisted from trading on the American Stock Exchange in March
1998 and the future continued operation of your Company is at risk. From a
financial perspective, fiscal year 1998, ended two months early on March 31,
produced $12,644,431 in revenues and a net loss of $4,807,351, or $0.31 per
share. The losses were attributable primarily to write-offs associated with
ETSI's environmental subsidiaries and, to a lesser extent, the impact of
weather-related delays on construction projects. The losses resulted in negative
working capital of $3,069,250, which placed your Company in default on its
borrowings. Further, it is possible that a contract to build three LEC units on
behalf of China Steel Corporation ("CSC") at its facility in Taiwan, was
under-priced and could have a very negative impact on ETSI going forward.
I agreed to join your Company as President and Chief Executive Officer
on January 20, 1998. I subsequently became Chairman upon the resignation of John
McKenna on February 2, 1998. I accepted the challenges by way of a six-month
contract with the commitment to attempt to stabilize the financial condition of
ETSI, sell off unprofitable businesses and develop a strategy for the future,
intended to enhance shareholder value.
In that regard, the following steps have been taken:
o arrangements were successfully made for your Company's
common stock to trade on the OTC Bulletin Board under the
symbol "ETSI";
o your Company has adopted a newly disciplined and singular
focus on the installation and rehabilitation of subsurface
pipelines for the transmission of water, waste and natural
gas;
o all remaining environmental subsidiary assets (including
patents) and certain liabilities were transferred in March
1998 to a new company, formed by John McKenna and other
former Company executives, for approximately $1,900,000 plus
fifty percent of any future royalties associated with the
LEC. ETSI has as yet not been able to successfully transfer
the contract with CSC, but entered into an agreement with
another company formed by the former executives to manage
the CSC Contract and assume responsibility for any
liabilities associated with the CSC Contract. Still, in the
event this new company defaults on its obligations, CSC
could hold your Company liable. Negotiations are presently
underway with CSC seeking transfer of the CSC Contract in
its entirety to the new company. There can be no assurance
that these negotiations will be successful. ETSI's
environmental laboratory subsidiary's assets were sold in
October 1997 in exchange for a $1,000,000 promissory note,
which is secured by the buyer's stock and the purchased
equipment;
o in an effort to reduce future overhead costs, your Company
closed its Roanoke corporate headquarters office, terminated
certain corporate executive positions and consolidated its
operations in Richmond, Virginia, where ETSI's construction
subsidiary is based;
o your Company's Richmond, Virginia-based construction
subsidiary sold its septic and plumbing services division in
April 1998 for $700,000, consisting of cash, a promissory
note and the assumption of certain liabilities. The
construction subsidiary has since been awarded the largest
1
<PAGE>
contract in its history for approximately $4,000,000 for
pipeline work to be performed on behalf of the City of
Petersburg, Virginia. In addition, Motorola Corporation
awarded the subsidiary a contract to perform approximately
$1,000,000 of pipeline work, and the subsidiary's authorized
backlog was approximately $12,000,000 at May 31, 1998;
o your Company's debt financing was restructured with its
primary lender with the annual interest rate reduced to ten
percent, and attempts to obtain new debt and equity
financing are underway. Management is negotiating with
certain promissory note holders to convert debt of
approximately $4,000,000 to preferred stock and to obtain a
line of credit from a bank. Management's success in these
regards will, to a large extent, depend upon whether ETSI is
able to accomplish the transfer of the CSC Contract to a
third party, of which there can be no assurance; and
o an independent Management Advisory Committee (the "MAC") was
created with retired Chief of Naval Operations, Admiral Elmo
R. Zumwalt, Jr., being the first to join and serve as its
Chairman. Other advisors slated to join the MAC (contingent
upon ETSI being re-capitalized as described above) include Mr.
Charles Bowsher, recently retired Controller General of the
United States General Accounting Office; and Mr. Charles
DiBona, recently retired President of the American Petroleum
Institute. Additional advisors will be recruited to join the
MAC and provide the seasoned guidance helpful in defining and
achieving your Company's goals.
While there are no guarantees, management is working to stabilize and
expand ETSI's existing infrastructure-related operations in Virginia and further
expand operations to adjacent southeastern states. ETSI's small eighteen-month
old Florida subsidiary, which deploys trenchless technologies for pipeline
rehabilitation, continues to lose money and is being closely monitored. If
profitability is not achieved by the Florida subsidiary relatively soon, it may
be divested. Expansion via mergers with profitable companies performing
compatible operations throughout the United States and sharing the goal of
becoming a consolidated industry leader in the installation and rehabilitation
of subsurface pipelines for the transmission of water, waste and natural gas,
would be a natural progression for ETSI. These opportunities will be carefully
evaluated if they arise.
I believe that a new name for your Company will better reflect its
focus on the delivery of infrastructure- related pipeline installation and
rehabilitation services and deployment of trenchless technologies. I urge you to
approve management's request to change your Company's name from ETSI to
"InfraCorps Inc."
Management has considerable work ahead and success cannot be assured.
In the near term, we intend to focus attention on the further restructuring of
your Company's Board of Directors, attempting to strengthen the management team
with senior-level executives who possess construction industry experience, and
implementing cost reductions in ETSI's operations and corporate activities. In
addition, we will be pursuing strategic opportunities that would help stabilize
and strengthen your Company's core business as outlined in this report.
I will keep you informed of our progress during this next fiscal year.
I am cautiously optimistic that we can secure a stable financial base for your
Company with the goals of increasing shareholder value and providing a platform
for future profitable growth. Your continued support and patience will be
greatly appreciated.
Sincerely,
s/James B. Quarles
James B. Quarles
Chairman and President
June 1998
2
<PAGE>
COMPANY PROFILE
ETS International, Inc. ("ETSI"), a Virginia corporation formed in
1987, is a technology-based firm that historically has provided both
environmental and construction products and services. During the second half of
fiscal 1998, ETSI made a determination to focus on its construction lines of
business and to de-emphasize its environmental products and services.
Specifically, ETSI is directing its efforts to the development and growth of its
existing underground infrastructure products and services related to the
installation and rehabilitation of subsurface pipelines using trenchless
technologies. Trenchless technology involves the installation and rehabilitation
of underground pipelines with minimal surface disruption. Some of the methods
used are pipe relining, manhole construction and "pipe bursting."
As part of its refocusing effort, ETSI undertook a major management
reorganization, sold substantially all of the assets of its two environmental
related subsidiaries, relocated its corporate headquarters to Richmond,
Virginia, where ETSI's construction subsidiary is based, changed the names of
certain of its subsidiaries to reflect ETSI's emphasis on infrastructure and,
subject to shareholder approval, intends to change the name of ETSI to
InfraCorps Inc. ETSI also changed its fiscal year-end from May 31 to March 31.
ETSI operates its infrastructure business through two wholly-owned
affiliates: InfraCorps of Virginia, Inc. (formerly ETS Water and Waste
Management, Inc.) ("ETSW") and InfraCorps of Florida, Inc. (formerly ETS Liner,
Inc.) ("ETSL"), a subsidiary of ETSW. In connection with its restructuring, ETSI
during fiscal 1998 sold substantially all of the assets of IC Subsidiary, Inc.
(formerly ETS, Inc.) ("ETS") and ETS Analytical Services, Inc. ("ETSAS"), as
described below. As a result of these sales, neither ETS nor ETSAS, which are
wholly-owned subsidiaries of ETSI, currently is engaged in active business
operations.
On March 6, 1998, the common stock of ETSI was delisted from the
Emerging Company Marketplace (the "EMC") of the American Stock Exchange
("AMEX"). This action became necessary because ETSI was unable to achieve
compliance with the EMC's financial guidelines for continued listing. The common
stock of ETSI presently is quoted on the OTC Bulletin Board under the symbol
ETSI.
InfraCorps of Virginia, Inc. (formerly ETS Water and Waste Management,
Inc.) ("ETSW"), a Virginia corporation headquartered in Richmond, Virginia, is
ETSI's construction subsidiary. ETSW was formed as a result of ETSI's
acquisition on June 1, 1994, of Stamie E. Lyttle Company, Inc., Lyttle
Utilities, Inc. and LPS Corporation. The three firms, the history of which dates
back to 1947, were consolidated into one corporation, ETSW. ETSW, along with its
subsidiary, InfraCorps of Florida, Inc. (formerly ETS Liner, Inc.) ("ETSL"), a
Virginia corporation headquartered in Orlando, Florida, utilizes trenchless
technologies to install and rehabilitate subsurface pipelines. ETSI's
infrastructure customers include municipalities, government agencies, Fortune
500 companies and developers. ETSW, through its Service Division, also designed
and installed septic and irrigation systems and provided related repair and
maintenance services. As part of ETSI's effort to focus on the infrastructure
business, ETSI, in April 1998, sold the Service Division of ETSW to a new
corporation formed by Coleman S. Lyttle, a director of ETSI and President of
ETSW.
IC Subsidiary, Inc. (formerly ETS, Inc.) ("ETS"), a Virginia
corporation, was ETSI's environmental products and services subsidiary. On March
12, 1998, ETSI completed the sale of substantially all of the assets of ETS to
ETS Acquisition, Inc. In connection with the sale, ETSI sold a portion of its
assets and liabilities relating to the Limestone Emission Control ("LEC")
technology, including patents and licenses, to Christel Clear Technologies, Inc.
("CCTI"). Both ETS Acquisition and CCTI are newly formed entities owned by John
D. McKenna, Arthur B. Nunn, III and John C. Mycock (the "Buyers"), former
executive officers and former directors of ETSI. Related to this transaction,
ETSI also entered into a management agreement with Air Technologies, Inc.
("ATI"), another newly formed entity owned by the Buyers, pursuant to which ATI
provides services with respect to ETSI's contract to supply to China Steel
Corporation sulfur dioxide removal systems utilizing the LEC technology (the
"CSC Contract"). ATI and CCTI have agreed to use their best efforts to have the
CSC Contract assigned without recourse from ETSI to ATI. Negotiations in this
regard are presently underway with China Steel
3
<PAGE>
Corporation. If these negotiations are not successful, ETSI will continue to be
subject to potential liabilities and losses in connection with the environmental
technology being developed in connection with the CSC Contract.
ETS Analytical Services, Inc. ("ETSAS"), a Virginia corporation,
operated as the environmental analytical laboratory subsidiary of ETSI. In
October 1997, ETSI sold substantially all of the assets of ETSAS to Q
Enterprises, Inc., a company owned by James B. Quarles, a former employee and
Senior Vice President of ETSI. Mr. Quarles has since become President and Chief
Executive Officer of ETSI and sold his interest in Q Enterprises, Inc.
ETSI's principal executive offices are located at 7400 Beaufont Springs
Drive, Suite 415, Richmond, Virginia 23225, and its telephone number is (804)
272-6600.
