SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
Commission file number 0-19678
INFRACORPS INC.
- --------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
Virginia 54-1414643
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 272-6600
--------------
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
Title of Each Class Which Registered
Common Stock, without 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 non-affiliates of
the registrant as of June 15, 1999. $2,940,560
As of July 13, 1999, the registrant had 16,492,043 shares of common stock,
without par value per share, issued and outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the 1999 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 July 26, 1999 are incorporated by reference into Part III hereof.
PART I
Forward Looking Statements
This 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
Overview
InfraCorps Inc. ("INFC"), 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, INFC made a determination to focus on its
construction lines of business and to de-emphasize its environmental
products and services. Specifically, INFC 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."
INFC operates its infrastructure business through a wholly-owned
affiliate: InfraCorps of Virginia, Inc. ("ICVA"). During fiscal year
1999 INFC closed InfraCorps of Florida, Inc. ("ICFL"), a subsidiary
of ICVA. As a result ICFL is not engaged in active business operation
at March 31, 1999.
<PAGE>
ICVA, a Virginia corporation headquartered in Richmond, Virginia, is
INFC's construction subsidiary. ICVA was formed as a result of INFC'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, ICVA. ICVA, along with its subsidiary, InfraCorps of
Florida, Inc., a Virginia corporation previously headquartered in
Orlando, Florida, utilizes trenchless technologies to install and
rehabilitate subsurface pipelines. INFC's infrastructure customers
include municipalities, government agencies, Fortune 500 companies
and developers. ICVA, through its Service Division, also design and
install septic and irrigation systems and provided related repair and
maintenance services. As part of INFC's effort to focus on the
infrastructure business, INFC, in April 1998, sold the Service
Division of ICVA to a new corporation formed by Coleman S. Lyttle, a
director of INFC and President of ICVA.
INFC's principal executive offices are located at 7400 Beaufont
Springs Drive, Suite 415, Richmond, Virginia 23225, and its telephone
number is (804) 272-6600.
Business Segment Information
During the ten-month period ended March 31, 1998 ("fiscal year
1998"), INFC and its wholly-owned affiliates provided both
environmental and infrastructure products and services. Prior to
fiscal 1998 year end, INFC disposed of its environmental operations
segments. During the twelve-month period ended March 31, 1999
("fiscal year 1999"), INFC specialized in infrastructure design,
construction and maintenance utilizing trenchless technologies to
install and rehabilitate subsurface pipelines.
Services and Products
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 an other activities, as
opposed to open trenching and its associated major disruptions to
surface activities.
Both ICVA and ICFL 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 pipe liner
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.
<PAGE>
INFC is a party to a contract license agreement (the "License
Agreement") with Ultraliner, Inc. ("Ultraliner"), under which ICVA
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 Virginia 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, 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
ICVA for an additional five-year term, subject to termination in the
event of specific defaults, including the failure of ICVA to meet
certain minimum performance objectives. After payment of an initial
license fee, no further royalties are due under the License
Agreement. However, if ICVA seeks to utilize the Ultraliner
technology outside of the Territory, whether or not in an area where
a license for such permitted use has been granted by Ultraliner, ICVA
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 ICVA to Ultraliner, as agent for ICVA, 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 year 1999, ICVA comprised 100% of INFC's
infrastructure business.
ICFL was a party to a sub-license agreement with Miller Pipeline
Corporation ("Miller") for an exclusive sub-license to use the "EX,"
"EX Method" and "EX Pipe" service marks and related technology and
process in water, sewer and industrial process pipelines. ICFL's
territory under the sub-license 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 "ICFL Territory"). Miller and Ultraliner have
separately patented processes and different end uses of its products.
ICFL historically has not had profitable operations and was closed
November 30, 1998. Operations were shut down with all contracts
expected to be completed within the year.
On March 12, 1998, INFC completed the sale of substantially all of
the environmental assets to ETS Acquisition, Inc. In connection with
the sale, INFC 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").
Also, INFC 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 INFC's contract to supply
to China Steel Corporation sulfur dioxide removal systems utilizing
the LEC technology (the "CSC Contract").
<PAGE>
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
INFC to ATI. However, although negotiations are underway with CSC,
INFC has not yet been successful in obtaining assignment of the CSC
Contract. Accordingly, INFC still has potential liability under the
CSC Contract which could have a material negative impact on INFC'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, CSC 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 INFC.