MARKET INFORMATION
Prior to March 6, 1998, the Common Stock of ETSI was listed and
registered on the Emerging Company Marketplace ("EMC") of the American Stock
Exchange ("AMEX") under the symbol "ETS.EC." On March 6, 1998, the Common Stock
of ETSI was delisted from the AMEX-EMC because ETSI was unable to achieve
compliance with the EMC's financial guidelines for continued listing. The Common
Stock of ETSI currently trades in the over-the-counter market and is quoted
under the symbol ETSI on the OTC Bulletin Board, an electronic quotation and
trade reporting service of the National Association of Securities Dealers.
The table below sets forth for each of the fiscal years during ETSI's
last two fiscal years the range of the high and low bid information for ETSI
Common Stock. Such information reflects inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
High Low
---- ---
Fiscal 1997
Quarter ended August 31, 1996...................... $ 1.19 $ 0.69
Quarter ended November 30, 1996.................... $ 1.00 $ 0.69
Quarter ended February 28, 1997.................... $ 1.06 $ 0.63
Quarter ended May 31, 1997......................... $ 0.81 $ 0.50
Fiscal 1998
Quarter ended August 31, 1997...................... $ 0.75 $ 0.75
Quarter ended November 30, 1997.................... $ 0.50 $ 0.50
Quarter ended February 28, 1998.................... $ 0.375 $ 0.375
One month ended March 31, 1998..................... $ 0.125 $ 0.125
On June 12, 1998, the latest bid price for ETSI Common Stock reported
on the OTC Bulletin Board was $.07 per share.
As of March 31, 1998, there were approximately 1,400 holders of record
of ETSI's outstanding Common Stock.
No dividends have been declared or paid by ETSI, and it is anticipated
that for the foreseeable future any profits will be reinvested in the business
of ETSI.
4
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
as of and for the years ended May 31
except for 1998 which is as of and for the 10 month period ended March 31
<CAPTION>
<S> <C>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenue $ 12,644,431 $ 18,518,127 $ 14,042,804 $ 13,172,142 $ 11,541,183
Gross profit 1,965,883 3,120,945 878,772 1,960,245 1,211,856
Operating income (loss) (781,453) 914,997 (1,182,574) 272,210 (519,888)
Income (loss) from continuing
operations (1,536,104) 650,815 (1,370,844) 112,115 (542,434)
Income (loss) from discontinued
operations (1,879,374) (502,380) (627,947) 390,551 (158,958)
Loss on disposal of discontinued
operations (1,391,873) - - - -
Net income (loss) (4,807,351) 148,435 (1,998,791) 502,666 (701,392)
Total assets 8,550,871 12,111,437 9,651,799 9,397,411 7,672,962
Long term debt, net of current portion 907,896 1,063,831 1,260,133 867,817 1,002,234
Total stockholders' equity (deficit) (713,619) 2,969,523 1,305,089 3,068,464 2,436,151
Income (loss) from continuing
operations per common share:
Basic (0.10) 0.05 (0.11) 0.01 (0.05)
Diluted (0.10) 0.05 (0.11) 0.01 (0.05)
Income (loss) from discontinued
operations per common share:
Basic (0.12) (0.04) (0.05) 0.03 (0.01)
Diluted (0.12) (0.04) (0.05) 0.03 (0.01)
Loss on disposal of discontinued
operations per common share:
Basic (0.09) - - - -
Diluted (0.09) - - - -
Net Income (loss) per common share:
Basic (0.31) 0.01 (0.16) 0.04 (0.06)
Diluted (.031) 0.01 (0.16) 0.04 (0.06)
</TABLE>
Total revenue, gross profit, operating income (loss), and income (loss)
from continuing operations includes infrastructure operations, but excludes
environmental operations, which are included in income (loss) from discontinued
operations. Total revenues from the environmental operations were $2,640,195,
$5,607,133, $6,496,457, $6,739,764 and $5,548,926 for the ten-month period ended
March 31, 1998 and years ended May 31, 1997, 1996, 1995 and 1994, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On January 20, 1998, ETSI announced a management reorganization,
pursuant to which James B. Quarles was elected President and Chief Executive
Officer of ETSI and was appointed to its Board of Directors. Navin D. Sheth, the
Chief Operating Officer of ETSW, a wholly owned subsidiary of ETSI, was
appointed Chief Financial Officer of ETSI. John D. McKenna resigned as President
and Chief Executive Officer of ETSI on that date. Further, in connection with
on-going negotiations to purchase substantially all the assets of ETSI's wholly
owned environmental subsidiary, ETS, John D. McKenna, Arthur B. Nunn, III and
John C. Mycock resigned from ETSI's Board of Directors effective February 2,
1998. These resignations were not the result of a disagreement on any
5
<PAGE>
matter relating to ETSI's operations, policies or practices. In light of these
resignations, James B. Quarles was elected Chairman of the Board, in addition to
his position as President and Chief Executive Officer.
The management reorganization reflects ETSI's intention to focus on its
infrastructure lines of business and to de-emphasize its environmental products
and services. New management believes that the environmental services aspect of
ETSI historically has been a break-even business, providing little value to
shareholders, while attempts to commercialize the environmental technologies
aspect of ETSI have been a drain on ETSI's limited capital resources. Management
believes that ETSI should focus on one line of business -- the installation and
rehabilitation of subsurface pipelines for the transmission of water, waste and
natural gas -- and is seeking to position ETSI to take advantage of perceived
growth opportunities within that industry segment. There can, however, be no
assurance that the Company's refocusing efforts will be successful.
ETSI is seeking shareholder approval at its Annual Meeting of
Shareholders, to be held on August 17, 1998, to formally change its name to
InfraCorps Inc. Pending shareholder approval of the formal name change, the
Company has filed a fictitious name certificate to conduct business in Virginia
as InfraCorps Inc. On April 9, 1998, the Company relocated its headquarters to
Richmond, Virginia, where its construction subsidiary, ETSW, is based. Effective
May 22, 1998, ETSI changed the names of its wholly owned subsidiaries, ETSW and
ETS, to InfraCorps of Virginia, Inc. and IC Subsidiary, Inc., respectively. The
name of ETSL was changed to InfraCorps of Florida, Inc. effective May 21, 1998.
On October 31, 1997, ETSI sold substantially all of the assets and
certain liabilities of ETSAS to Q Enterprises, Inc., a company owned by James B.
Quarles, a former employee and Senior Vice President of ETSI. Mr. Quarles has
since become President and Chief Executive Officer of ETSI and sold his interest
in Q Enterprises, Inc. Since the risks of ownership were not transferred to Q
Enterprises, Inc., no sale was recognized for accounting purposes. Accordingly,
the assets and liabilities transferred to Q Enterprises, Inc. are shown in the
noncurrent sections of the balance sheet and are designated as "assets of
business transferred under contractual arrangements" and "liabilities of
business transferred under contractual arrangements." ETSI received an 8.5%
promissory note in the amount of $1,000,000 with payments amortized over 30
years with a balloon payment after 10 years. As payments of principal and
interest are received, they are being recorded as a reduction to "assets of
business transferred under contractual arrangements" until such time as ETSI
determines a sale can be recorded for accounting purposes. At March 31, 1998,
"assets of business transferred under contractual arrangements" of $267,666 are
stated net of a valuation allowance of $858,000. The conversion of these assets
to cash is dependent on the future profitable operations of Q Enterprises, Inc.
A loss on disposal of these discontinued environmental operations of $878,326
was recorded.
On March 6, 1998, ETSI Common Stock was removed from listing and
registration on the AMEX-EMC because ETSI was unable to achieve compliance with
the EMC continued listing guidelines. ETSI's Common Stock currently is quoted on
the OTC Bulletin Board under the symbol ETSI. See "Market Information."
On March 12, 1998, substantially all of the assets of ETS were sold to
ETS Acquisition, Inc., a newly formed firm based in Roanoke, Virginia. In
connection with this sale, ETSI sold a portion of its assets and business
relating to the LEC technology, including patents and licenses, to CCTI, a newly
formed firm based in Roanoke, Virginia. The total purchase price was
approximately $1,896,000 for all of the aforementioned. The purchase price was
paid in cash, stock of ETSI, assumption of certain liabilities of ETS, delivery
of a 30-day note bearing 8 1/2% interest and delivery of a 10-year note bearing
8 1/2% interest, and ETSI will receive 50% of all royalties received by CCTI in
connection with the license of the LEC technology. While there is no indication
that the LEC will be resold by CCTI, the agreement further provides that ETSI
will receive 50% of the net sales price from a resale of the LEC technology on
or before March 12, 1999, and 25% of the net sales price from a resale after
March 12, 1999 but on or before March 12, 2000. A loss on disposal of these
discontinued environmental operations of $513,547 was recorded.
6
<PAGE>
In connection with the foregoing transaction, ETSI entered into a
Management Agreement with ATI, a newly formed firm based in Roanoke, Virginia,
to provide management services with respect to ETSI's contract with China Steel
Corporation. ETS Acquisition, Inc., CCTI and ATI are owned by John D. McKenna,
Arthur B. Nunn, III and John C. Mycock, three former executive officers of ETSI
and former members of ETSI's Board of Directors.
ATI and CCTI have agreed to accept responsibility for any potential
liabilities associated with the CSC Contract and to provide their best efforts
to have the CSC Contract assigned without recourse from ETSI to ATI. However,
although negotiations are underway with China Steel Corporation, ETSI has not
yet been successful in obtaining assignment of the CSC Contract. Accordingly,
ETSI still has potential liability under the CSC Contract which could have a
material negative impact on ETSI's business operations. Potential issues have
been brought to current management's attention regarding the budget to meet
certain of the performance specifications of the CSC Contract and the overall
viability of the LEC technology for wide-scale commercialization. If the LEC
technology does not meet contract specifications, China Steel Corporation may
seek to impose financial penalties or attempt to recover damages or obtain other
relief under the CSC Contract, including drawing down on the $600,000
performance bond posted by ETSI.
Result of Operations
On April 6, 1998, the Board of Directors changed the fiscal year-end of
the Company from May 31 to March 31. Accordingly, the March 31, 1998 operating
results of ETSI are for a ten-month period; therefore the Company will compare
its results of operations for the ten-month period ended March 31, 1998 with its
results of operations for the ten-month period ended March 31, 1997. See Note 16
of Notes to Consolidated Financial Statements for unaudited results of
operations for the ten-month period ended March 31, 1997.
Ten Months Ended March 31, 1998 compared to Ten Months Ended March 31, 1997
Revenues for the ten-month period ended March 31, 1998 were $12,644,431
from continuing infrastructure operations compared to $14,219,865 for the
ten-month period ended March 31, 1997, for a 11% decrease. This decrease mainly
was due to lower billings resulting from the unseasonably wet weather
experienced during the last four months of fiscal 1998.
Cost of goods and services was $10,678,548 or 84.5% of total revenues
for the ten-month period ended March 31, 1998, compared to $11,834,222 or 83.2%
of the total revenues for the same period ended March 31, 1997. Gross profit for
the current ten-month period was $1,965,883 or 15.5% of total revenues compared
to $2,385,643 or 16.8% of total revenues for the ten months ended March 31,
1997. These decreases were due primarily to the unseasonably wet weather, which
increased downtime and the cost of completing projects.
Selling, general and administrative expenses for the ten-month period
ended March 31, 1998 were $2,747,336 or 21.7% of revenues compared to $2,246,981
or 15.8% of revenues for the same period ended March 31, 1997. The increase in
selling, general and administrative expenses primarily was due to higher costs
associated with attempts to increase sales in the "pipe bursting" division and
additional costs incurred to relocate ETSL to Orlando, Florida.
Interest income from certificates of deposits for the ten-month period
ended March 31, 1998 was $19,842 compared to $15,729 for the same period in
1997. Interest expense for the ten-month period ended March 31, 1998 was
$758,566 as compared to $166,856 for the same period last year. The increase is
due to increased loans outstanding of approximately $1.2 million and interest
costs associated with ETSI's convertible debentures. Gain (loss) on sale of
equipment was ($14,264) for the current ten-month period compared to $101,037
for the same period last year.
7
<PAGE>
Loss from continuing operations for the ten-month period ended March
31, 1998 was $1,536,104 compared to profit of $89,299 for the same period last
year. Such loss reflects lower revenues, increased selling, general and
administrative expenses and increased interest expense during fiscal 1998.
Loss from discontinued operations was $1,879,374 for the ten-month
period ended March 31, 1998 compared to $566,793 for the same period in 1997.
These discontinued operations were the analytical laboratory and environmental
services. The environmental operations had revenues of $2,640,195 for the
ten-month period. Increased competition among analytical laboratories created
tight margins and lower revenues. As such, the analytical laboratory was unable
to show a profit. The commercialization of the LEC technology caused a drain on
the profits of the environmental services operations. As a result, ETSI
considered the environmental services operations no longer viable and disposed
of these operations. Loss on disposal of discontinued operations was $1,391,873,
with a loss of $878,326 having been incurred on the sale of the assets of ETSAS
and a loss of $513,547 having been incurred on the sale of the assets of ETS.
Fiscal Year ended May 31, 1997 Compared to Fiscal Year ended May 31, 1996
Revenues from infrastructure services for the fiscal year ended May 31,
1997 ("fiscal 1997") were $18,518,127 compared to revenues of $14,042,804 for
the fiscal year ended May 31, 1996 ("fiscal 1996"), representing a 31.9%
increase. ETSI showed a substantial increase in revenues for fiscal 1997 as a
result of an increase in the construction division, which experienced greater
activity in the Richmond, Virginia area. The service area revenues in fiscal
1997 remained about the same, while the irrigation business was lower in fiscal
1997 due to a changed focus from residential irrigation to commercial
irrigation. The major area of improvement in fiscal 1997 was the rehabilitation
of subsurface pipelines, where the market appeared to be getting stronger.
Cost of goods and services were $15,397,182 or 83.1% of total revenues
for fiscal 1997 compared to $13,164,032 or 93.7% of total revenues for fiscal
1996. This decrease in cost as a percentage of revenues in fiscal 1997 was the
result of increased efforts to cut costs and sell contracts that are more
profitable.
Gross profits in fiscal 1997 were $3,120,945 or 16.9% of revenues
compared to $878,772 or 6.3% of revenues in fiscal 1996. This increase in gross
profits reflected the increase in sales and the lower cost of those sales.
Selling, general and administrative expenses for fiscal 1997 were
$2,205,948 or 11.9% of revenues compared to $2,061,346 or 14.6% of fiscal 1996
revenues. This decrease in cost as a percentage of revenues was largely the
result of ETSI's cost control efforts.
Interest income from savings on deposit for fiscal 1997 was $20,024
compared to $21,107 for fiscal 1996. Interest expense for fiscal 1997 was
$385,969, compared to interest expense of $213,934 for fiscal 1996. The increase
in expense in fiscal 1997 was due to higher interest costs associated with
ETSI's convertible debentures. Gain (loss) on sale of equipment was $101,037 for
fiscal 1997 compared to ($1,925) for fiscal 1996.
Loss from discontinued operations for fiscal 1997 was $502,380 compared
to $627,947 for fiscal 1996. This decrease in fiscal 1997 was due to an effort
to control costs of the environmental operations, plus the reimbursement of
approximately $225,000 of costs expended for engineering services as a result of
audits completed by the EPA.
Net income for fiscal 1997 was $148,435 compared to a loss of
$1,998,791 for fiscal 1996. In fiscal 1997, the construction company experienced
a substantial increase in contract revenues of $4,475,323, which resulted in
income from continuing operations of $650,815. This amount was sufficient to
offset the substantial loss of $502,380 experienced by the environmental
operations in fiscal 1997. In fiscal 1996, the construction company experienced
a net loss of $1,370,844, and the environmental operations experienced a net
loss of $627,947.
8
<PAGE>
Liquidity And Capital Resources As of March 31, 1998
ETSI is capital deficient, having invested heavily in its attempts to
commercialize the LEC system on an international level and having failed to
raise additional funds with which to go forward in a weak environmental
marketplace. ETSI experienced a substantial loss of $4,807,351 for the
ten-months ended March 31, 1998. Stockholders' deficit at March 31, 1998 was
$713,619, which represents a decrease of $3,683,142 from stockholders' equity of
$2,969,523 at May 31, 1997. ETSI's current liabilities of $7,734,434 exceeded
its current assets of $4,665,184 by $3,069,250 at March 31, 1998.
During fiscal 1998, ETSI concluded that it was in the Company's best
interest to de-emphasize its environmental products and services and to focus on
its construction operations, particularly with respect to the installation and
rehabilitation of subsurface pipelines for the transmission of water, waste and
natural gas. Management currently is negotiating with certain note holders to
convert debt of approximately $4,000,000 to preferred stock and to obtain a line
of credit from a bank. Management's success in these regards will, to a large
extent, depend upon whether ETSI is able to accomplish the assignment without
recourse of the CSC Contract to ATI. While negotiations with China Steel
Corporation are on-going, there can be no assurance that such negotiations will
be successful or that ETSI will find sufficient sources of outside capital to
support its future operations. See Note 19 of Notes to Consolidated Financial
Statements.
Effective May 1, 1998, ETSI restructured its credit facility with
Thomas W. Marmon, a former director and a large shareholder of ETSI. The new
note for the credit facility, which in part is a renewal of the previous note,
permits total aggregate borrowings by ETSI of up to $3.5 million. The new note
provides for monthly interest payments at a rate of 10% until the credit
facility's maturity at May 1, 1999 and 12% thereafter and is subject to call by
the holder upon sixty days written notice. At March 31, 1998, the principal
amount outstanding on the credit facility was approximately $3.1 million (which
included unpaid interest of $210,000 as part of principal). The new note is
secured by the assets of ETSI and its subsidiaries. Mr. Marmon resigned as a
director of ETSI as of April 13, 1998, in order to eliminate concerns regarding
his conflict of interest in certain circumstances. Mr. Marmon's resignation is
not the result of a disagreement with ETSI on any matter relating to ETSI's
operations, policies or practices.
On April 28, 1998, ETSI sold the Service Division of ETSW (e.g., septic
system installation and repair, irrigation, plumbing, jacuzzi service contracts
and incidental concrete manufacturing/concrete products) to a new corporation
formed by Coleman S. Lyttle, a director of ETSI and President of ETSW, for a
total purchase price of $700,000, payable as follows: $350,000 cash at closing,
assumption of certain indebtness of ETSW and notes payable to ETSW in the
aggregate amount of $250,000.
Net cash used in operating activities for the ten months ended March
31, 1998 consisted mainly of the net loss of $4,807,351. There was a general
decrease in assets and liabilities due to the sales of ETS and ETSAS.
Net cash used in investing activities during the ten months ended March
31, 1998 primarily represents purchases of new "pipe bursting" equipment for
ETSI's infrastructure operation in Florida, the cost of which was offset by
proceeds received from the sale of discontinued operations during the same
period. Cash provided by financing during the ten months ended March 31, 1998
came from loans from shareholders of $1,410,000, an increase of $775,542 in
loans from affiliates, and proceeds from long-term debt of $645,036.
New orders received for the ten-month period ended March 31, 1998
totaled $12,883,266 as compared to $14,917,207 for the same period in 1997. The
new orders for the ten-month period ended March 31, 1998 were down, reflecting
the slow period in the second quarter of fiscal 1998. Backlog at March 31, 1998
was $5,527,124, compared to $4,770,106 at March 31, 1997.
Subsequent to the fiscal 1998 year-end, ETSW was awarded a $4,000,000
contract for pipeline work to be performed on behalf of the City of Petersburg,
Virginia. In addition, Motorola Corporation awarded ETSW a
9
<PAGE>
contract to perform approximately $1,000,000 of pipeline work. ETSW's authorized
backlog was approximately $12,000,000 at May 31, 1998.
Year 2000
ETSI has contacted its software vendors about upgrading its computer
systems and applications to be Year 2000 compliant. ETSI expects conversion and
testing to be completed during fiscal 1999. There were no expenditures during
fiscal year 1998 related to the Year 2000 upgrades and, based on estimates
provided by software vendors, the cost of making the systems and applications
Year 2000 compliant are not currently expected to be significant to the
consolidated financial statements.
Recent Accounting Developments
Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, and
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information. These statements are effective for
fiscal years beginning after December 15, 1997. The Company does not anticipate
that the adoption of these statements will have a material effect on its
financial position or results of operations.
10
<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 March 31, 1998 and May 31, 1997, and
the related consolidated statements of income (loss), stockholders' equity
(deficit) and cash flows for the ten-month period ended March 31, 1998 and years
ended May 31, 1997 and 1996. 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 audit 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 March 31, 1998 and May 31, 1997, and the results of
their operations and their cash flows for the ten-month period ended March 31,
1998 and years ended May 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 19 to
the consolidated financial statements, the Company has suffered losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in note 19. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
s/ KPMG Peat Marwick LLP
Roanoke, Virginia
May 8, 1998
11
<PAGE>
<TABLE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and May 31, 1997
============== =================================================================== ================ =============
<CAPTION>
March 31, May 31,
Assets 1998 1997
- -------------- ------------------------------------------------------------------- ---------------- -------------
<S> <C>
Current assets:
Cash and cash equivalents $ 206,750 94,734
Accounts receivable:
Trade (net of allowance of $50,000 in 1998 and
$119,424 in 1997) 2,540,810 4,809,128
U.S. Government agencies - 79,661
Other 78,936 151,341
- ---------------------------------------------------------------------------------- ---------------- -------------
2,619,746 5,040,130
Costs and estimated earnings in excess of billings on
uncompleted contracts 563,924 1,325,954
Notes receivable 200,000 -
Notes receivable from employees - 64,694
Inventories 931,590 771,788
Prepaid expenses 143,174 516,974
- ---------------------------------------------------------------------------------- ---------------- -------------
Total current assets 4,665,184 7,814,274
Property, plant and equipment:
Furniture and fixtures 345,857 984,463
Laboratory equipment - 2,829,277
Tools and equipment 4,027,556 3,138,372
Vehicles 1,373,657 1,845,518
Leasehold improvements 340,282 788,051
- ---------------------------------------------------------------------------------- ---------------- -------------
6,087,352 9,585,681
Less accumulated depreciation and amortization 3,475,318 6,505,254
- ---------------------------------------------------------------------------------- ---------------- -------------
Property, plant and equipment, net 2,612,034 3,080,427
Other assets:
Restricted cash 600,000 -
Goodwill (net of accumulated amortization of $28,091) - 227,155
Notes receivable from employees 151,040 151,040
Prepublication costs (net of accumulated amortization
of $322,646) - 208,890
Cash surrender value of life insurance (net of outstanding
loan of $156,339 in 1998) 6,693 142,728
Patents granted (net of accumulated amortization of
$33,190) - 77,546
Patents pending - 65,905
Assets under contractual arrangements (net of valuation
allowance of $858,000) 267,666 -
Other 248,254 343,472
- ---------------------------------------------------------------------------------- ---------------- -------------
1,273,653 1,216,736
- -------------- ------------------------------------------------------------------- ---------------- -------------
$ 8,550,871 12,111,437
============== =================================================================== ================ =============
See accompanying notes to consolidated financial statements.
12
<PAGE>
==============================================================================================================
<CAPTION>
March 31, May 31,
Liabilities and Stockholders' Equity (Deficit) 1998 1997
- --------------------------------------------------------------------------------------------------------------
Current liabilities:
Bank overdraft $ 173,493 44,560
Note payable to bank 89,062 89,837
Notes payable to stockholders 3,410,000 2,000,000
Notes payable to affiliates 966,159 289,159
Current portion of long-term debt 480,543 493,012
Accounts payable 1,846,539 3,198,194
Accrued expenses and other liabilities 768,638 431,467
Common stock to be repurchased (including interest of
$22,142), 269,565 shares; issued and outstanding - 409,642
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 7,734,434 6,955,871
Long-term debt 907,896 861,673
Notes payable to affiliates - 201,458
Deferred gain on sale/leaseback 481,821 735,412
Liabilities under contractual arrangements 140,339 -
- --------------------------------------------------------------------------------------------------------------
Total liabilities 9,264,490 8,754,414
- --------------------------------------------------------------------------------------------------------------
Common stock subject to repurchase agreement, 269,565
shares; issued and outstanding - 387,500
Stockholders' equity (deficit):
Preferred stock, no par value; authorized 5,000,000 shares;
none issued and outstanding - -
Common stock, no par value; authorized 30,000,000 shares;
issued and outstanding 16,492,043 and 14,215,823
at March 31, 1998 and May 31, 1997, respectively 6,126,338 5,002,129
Accumulated deficit (6,646,845) (1,839,494)
Less notes receivable from officers (193,112) (193,112)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (713,619) 2,969,523
Commitments and contingencies
- --------------------------------------------------------------------------------------------------------------
$ 8,550,871 12,111,437
==============================================================================================================
13
<PAGE>
ETS INTERNATIONAL, INC. AND
SUBSIDIARIES
Consolidated Statements of Income (Loss)
Ten-month Period Ended March 31, 1998 and Years Ended May 31, 1997 and 1996
================================================================= ================= =================================
1998 1997 1996
- ----------------------------------------------------------------- ----------------- ---------------------------------
Contract revenues $ 12,644,431 18,518,127 14,042,804
Cost of goods and services 10,678,548 15,397,182 13,164,032
Selling, general and administrative expenses 2,747,336 2,205,948 2,061,346
- ----------------------------------------------------------------- ----------------- ---------------------------------
(781,453) 914,997 (1,182,574)
Interest income 19,842 20,024 21,107
Interest expense (758,566) (385,969) (213,934)
Gain (loss) on sale of equipment (14,264) 101,037 (1,925)
Other, net (1,663) 726 6,482
- ----------------------------------------------------------------- ----------------- ---------------------------------
Income (loss) from continuing operations
before income taxes (1,536,104) 650,815 (1,370,844)
Income tax expense (benefit) - - -
- ----------------------------------------------------------------- ----------------- ---------------------------------
Income (loss) from continuing operations (1,536,104) 650,815 (1,370,844)
Loss from discontinued operations (1,879,374) (502,380) (627,947)
Loss on disposal of discontinued operations (1,391,873) - -
- ----------------------------------------------------------------- ----------------- ---------------------------------
Net income (loss) $ (4,807,351) 148,435 (1,998,791)
================================================================= ================= =================================
Income (loss) from continuing operations per common share:
Basic (0.10) 0.05 (0.11)
Diluted (0.10) 0.05 (0.11)
Loss from discontinued operations per common share:
Basic (0.12) (0.04) (0.05)
Diluted (0.12) (0.04) (0.05)
Loss on disposal of discontinued operations per common share:
Basic (0.09) - -
Diluted (0.09) - -
Net income (loss) per common share:
Basic $ (0.31) 0.01 (0.16)
Diluted (0.31) 0.01 (0.16)
Average shares of common stock used for above computations:
Basic 15,644,998 13,232,108 12,479,167
Diluted 15,644,998 13,279,039 12,479,167
================================================================= ================= =================================
See accompanying notes to consolidated financial statements.
14
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Ten-month Period Ended March 31, 1998 and Years Ended May 31, 1997 and 1996
================================================================================== ================ =============== ===============
<CAPTION>
Retained
Earnings
Common Stock (Accumulated
-----------------------------
Shares Amount Deficit)
- ---------------------------------------------------------------------------------- ---------------- --------------- ---------------
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 -
Addition to notes receivable for accrued interest - - -
Collections on notes receivable - - -
Net loss - - (1,998,791)
- ---------------------------------------------------------------------------------- ---------------- --------------- ---------------
Balances at May 31, 1996 12,580,733 3,476,235 (1,987,929)
Proceeds from issuance of common stock 461,525 300,000 -
Proceeds from exercise of vendor options 212,000 1,060 -
Proceeds from exercise of employee stock options 5,014 3,929 -
Repurchase of common stock (65,617) (75,000) -
Issuance of common stock and options for services 43,500 160,881 -
Issuance of common stock for payment of note payable to stockholder 833,333 500,000 -
Issuance of warrants with convertible debentures to acquire 1,000,000
shares of common stock - 173,334 -
Discount on issuance of convertible debentures - 410,914 -
Conversion of convertible debentures 145,335 50,776 -
Addition to notes receivable for accrued interest - - -
Net income - - 148,435
- ---------------------------------------------------------------------------------- ---------------- --------------- ---------------
Balances at May 31, 1997 14,215,823 5,002,129 (1,839,494)
Proceeds from exercise of employee stock options 20,000 10,000 -
Issuance of warrants and stock options - 82,999 -
Common stock received as part of sale of discontinued operations (500,000) (125,000) -
Reclassification of common stock subject to repurchase agreement 269,565 387,500 -
Conversion of convertible debentures 2,486,655 768,710 -
Net loss - - (4,807,351)
- ---------------------------------------------------------------------------------- ---------------- --------------- ---------------
Balances at March 31, 1998 16,492,043 $ 6,126,338 (6,646,845)
================================================================================== ================ =============== ===============
================================================================================== =============== ================
<CAPTION>
Notes
Receivable
from
Officers Total
- ---------------------------------------------------------------------------------- --------------- ----------------
Balances at May 31, 1995 (261,200) 3,068,464
Issuance of common stock in connection with asset acquisition - 75,000
Proceeds from exercise of employee stock options - 82,433
Addition to notes receivable for accrued interest (9,298) (9,298)
Collections on notes receivable 87,281 87,281
Net loss - (1,998,791)
- ---------------------------------------------------------------------------------- --------------- ----------------
Balances at May 31, 1996 (183,217) 1,305,089
Proceeds from issuance of common stock - 300,000
Proceeds from exercise of vendor options - 1,060
Proceeds from exercise of employee stock options - 3,929
Repurchase of common stock - (75,000)
Issuance of common stock and options for services - 160,881
Issuance of common stock for payment of note payable to stockholder - 500,000
Issuance of warrants with convertible debentures to acquire 1,000,000
shares of common stock - 173,334
Discount on issuance of convertible debentures - 410,914
Conversion of convertible debentures - 50,776
Addition to notes receivable for accrued interest (9,895) (9,895)
Net income - 148,435
- ---------------------------------------------------------------------------------- --------------- ----------------
Balances at May 31, 1997 (193,112) 2,969,523
Proceeds from exercise of employee stock options - 10,000
Issuance of warrants and stock options - 82,999
Common stock received as part of sale of discontinued operations - (125,000)
Reclassification of common stock subject to repurchase agreement - 387,500
Conversion of convertible debentures - 768,710
Net loss - (4,807,351)
- ---------------------------------------------------------------------------------- --------------- ----------------
Balances at March 31, 1998 (193,112) (713,619)
================================================================================== =============== ================
See accompanying notes to consolidated financial statements.
15
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Ten-month Period Ended March 31, 1998 and Years Ended May 31, 1997 and 1996
================================ ============================== ==================== =============== ================
<CAPTION>
1998 1997 1996
- -------------------------------- ------------------------------ -------------------- --------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (4,807,351) 148,435 (1,998,791)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on disposal of discontinued operations 1,391,873 - -
Depreciation and amortization 683,361 830,687 873,214
Write-down of note receivable 204,101 - -
Write-off of goodwill and other intangibles, due
to impairment 145,474 - -
Provision for bad debts - 75,307 56,350
Amortization of convertible debentures discount 438,028 139,152 -
Conversion of accrued interest on convertible
debentures to common stock 68,710 - -
Stock options issued to the president at less
than market value 44,000 - -
Professional services received in exchange for
warrants 38,999 29,437 -
Amortization of deferred gain on sale/leaseback (253,591) (304,308) (177,512)
(Gain) loss on sale of equipment 14,264 (101,037) 13,474
Other - 7,844 -
Increase or decrease in operating assets
and liabilities:
Accounts receivable 1,692,623 (1,235,534) (310,839)
Costs and estimated earnings in excess of
billings on uncompleted contracts (257,444) (447,606) 153,528
Inventories (208,641) (221,060) 2,095
Prepaid expenses 260,856 (159,591) 2,235
Cash surrender value of life insurance, net (20,304) (26,445) (20,596)
Accounts payable (989,296) 360,808 1,078,599
Accrued expenses and other liabilities 510,584 (193,441) 41,790
Customer advances 292,465 - -
Other (19,566) 32,487 (65,000)
- --------------------------------------------------------------- -------------------- --------------- ----------------
Net cash used in operating activities (770,855) (1,064,865) (351,453)
Cash flows from investing activities:
Purchases of property, plant and equipment (1,209,611) (820,374) (334,065)
Prepublication costs - (105,913) -
Patent costs incurred - (54,345) (16,417)
Proceeds from sale of discontinued operations 200,000 - -
Proceeds from sale/leaseback of equipment - - 1,660,900
Proceeds from sale of equipment 26,750 1,751 36,940
Decrease in assets under contractual arrangements 7,689 - -
Notes receivable (increase) decrease 64,694 (17,047) 83,815
- --------------------------------------------------------------- -------------------- --------------- ----------------
Net cash provided by (used in) investing activities (910,478) (995,928) 1,431,173
(Continued)
16
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
======================================================================= ================ =============================
1998 1997 1996
- ----------------------------------------------------------------------- ---------------- -----------------------------
Cash flows from financing activities:
Bank overdraft increase (decrease) $ 128,933 35,814 (48,520)
Notes payable to banks decrease (775) (981,590) (179,237)
Notes payable to affiliates increase 775,542 140,006 47,466
Proceeds from notes payable to stockholders 1,410,000 1,900,000 600,000
Proceeds from convertible debentures - 750,000 -
Proceeds from long-term debt 645,036 507,382 344,465
Proceeds from loan against cash surrender value 156,339 - -
Principal payments on long-term debt (344,226) (547,791) (1,869,789)
Proceeds from issuance of common stock 10,000 304,993 82,433
Repurchase of common stock subject to repurchase
agreement (387,500) (75,000) -
- ----------------------------------------------------------------------- ---------------- -----------------------------
Net cash provided by (used in) financing activities 2,393,349 2,033,814 (1,023,182)
- ----------------------------------------------------------------------- ---------------- -----------------------------
Increase (decrease) in cash and cash equivalents 712,016 (26,979) 56,538
Cash and cash equivalents at beginning of year 94,734 121,713 65,175
- ----------------------------------------------------------------------- ---------------- -----------------------------
Cash and cash equivalents at end of year, including
$600,000 of restricted cash in 1998 $ 806,750 94,734 121,713
======================================================================= ================ =============================
</TABLE>
Supplemental disclosures of cash flow information and noncash investing
activities:
Interest paid on notes payable and long-term debt was $213,137, $392,126 and
$382,233 for the years 1998, 1997 and 1996, respectively. Capital lease
obligations of $260,394, $94,210 and $88,269 were incurred during 1998, nt.
1997 and 1996, respectively, under leases entered into for vehicles,
furniture and fixtures, and laboratory equipme
During 1998, the Company issued $38,999 of warrants for services, issued
common stock options to the President of the Company with an aggregate
exercise price of $44,000 below the market price at the date of grant,
reclassed $387,500 of common stock subject to repurchase agreement (see note
8) and converted $768,710, including $68,710 of accrued interest, of
convertible debentures to common stock. Also in March 1998, the Company
received $125,000 of its common stock as part of the sale of discontinued
operations (see note 10).
During 1997, the Company issued $160,881 of common stock and options for
services ($131,440 in prepaid expenses at May 31, 1997), issued $500,000 in
common stock in repayment of note payable to stockholder, issued $173,334 of
warrants for common stock with convertible debentures, recognized a discount
of $410,914 on issuance of convertible debentures and converted 50,776 of
convertible debentures to common stock (see note 6).
During 1996, the Company acquired certain assets (see note 3) in exchange
for 604,747 shares of its common stock.
See accompanying notes to consolidated financial statements.
17
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of March 31, 1998 and May 31, 1997 and Ten-month Period Ended March 31, 1998
and Years Ended May 31, 1997 and 1996
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
Currency
All references to dollars ($) 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. During fiscal 1998,
substantially all assets and certain liabilities of ETS, Inc. and ETS
Analytical Services, Inc. were sold. See note 10 for additional
information.
Change in Fiscal Year
On April 6, 1998, the Company's fiscal year end was changed from May 31
to March 31. As a result, these consolidated financial statements cover
the ten-month transition period from June 1, 1997 to March 31, 1998.
The Company's next full year will be from April 1, 1998 to March 31,
1999.
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 ($471,166 in 1998 and $351,856
in 1997) and supplies ($460,424 in 1998 and $419,932 in 1997), 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
percentage-of-completion 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. For the year ended May 31, 1997,
the Company recognized approximately $225,000 in income from
adjustments to prior year contracts. 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.
(Continued)
18
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) (Continued)
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.
Provisions for depreciation and amortization have been calculated using
the straight line method 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 - 31 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 straight-line 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 straight-line 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
(Continued)
19
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) (Continued)
flows using a discount rate reflecting the Company's average cost of
funds. Due to impairment, $104,754 of goodwill was written off in 1998.
Research and Development
Research and development costs are charged to operations as incurred.
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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 establishes new standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Statement 128 was adopted by the Company at
February 28, 1998. The Statement requires restatement of prior years
EPS data previously presented. Adoption of this Statement did not have
a material effect on current or prior years' EPS data presented.
(Continued)
20
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) (Continued)
Basic earnings per share have been computed on the basis of weighted
average number of shares outstanding. Diluted earnings per share
included 46,931 shares related to stock options and warrants for the
year ended May 31, 1997, due to their dilutive effect. Diluted earnings
per share did not include shares related to stock options and warrants
for the ten-month period ended March 31, 1998 and for the year ended
May 31, 1996 and did not include any shares related to convertible
debentures for any of the periods as their effect was antidilutive. See
note 11 for information relating to stock options and warrants that
could potentially dilute basic earnings per share in the future. See
earnings per share information included on consolidated statements of
income (loss).
Stock Options and Warrants
Prior to June 1, 1996, the Company accounted for its stock options and
warrants in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As such, compensation expense was recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On June 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (Statement 123), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, Statement 123
also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income or loss and pro forma net
income or loss per common share disclosures for stock option and
warrant grants made in 1996 and future years as if the fair-value-based
method defined in Statement 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of Statement 123.
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 periods. Actual results
could differ from these estimates.
Reclassifications
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to classifications used in
1998.
(Continued)
21
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Restricted Cash
Included in restricted cash is $600,000 relating to a performance bond
relating to the Company's contract with China Steel Corporation (the
"China Steel Contract"). The Board of Directors of the Company is
continuing to review the financial and other aspects of the Limestone
Emission Control ("LEC") technology that is being developed for the
China Steel Contract. This review was undertaken after potential issues
were brought to current management's attention regarding the budget to
meet certain of the performance specifications of the China Steel
Contract and the overall viability of the LEC technology for wide-scale
commercialization. If the LEC technology does not meet contract
specifications, China Steel Corporation may seek to impose financial
penalties or attempt to recover damages or obtain other relief under
the contract, including drawing down on the $600,000 performance bond
posted by the Company.
(3) Business Combinations
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 8). 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
straight line basis over periods not exceeding 15 years.
The following table summarizes these acquisitions:
1996
- -----------------------------------------------------------------------------
Purchase price (604,747 shares of stock issued
in 1996) $ 850,000
- -----------------------------------------------------------------------------
Accounts receivable 2,000
Equipment 529,200
Franchise fee 200,000
Other assets 72,816
Accounts payable and other liabilities (100,000)
- -----------------------------------------------------------------------------
Net assets acquired (estimated fair value) $ 704,016
- -----------------------------------------------------------------------------
Excess of purchase price over fair value of net
assets acquired (goodwill) $ 145,984
- -----------------------------------------------------------------------------
(Continued)
22
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Business Segment Information
ETS International, Inc. and its wholly-owned subsidiaries provide
environmental (see note 10 for disposal of environmental operations
segment) and infrastructure products and services. The Company
specializes in toxic emission measurement and control as well as
infrastructure design, construction and maintenance.
The Company currently derives its primary contract revenues from
domestic customers.
For the ten-month period ended March 31, 1998, the Company had
infrastructure contract revenues from five customers, each of which
accounted for more than 5 percent of contract revenues, aggregating
approximately $4,718,000 or 37 percent of contract revenues. At March
31, 1998, four customers had accounts receivable balances which
exceeded 5 percent of the trade accounts receivable balance. The
accounts receivable balances for these customers totaled $883,854.
For the year ended May 31, 1997, the Company had infrastructure
contract revenues from one customer, which accounted for more than 5
percent of infrastructure contract revenues, aggregating approximately
$2,337,000 or 13 percent of contract revenues. At May 31, 1997, one
customer had an accounts receivable balance which exceeded 5 percent of
trade accounts receivable. The accounts receivable balances of this
customer totaled approximately $767,000.
No single customer accounted for more than 5 percent of infrastructure
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
trade accounts receivable. The accounts receivable balance of this
customer was $273,562.
Information related to the environmental and infrastructure operations
follows:
<TABLE>
<CAPTION>
Environmental Infrastructure Reclassifications/
Operations Operations Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C>
1998:
Total assets $ 267,666 8,283,205 - 8,550,871
Total liabilities 440,930 8,823,560 - 9,264,490
Contract revenues 2,640,195 12,644,431 (2,640,195) 12,644,431
Depreciation and amortization 282,986 400,375 - 683,361
Interest income - 19,842 - 19,842
Interest expense 301,678 758,566 (301,678) 758,566
Loss from continuing
operations - (1,536,104) - (1,536,104)
Loss from discontinued
operations (1,879,374) - - (1,879,374)
Loss from disposal of
discontinued
discontinued operations (1,391,873) - - (1,391,873)
Net income (loss) (3,271,247) (1,536,104) - (4,807,351)
Capital expenditures 27,542 1,182,069 - 1,209,611
(Continued)
</TABLE>
23
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) (Continued)
<TABLE>
<CAPTION>
Environmental Infrastructure Reclassifications/
Operations Operations Eliminations Consolidated
--------------- ------------------------------------------------------
<S> <C>
1997:
Total assets $ 4,660,039 7,451,398 - 12,111,437
Total liabilities 3,361,085 5,393,329 - 8,754,414
Contract revenues 5,607,133 18,660,836 (5,749,842) 18,518,127
Depreciation and amortization 537,373 293,314 - 830,687
Interest income - 20,024 - 20,024
Interest expense 186,860 385,969 (186,860) 385,969
Income from continuing operations - 650,815 - 650,815
Loss from discontinued operations (502,380) - - (502,380)
Net income (loss) (502,380) 650,815 - 148,435
Capital expenditures 156,605 663,769 - 820,374
1996:
Total assets 3,981,132 5,670,667 - 9,651,799
Total liabilities 2,068,784 5,502,926 - 7,571,710
Contract revenues 6,496,457 14,219,339 (6,672,992) 14,042,804
Depreciation and amortization 639,357 233,857 - 873,214
Interest income - 21,107 - 21,107
Interest expense 178,197 213,934 (178,197) 213,934
Loss from continuing operations - (1,370,844) - (1,370,844)
Loss from discontinued operations (627,947) - - (627,947)
Net income (loss) (627,947) (1,370,844) - (1,998,791)
Capital expenditures 107,568 226,497 - 334,065
(5) Accounts Receivable
A summary of the changes in the allowance for doubtful accounts
follows:
<CAPTION>
Ten-month
Period Ended
March 31, Years Ended May 31,
---------------------------
1998 1997 1996
- ------------------------------------------------------------------- ---------------- --------------- --------------
Balances, beginning of year $ 119,424 95,100 99,500
Provision for bad debts - 75,307 56,350
Accounts written off (69,424) (50,983) (60,750)
- ------------------------------------------------------------------- ---------------- --------------- --------------
Balances, end of year $ 50,000 119,424 95,100
- ------------------------------------------------------------------- ---------------- --------------- --------------
</TABLE>
(Continued)
24
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Note Payable to Bank and Long-term Debt
Note payable to bank consists of the following:
<TABLE>
<CAPTION>
March 31, May 31,
1998 1997
- -------------------------- ------------------------------------------------------- -------------------- -----------
<S> <C>
$100,000 line of credit, due on demand, bearing interest at prime plus 2%, which
approximated 10.50% and 10.25% at March 31, 1998
and May 31, 1997, respectively, secured by certain equipment $ 89,062 89,837
- -------------------------- ------------------------------------------------------- -------------------- -----------
Long-term debt consists of the following:
<CAPTION>
March 31, May 31,
1998 1997
- ------- ----------------- ----- ------------------------------------------------ --------------------- ------------
7% convertible debentures due February 2002, net of unamortized
discount of $438,028 at May 31, 1997 $ - 261,972
$373,500 term note payable to bank, due October 2002, bearing interest at 9.35%,
payable in monthly installments of $7,819
including interest, secured by equipment 349,176 -
$400,000 term note payable to bank, due February 2001, bearing interest at 11%,
payable in monthly installments of $10,322
including interest, secured by certain vehicles 308,561 379,851
$190,139 term note payable to finance company, due February 2002, bearing
interest at 9.75%, payable in varying monthly installments of $2,330 to
$6,545 including interest, secured
by equipment 190,139 -
$185,806 term note payable to finance company, due December 1999, bearing
interest at 19.47%, payable in monthly installments of $6,350 including
interest, secured by certain
vehicles and equipment 103,133 103,133
$100,000 term note payable to finance company, due February 2001, bearing
interest at 12.5%, payable in monthly installments
of $2,658 including interest, secured by certain vehicles 56,186 73,906
Installment loans with maturities to 2002, bearing interest at varying interest
rates from 8.90% to 9.50%, payable in varying monthly installments of $838
to $1,335 including
interest, secured by vehicles and equipment 112,715 197,312
Capital lease obligations, with maturities to 2001 (see note 7) 268,529 338,511
- -------------------------------------------------------------------------------- --------------------- ------------
1,388,439 1,354,685
Less current maturities 480,543 493,012
- -------------------------------------------------------------------------------- --------------------- ------------
$ 907,896 861,673
- ------- ----------------- ----- ------------------------------------------------ --------------------- ------------
</TABLE>
(Continued)
25
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) (Continued)
Aggregate debt maturities for each of the next four years ending on
March 31 is as follows: 1999, $480,543; 2000, $327,760; 2001, $302,605;
2002, $179,840 and 2003, $97,691, respectively.
On February 28, 1997, the Company issued $750,000 of 7 percent
convertible debentures due February 27, 2002. The holder of the
debentures is entitled to convert them into common stock at his option.
The Company may at its option force conversion after one year from
February 28, 1997. The Company is not required to pay cash to retire
the debentures and the accrued interest. The debentures are convertible
into the Company's common stock at the lower of $.76 or 65 percent of
the average closing bid price of the common stock for the five trading
days immediately preceding the conversion date. Since the conversion
rate was lower than the market price of the common stock on the date of
issuance, a discount of $403,846 was recognized on the debentures. In
addition, 1,000,000 warrants for common stock were issued with the
convertible debentures. The fair value of these warrants, $173,334, was
recorded as part of the discount. The total discount of $577,180 is
being amortized as interest expense using the interest method; $438,028
in 1998 and $139,152 in 1997.
On May 20, 1997, the Company issued 145,335 shares of common stock upon
the conversion of $50,776 of the convertible debentures, including $776
of accrued interest. During 1998, the Company issued 2,486,655 shares
of common stock upon the conversion of $768,710 of the convertible
debentures, including $68,710 of accrued interest.
(7) Leases
Property, plant and equipment included the following amounts of assets
under capital lease obligations:
<TABLE>
<CAPTION>
March 31, May 31,
1998 1997
- ----------------------------------- -------- ----- ---------------------------- ---------------- ------------------
<S> <C>
Furniture and fixtures $ 75,822 221,057
Laboratory equipment - 987,960
Tools and equipment 228,758 94,210
Vehicles 31,635 68,727
Leasehold improvements - 30,437
- ------------------------------------------------------------------------------- ---------------- ------------------
336,215 1,402,391
Less accumulated amortization (48,060) (823,178)
- ------------------------------------------------------------------------------- ---------------- ------------------
$ 288,155 579,213
- ----------------------------------- -------- ----- ---------------------------- ---------------- ------------------
</TABLE>
(Continued)
26
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(7) (Continued)
The capital lease payments were $171,054 in 1998, $243,536 in 1997 and
$246,527 in 1996. Lease amortization is included in depreciation
expense ($120,035 in 1998, $182,252 in 1997 and $171,125 in 1996).
Future minimum payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- ----------------------- ------------------------------------------------------- -------------- ------ -------------
<S> <C>
1999 $ 90,382 776,463
2000 67,081 521,409
2001 65,940 134,381
2002 64,768 23,262
2003 39,566 -
- ----------------------- ------------------------------------------------------- -------------- ------ -------------
327,737 $ 1,455,515
-------------
Less amounts representing interest (rates
8.5% - 16.5%) 59,208
- ------------------------------------------------------------------------------- --------------
Present value of lease payments (including
$68,647 classified as current) $268,529
- ------------------------------------------------------------------------------- --------------
</TABLE>
Rent expense for operating leases of approximately $1,001,000,
$1,302,000 and $1,407,000 was recognized for the ten-month period ended
March 31, 1998 and the years ended May 31, 1997 and 1996, respectively.
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 48-month 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 $481,821 at March 31, 1998.
(8) Common Stock Subject to Repurchase Agreement
In connection with the Olympic Industries, Inc. asset acquisition (see
note 3), 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 one-half of the issued
shares (269,565 shares) on the first anniversary of the acquisition and
up to one-half of the issued shares (269,565) on the second anniversary
of the acquisition.
(Continued)
27
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) (Continued)
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. As security for the
Company's obligation to repurchase the shares, the Company granted the
seller a security interest in the assets purchased. The Company may
satisfy its obligation related to the shares (269,565 shares) subject
to repurchase on the second anniversary in February 1998 upon the
successful registration of the issued shares with the Securities and
Exchange Commission (SEC).
In February 1997, the first anniversary of the acquisition, Olympic
Industries, Inc. elected to have the Company repurchase one-half of the
issued shares (269,565 shares). Accordingly, this obligation of
$409,642 including interest of $22,142 is shown as current. The Company
completed the repurchase in fiscal 1998.
In August 1997, Olympic Industries, Inc. agreed to retain the remaining
269,565 shares and this common stock subject to repurchase of $387,500
was reclassified to stockholders' equity.
(9) Income Taxes
The Company is in a net operating loss position, accordingly, no income
tax expense (benefit) has been recognized for the ten-month period
ended March 31, 1998 and years ended May 31, 1997 and 1996.
Income tax expense (benefit) differs from the amount computed by
applying the statutory corporate tax rate of 34 percent to income
(loss) including loss from discontinued operations and loss on disposal
of discontinued operations before income taxes as follows:
<TABLE>
<CAPTION>
Ten-month
Period Ended Years Ended
March 31, May 31,
-------------------------
1998 1997 1996
- ------- ------------------------------------------------------------ ----------------- ------------- --------------
<S> <C>
Expected federal income tax expense (benefit) $ (1,634,499) 50,468 (679,588)
Increase (decrease) resulting from:
State income tax, net of federal income tax impact (185,467) 8,588 (75,939)
Meals and entertainment 8,016 12,897 22,075
Goodwill amortization not deductible for tax
purposes 31,886 - -
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets 1,555,909 (60,482) 736,696
Adjustment of prior year's tax estimates 221,951 - -
Other 2,204 (11,471) (3,244)
- -------------------------------------------------------------------- ----------------- ------------- --------------
Income tax expense (benefit) $ - - -
- -------------------------------------------------------------------- ----------------- ------------- --------------
</TABLE>
(Continued)
28
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) (Continued)
The significant components of deferred income tax expense (benefit) for
the ten-month period ended March 31, 1998 and years ended May 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
Ten-month
Period Ended Years Ended
March 31, May 31,
---------------------------
1998 1997 1996
- -------------------------------- -------------------------------- ----------------- -------------- ---------------
<S> <C>
Deferred tax expense (benefit) exclusive of the
components listed below $ (1,777,860) 82,395 (727,936)
Expiration of investment tax credit carryforwards - (21,913) (8,760)
Increase (decrease) in beginning of the year balance
of the valuation allowance for deferred tax assets 1,555,909 (60,482) 736,696
Adjustment of prior year's tax estimates 221,951 - -
- ----------------------------------------------------------------- ----------------- -------------- ---------------
Deferred income tax expense (benefit) $ - - -
- ----------------------------------------------------------------- ----------------- -------------- ---------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31, 1998 and May 31, 1997 are presented below:
<TABLE>
<CAPTION>
March 31, May 31,
1998 1997
- ------- -------------------------------------------------------------------------------------- -------------------
<S> <C>
Deferred tax assets:
Net operating loss and tax credit carryforwards $ 2,055,813 883,791
Property, plant and equipment, principally due to
differences in
depreciation for financial reporting and tax purposes
differences in depreciation for financial reporting
and tax purposes 268,722 -
Deferred gain on sale/leaseback transaction due
to accrual versus cash basis of accounting
for financial reporting and tax purposes 182,899 279,162
Accrued costs, principally due to accrual for
financial reporting purposes 180,797 17,140
Other 35,682 158,929
- ---------------------------------------------------------------------------------------------- -------------------
Total gross deferred tax assets 2,723,913 1,339,022
Less valuation allowance (2,619,173) (1,063,264)
- ---------------------------------------------------------------------------------------------- -------------------
Net deferred tax asset 104,740 275,758
- ---------------------------------------------------------------------------------------------- -------------------
</TABLE>
(Continued)
29
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) (Continued)
<TABLE>
<CAPTION>
March 31, May 31,
1998 1997
- ------- ------ ----------------------- ---------------------------------------- --------------- ------------------
<S> <C>
Deferred tax liabilities:
Accounts receivable and accounts payable,
principally due to accrual versus cash
basis of accounting for financial reporting
and tax purposes $ 104,740 157,110
Property, plant and equipment, principally due
to difference in depreciation for financial
reporting and tax purposes - 101,801
Other - 16,847
- -------------- ----------------------- ---------------------------------------- --------------- ------------------
Total gross deferred tax liabilities 104,740 275,758
- ------------------------------------------------------------------------------- --------------- ------------------
Net deferred tax $ - -
- ------------------------------------------------------------------------------- --------------- ------------------
</TABLE>
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.
At March 31, 1998, the Company has loss carryforwards for income tax
purposes of $5,344,137 available to offset future taxable income. If
not utilized, these loss carryforwards will expire as follows:
Expiration
Date
------------------------ ---------- ---- ---------------
2003 $ 555,174
2008 1,000,451
2011 582,048
2012 100,841
2013 3,105,673
------------------------ ---------- ---- ---------------
$ 5,344,187
------------------------ ---------- ---- ---------------
(Continued)
30
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) (Continued)
In addition, the Company has various tax credit carryforwards of
approximately $27,000 which will expire between the years 1998 and
2000.
(10) Disposal of Environmental Operations Segment
During the ten-month period ended March 31, 1998, the Company disposed
of its environmental operations segment. In October 1997, the Company
sold substantially all of the assets and certain liabilities of ETS
Analytical Services, Inc. ("ETSAS"), a wholly-owned subsidiary, to Q
Enterprises, Inc. ("Q Enterprises"), a company owned by James B.
Quarles, a former employee and senior vice president of ETS
International, Inc. Mr. Quarles has since become president and chief
executive officer of the Company and sold his interest in Q
Enterprises. Since the risks of ownership were not transferred to Q
Enterprises, no sale was recognized for accounting purposes.
Accordingly, the assets and liabilities transferred to Q Enterprises
are shown in the noncurrent sections of the balance sheet and are
designated as "assets of business transferred under contractual
arrangements" and "liabilities of business transferred under
contractual arrangements." The Company received an 8.5 percent
promissory note in the amount of $1,000,000 with payments amortized
over 30 years with a balloon payment after 10 years. As payments of
principal and interest are received, they are being recorded as a
reduction to "assets of business transferred under contractual
arrangements" until such time the Company determines a sale can be
recorded for accounting purposes. At March 31, 1998,"Assets of business
transferred under contractual arrangements" of $267,666 are stated net
of a valuation allowance of 858,000. The conversion of these assets to
cash is dependent on the future profitable operations of Q Enterprises.
A loss on disposal of these discontinued environmental operations of
$878,326 was recorded.
In March 1998, substantially all of the assets and certain liabilities
of ETS, Inc. ("ETS"), a wholly owned subsidiary, were sold to ETS
Acquisition, Inc., a newly-formed firm. In connection with this sale,
the Company sold a portion of its assets and business relating to the
Limestone Emission Control (LEC) technology, including patents and
licenses, to Christel Clear Technologies, Inc. ("CCTI"), a newly formed
firm. The total purchase price was approximately $1,896,000 for all of
the aforementioned. The purchase price was paid in cash, stock of the
Company, assumption of certain liabilities of ETS, and delivery of a
$200,000 thirty-day note and a $100,000 ten-year note both bearing
8-1/2 percent interest. Also, the Company will receive 50 percent of
all royalties received by CCTI in connection with the license of the
LEC technology. While there is no indication that the LEC will be
resold by CCTI, the agreement further provides that the Company will
receive 50 percent of the net sales price from a resale of the LEC
technology on or before March 12, 1999, and 25 percent of the net sales
price from a resale after March 12, 1999 but on or before March 12,
2000. A loss on disposal of these discontinued environmental operations
of $513,547 was recorded.
(Continued)
31
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) (Continued)
In connection with the sale discussed in the preceding paragraph, the
Company entered into a Management Agreement with Air Technologies, Inc.
("ATI"), a newly-formed firm, to provide management services with
respect to the Company's contract with China Steel Corporation (the
"China Steel Contract"). ATI and CCTI agreed to accept responsibility
for any potential liabilities associated with the China Steel Contract
and to provide its best effort to have the contract transferred from
the Company to ATI. ETS Acquisition, Inc., CCTI and ATI are owned by
John D. McKenna, Arthur B. Nunn, III and John C. Mycock, three former
executive officers of the Company and former members of the Company's
Board of Directors. See note 2 for additional information.
Also in connection with the disposal of the environmental operations,
the Company has allocated interest costs to loss on discontinued
operations. Interest costs allocated to discontinued operations
includes interest on debt directly attributable to the environmental
operations, which was assumed by the buyers, and other consolidated
interest not directly attributable to any of the Company's other
operations. Other consolidated interest was allocated based on the
ratio of net assets sold to the sum of total net assets of the
consolidated Company plus consolidated debt not directly attributed to
other operations of the Company. Interest costs allocated to
discontinued operations were $301,678, $186,860 and $178,197 for the
ten-month period ended March 31, 1998 and the years ended May 31, 1997
and 1996, respectively.
(11) 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,
vendors and employees of the Company and its subsidiaries. Options and
warrants are generally granted at approximate fair market value based
on the higher of the most recent ten-day average price of the stock or
the last day's closing price of the stock on the date of the grant.
Options generally become exercisable over a period not exceeding five
years from date of grant and warrants are exercisable upon issuance.
The aggregate amount of shares under option pursuant to these
agreements were as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
- ----------------- ---------- -------------------------------------------------- ---------------------------
<S> <C>
Options outstanding at May 31, 1995 2,278,089 $1.91 CDN and 1.56 US
Granted 448,000 $1.07 US
Exercised (77,700) $1.30 CDN and 1.07 US
Expired (178,816) $2.34 CDN and 1.66 US
- ----------------- ---------- --------------------------------------------------
Options outstanding at May 31, 1996 2,469,573 $1.90 CDN and 1.46 US
</TABLE>
(Continued)
32
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) (Continued)
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
- ----------------- ---------- -------------------------------------------------- ---------------------------
<S> <C>
Granted 1,726,000 $ .66 US
Exercised (217,014) $ 1.05 CDN and .005 US
Expired (585,659) $ 1.50 CDN and .42 US
- ------------------------------ --------------------- ------- ----------------
Options outstanding at May 31, 1997 3,392,900 $ 2.35 CDN and 1.12 US
Granted 850,000 $ .39 US
Exercised (20,000) $ .50
Expired (919,700) $ 2.35 CDN and $1.04 US
- ------------------------------ --------------------- ------- ----------------
Options outstanding at March 31, 1998 3,303,200 $ .95
- ------------------------------------------------------------ ----------------
Price range - $.27 - $.75 (weighted-average
remaining contractual life of 3.8 years 2,069,000 $ .61
Price range $1.00 - $1.81 (weighted-average
remaining contractual life of 3.2 years) 1,234,200 $ 1.52
- ------------------------------------------------------------ ----------------
Exercisable options:
March 31, 1998 3,190,000 $ .93
May 31, 1997 2,998,000 $ 1.15
- ------------------------------------------------------------ ----------------
</TABLE>
In 1998, stock options for 400,000 shares were granted to the president
at an exercise price of $.27, which was $.11 per share below the market
value on the date of grant. These shares have not been exercised but
compensation expense of $44,000 was recorded which represents the
difference between the exercise price and the market value on date of
grant.
In 1997, 212,000 options were granted and exercised at $.005. At the
time the options were granted, the common stock of the Company had a
fair value of $.63. These options were granted in exchange for
services. The services were recorded at the difference between the
option price and fair value of the common stock.
The aggregate amount of shares under warrant pursuant to these
agreements were as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
- ---------------------------------------------- ------------------------- -----------------------------------------
<S> <C>
Warrants outstanding at May 31, 1995 141,108 $ 1.92 US
Expired (42,429) $ 1.62 US
- ---------------------------------------------- ------------------------- --------------
Warrants outstanding at May 31, 1996 98,679 $ 2.04 US
</TABLE>
(Continued)
33
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) (Continued)
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
- --------------------------------- --------------------------------------------------------------------------------
<S> <C>
Granted 1,494,875 $ .84 US
Expired (47,679) $ 1.87 US
- --------------------------------- ----------------------------------------------------
Warrants outstanding at May 31, 1997 1,545,875 $ .88 US
Granted 225,000 $ .63 US
- --------------------------------- ----------------------------------------------------
Warrants outstanding at March 31, 1998 1,770,875 $ .85 US
- --------------------------------- ----------------------------------------------------
The per share weighted average fair values of stock options and
warrants granted during 1998, 1997 and 1996 were $.16, $.29 and $.18,
respectively, on the various dates of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
1998 - expected dividend yield of 0 percent, risk-free interest rate
ranging from 5.50 percent to 6.39 percent, expected volatility of 20
percent and an expected life of 5 years; 1997 - expected dividend yield
of 0 percent, risk free interest rate of 6.29 percent, expected
volatility of 20 percent and an expected life of 2 to 4 years; 1996 -
expected dividend yield of 0 percent, risk-free interest rate of 6.36
percent, expected volatility of 20 percent and an expected life of 4
years.
The Company uses the intrinsic value method of APB Opinion No. 25 for
recognizing stock-based compensation in the financial statements. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options and warrants under the provisions of
Statement 123, the Company's net income (loss) and net income (loss)
per common share would have been as shown in the following table:
<CAPTION>
Ten-month Year
Period Ended Ended
March 31, May 31,
-------------------------------
1998 1997 1996
- ------- ------------ --------------------------------------- --------------------- ---------------- --------------
Net income
(loss):
As reported $ (4,807,351) 148,435 (1,998,791)
Pro forma (4,903,556) (340,489) (2,032,923)
Net income (loss) per common share:
Basic, as reported (.31) .01 (.16)
Basic, pro forma (.31) (.03) (.16)
Diluted, as reported (.31) .01 (.16)
Diluted, pro forma (.31) (.02) (.16)
- ------- ------------ --------------------------------------- --------------------- ---------------- --------------
</TABLE>
(Continued)
34
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) (Continued)
Pro forma net income (loss) reflects only options granted in 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost
for stock options under Statement 123 is not reflected in the pro forma
net income (loss) amounts presented above because compensation cost is
reflected over the options' vesting periods and compensation cost for
options granted prior to June 1, 1995 is not considered.
(12) Related Party Transactions
During a portion of fiscal year 1998, the Company occupied office and
laboratory space under lease agreements with its former subsidiaries,
ETS, Inc. and ETS Analytical Services, Inc. ("ETSAS"). These facilities
were leased from entities whose members included former officers and
directors of the Company. As a result of the sale of the Company's
subsidiaries, ETS, Inc. and ETSAS, these leases were effectively
assigned to other parties during fiscal year 1998. The Company also
leases the premises of its subsidiary, ETS Water and Waste Management,
from an estate in which a current director serves as executor. Rent
expense under these operating leases approximated $258,000, $417,000
and $405,000 for 1998, 1997 and 1996, respectively.
Other accounts receivable consists primarily of advances to officers,
directors and other employees. At March 31, 1998 and May 31, 1997,
$32,918 and $91,381, respectively, were the result of these advances.
The Company has notes receivable from officers and employees of
$344,152 and $408,846 as of March 31, 1998 and May 31, 1997,
respectively. The notes bear interest at six percent.
The Company has notes payable to affiliates of $966,159 and $490,617 as
of March 31, 1998 and May 31, 1997, respectively. These affiliates
include certain partnerships and individuals whose members are officers
and directors of the Company. The notes bear interest at rates between
six and twenty percent.
In March 1997, the Company borrowed $2,000,000 from a stockholder,
Thomas W. Marmon. The note is due March 17, 1999; however, the
stockholder has the option to accelerate the entire principal and
interest owed and demand payment in full upon sixty days notice. Due to
this acceleration clause, the entire amount is shown as current at May
31, 1997. The note bears interest at fifteen percent which is payable
monthly.
(Continued)
35
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) (Continued)
The Company, in May 1998, entered into an agreement in principle to
restructure its credit facility with Thomas W. Marmon, a former
director and a large stockholder of the Company. The new note for the
credit facility, which in part is a renewal of the previous note,
permits total aggregate borrowing by the Company of up to $3,500,000.
The new note will provide for monthly interest payments at a rate of 10
percent until the facility's maturity at May 1, 1999 and 12 percent
thereafter. The note is subject to call by the holder upon sixty days
written notice. Due to this acceleration clause, the entire amount is
shown as current at March 31, 1998. At March 31, 1998, the amount
outstanding under the credit facility was $2,860,000, plus accrued
interest of $210,000 which is payable on June 1, 1998. The new note is
secured by the assets of the Company and its subsidiaries. Mr. Marmon
resigned as a director of the Company as of April 13, 1998.
In addition, the Company had $550,000 of notes payable to two
stockholders at March 31, 1998 with due dates in fiscal 1999. Interest
is payable monthly at rates ranging from 10 percent to 12 percent per
annum.
The notes are unsecured.
(13) Fourth Quarter Adjustments
Significant adjustments to the fourth quarter for the year ended May
31, 1997 included a charge of approximately $75,000 as a provision for
bad debts based on specific reviews of customer accounts and a $95,000
charge to correctly state costs and earnings in excess of billings.
(14) 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 long-term 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 long-term 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.
(Continued)
36
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(15) Contingencies
The Company does not receive hazardous waste during the normal course
of business. Until the Company's environmental operations were sold in
fiscal 1998, it received environmental samples for analysis; and,
occasionally, in the process of analysis, small quantities of hazardous
waste were generated. Such waste was 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 was engaged in field testing. It was
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 litigation or environmental matters currently existing
which would have a material impact on the financial position or results
of operations of the Company.
See notes 2 and 10 for contingencies related to the China Steel
Contract.
(16) Comparable Prior Period Income Statement Information (Unaudited)
As described in note 1, on April 6, 1998, the Company changed its
fiscal year from May 31 to March 31. Comparable results of operations
for the ten-month period ended March 31, 1997 follows:
<TABLE>
<CAPTION>
Contract revenues $ 14,219,865
- ----------------------------------- -----------------------------------------------------------------------------
<S> <C>
Cost of goods and services 11,834,222
Selling, general and administrative expenses 2,246,981
- -----------------------------------------------------------------------------------------------------------------
138,662
Interest income 15,729
Interest expense (166,856)
Gain on sale of equipment 101,037
Other, net 727
- ---------------------------- ------ -----------------------------------------------------------------------------
Income from continuing operations before income taxes 89,299
Income tax expense -
- ----------------------------------- -----------------------------------------------------------------------------
Income from continuing operations 89,299
Loss from discontinued operations (566,793)
- -----------------------------------------------------------------------------------------------------------------
Net loss $ (477,494)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
37
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Future Accounting Considerations
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. Statement 130 establishes standards for reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. Statement 130 was issued to address concerns over the
practice of reporting elements of comprehensive income directly in
equity.
This Statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence
with the other financial statements. It does not require a specific
format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the
period in that financial statement. Enterprises are required to
classify items of "other comprehensive income" by their nature in the
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. It does not require per share amounts of comprehensive income
to be disclosed.
Statement 130 is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Comparative financial
statements provided for earlier periods are required to be reclassified
to reflect the provisions of this statement. Publicly traded
enterprises that issue condensed financial statements for interim
periods are required to report a total for comprehensive income in
those financial statements.
Adoption of Statement 130 on April 1, 1998 will not have any effect on
the Company's consolidated financial position, results of operation or
liquidity.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. It is not anticipated that
Statement 131 will have a material effect on current or prior period
disclosures presented by the Company.
(Continued)
38
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(18) Sale of Service Division of ETS Water and Waste Management, Inc.
("ETSW")
On April 28, 1998, the Company sold the Service Division of ETSW (e.g.,
septic system installation and repair, irrigation, plumbing, jacuzzi
service contracts and incidental concrete manufacturing/concrete
products) to a new corporation formed by Coleman S. Lyttle, a director
of the Company and President of ETSW, for a total purchase price of
$700,000, paid as follows: $350,000 cash at closing, assumption of
$100,000 of indebtedness of ETSW and notes payable to ETSW in the
aggregate amount of $250,000. Mr. Lyttle will continue to serve as a
director of the Company and as President of ETSW after the purchase.
(19) Management's Plans
The Company experienced a substantial loss of $4,807,351 for the
ten-month period ended March 31, 1998. Stockholders' deficit at March
31, 1998 was $713,619 which represents a decrease of $3,683,142 from
stockholders' equity of $2,969,523 at May 31, 1997. The Company's
current liabilities of $7,734,434 exceeded its current assets of
$4,665,184 by $3,069,250 at March 31, 1998. The Company has experienced
negative cash flows from operations the past three years. See note 2
for restricted cash of $600,000 relating to the China Steel contract.
Also, see note 10 for additional information relating to "assets of
business transferred under contractual arrangements" of $267,666,
stated net of a valuation allowance of $858,000, to Q Enterprises. The
conversion of these assets to cash is dependent on the future
profitable operations of Q Enterprises. Management is negotiating with
certain note holders to convert debt to preferred stock and to obtain a
line of credit from a bank. Management believes it can return the
Company to profitable operations in fiscal 1999. There can be no
assurance that management's negotiations will be successful or the
Company will have profitable operations in fiscal 1999.
- --------------------------------------------------------------------------------
39
<PAGE>
ETS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
ETS INTERNATIONAL, INC.
7400 Beaufont Springs Drive
Suite 415
Richmond, VA 23225
Phone No. (804) 272-6600
James B. Quarles, Director, President and Chief Executive Officer
Navin D. Sheth, Director, Chief Financial Officer, Treasurer
Coleman S. Lyttle, Director
Lee A. Raver, Director
Warren E. Beam, Jr., Secretary
INFRACORPS OF VIRGINIA, INC.
(formerly ETS Water and Waste Management, Inc.)
2210 Belt Blvd. at Hopkins Road
P. O. Box 24205
Richmond, VA 23224
Phone No. (804) 232-6774
Coleman S. Lyttle, Director, President
Navin D. Sheth, Director, Chief Financial Officer, Secretary
David C. Paulette, Director, Vice President
INFRACORPS OF FLORIDA, INC.
(formerly ETS Liner, Inc.)
4948 North Orange Blossom Trail
Orlando, FL 32810
Phone No. (404) 298-4545
Coleman S. Lyttle, Director, President
Navin D. Sheth, Director, Chief Financial Officer, Secretary
Thomas R. Marmon, Director, Vice President
40
<PAGE>
ETS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
Annual Meeting
The 1998 Annual Meeting of Shareholders will be held at 10:00 a.m. on August 17,
1998, at the Richmond Marriott, 500 East Broad Street, Richmond, Virginia 23219.
Requests for Information
Requests for information about ETSI should be directed to Warren E. Beam, Jr.,
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225, telephone (804)
272-6600. A copy of ETSI's Annual Report on Form 10-K for the transition period
from June 1, 1997 to March 31, 1998 is available without charge to any
shareholder requesting the same.
Shareholder Relations
Warren E. Beam, Jr.
7400 Beaufont Springs Drive
Suite 415
Richmond, VA 23225
Phone No. (804) 272-6600
Transfer Agent
ChaseMellon Shareholder Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660-2108
Trading Information
OTC Bulletin Board
Symbol: ETSI
41
Exhibit 21
SUBSIDIARIES OF ETS INTERNATIONAL, INC.
As of March 31, 1998
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
InfraCorps of Virginia, Inc. Virginia
(formerly ETS Water and Waste Management, Inc.)
InfraCorps of Florida, Inc. Virginia
(formerly ETS Liner, Inc.)
IC Subsidiary, Inc.* Virginia
(formerly ETS, Inc.)
ETS Analytical Services, Inc.* Virginia
- ------------------------------
*Inactive
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and/or directors of ETS International, Inc., a Virginia corporation (the
"Company"), does hereby constitute and appoint James B. Quarles and Warren E.
Beam, Jr., and each of them (with full power to each of them to act alone),
his true and lawful Attorneys in Fact and Agents for him and on his behalf
and in his name, place and stead in any and all capacities and particularly
as an officer and/or director of the Company to sign, execute and affix his
seal thereto and file the document referred to below:
Annual Report for the transition period from June 1,
1997 to March 31, 1998 on Form 10-K, and any
amendments thereto, together with any exhibits and
any and all documents required to be filed with
respect thereto, with the Securities and Exchange
Commission and all other appropriate regulatory
authorities;
granting unto said Attorneys and each of them full power and authority to do
and perform every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully, to all intents
and purposes, as he himself might or could do if personally present, hereby
ratifying and confirming all that said Attorneys in Fact and Agents or each
of them may lawfully do or cause to be done by virtue hereof.
WITNESS the signatures and seals of the undersigned this 11th day of
June, 1998.
s/James B. Quarles (SEAL)
-------------------------------
James B. Quarles
s/Coleman S. Lyttle (SEAL)
-------------------------------
Coleman S. Lyttle
s/Navin D. Sheth (SEAL)
-------------------------------
Navin D. Sheth
s/Lee A. Raver (SEAL)
-------------------------------
Lee A. Raver
s/Warren E. Beam, Jr. (SEAL)
-------------------------------
Warren E. Beam, Jr.
<PAGE>
STATE OF VIRGINIA )
) to-wit:
CITY OF RICHMOND )
I, Victoria H. Crumpler, a Notary Public in and for the City of
Richmond, in the State of Virginia, do hereby certify that
James B. Quarles Lee A. Raver
Coleman S. Lyttle Warren E. Beam, Jr.
Navin D. Sheth
whose names are signed to the foregoing writing bearing date the 11th day of
June, 1998, this day personally appeared before me and acknowledged the same
in my City and State aforesaid.
GIVEN under my hand and seal this 11th day of June, 1998.
s/Victoria H. Crumpler
---------------------------
Notary Public
My Commission Expires:
10/31/2001
- -----------------------
(SEAL)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE TRANSITION PERIOD FROM JUNE 1, 1997 TO MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 206,750
<SECURITIES> 0
<RECEIVABLES> 2,540,810
<ALLOWANCES> (50,000)
<INVENTORY> 931,590
<CURRENT-ASSETS> 4,665,184
<PP&E> 6,087,352
<DEPRECIATION> (3,475,318)
<TOTAL-ASSETS> 8,550,871
<CURRENT-LIABILITIES> 7,734,434
<BONDS> 1,388,439
0
0
<COMMON> 6,126,338
<OTHER-SE> (6,839,957)
<TOTAL-LIABILITY-AND-EQUITY> 8,550,871
<SALES> 0
<TOTAL-REVENUES> 12,644,431
<CGS> 0
<TOTAL-COSTS> 13,425,884
<OTHER-EXPENSES> 1,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 758,566
<INCOME-PRETAX> (1,536,104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,536,104)
<DISCONTINUED> (3,271,247)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,807,351)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