Suppliers and Licenses
INFC's materials and equipment are generally available from several
suppliers. However, INFC believes that Ultraliner is presently the
sole source of proprietary Ultraliner material and, therefore, ICVA
is presently dependent upon Ultraliner for its supply of Ultraliner
material. During the last three years, ICVA has not experienced any
difficulty in obtaining adequate supplies of Ultraliner tube
material.
Because of the availability of alternate or similar trenchless
technology process, INFC management does not believe that the loss of
the current licenses by ICVA would be material to INFC's business
operations. See "Competition" below.
Revenue Recognition, Contract Awards and Backlog
INFC 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.
Customers
During fiscal year 1999, INFC, through ICVA, 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 INFC's infrastructure revenues came from
state and local government entities - cities, counties, state
agencies and regional authorities. For fiscal year 1999, INFC had
infrastructure contract revenues from six customers, each of which
accounted for more than 5% of contract revenues. At March 31, 1999,
five customers had accounts receivable balances which exceeded 5% of
the trade accounts receivable balance. The accounts receivable
balances for these customers totaled $1,477,180.
<PAGE>
Municipal Activities
In order to bid for municipal construction services in Virginia, ICVA
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. ICVA 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. ICVA not only bids on the basis of the
specifications contained in the Dodge Report, but is also often
invited by the municipalities themselves to bid on specific projects.
ICVA 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, ICVA 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 ICVA is the low bidder, ICVA must submit a profile
called the "Critical Path Method" or "CPM" setting forth the time
frame in which is 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. ICFL engaged in
similar bidding processes with respect to municipal construction in
the State of Florida.
Commercial Construction
ICVA also performs services for developers and corporations. For
residential and commercial developers, ICVA 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, ICVA 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. ICVA, in such a situation, will
design and modify the equipment to meet legal and environmental
requirements.
<PAGE>
Competition
The general pipeline reconstruction, rehabilitation and repair
business is highly competitive. INFC 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. INFC 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. INFC considers grouting a
short-term repair technique and not a long-term pipeline
rehabilitation solution competitive with the "fold and formed"
process. As a practical matter, competition for INFC typically begins
at the point that an end-user has determined to employ trenchless
technology over traditional rehabilitation methods involving
substantial excavation.
INFC competes with alternative trenchless technologies, such as
cured-in-place pipeline rehabilitation. INFC 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. INFC
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. INFC
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.
INFC believes that the trenchless pipeline reconstruction market is
continuing to expand, with the entry of imitation and alternative
products. INFC believes that its trenchless technology products and
services are cost-competitive.
ICVA's competition comes from many smaller and narrowly focused
companies in the Richmond and Northern Virginia areas. ICVA's major
competitor in the trenchless sewer and water main rehabilitation
business is Insituform, Inc., which is a cured-in-place technology.
ICVA 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 ICVA must first prove its
proficiency in trenchless technology to municipalities through
successful completion of small contracts before it will be chosen on
larger programs.
<PAGE>
Current Projects
As of June 15, 1999, ICVA had 17 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, 1999.
Supervision and Regulation
INFC's infrastructure activities are regulated by federal and state
statutes. In general, federal statues 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. INFC 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, 1999, INFC and ICVA employed 3 and 170 full-time
personnel, respectively.
ITEM 2-PROPERTIES
Effective in 1994, ICVA 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 INFC, is executor, at $10,500 per month for two
years. One 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 $126,000 for fiscal 1999. INFC believes that the
lease is on terms as favorable as those which would be available from
non-affiliated third parties.
ITEM 3-LEGAL PROCEEDINGS
Not applicable.
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 fiscal year 1999.
<PAGE>
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 July 26, 1999.
The names, ages and positions of all of the executive officers of
INFC as of March 31, 1999 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.
Previous and Present Duties and Responsibilities:
<TABLE>
<CAPTION>
Position and Business
Name & Age Experience for Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C>
James B. Quarles, 46 January 1998 to Present President and Chief
Executive Officer of
INFC
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
INFC
January 1987 to December 1996 Chairman and President
of Enviros, Inc., Seattle,
WA (biotechnical)
Navin D. Sheth, 52 January 1998 to Present Chief Financial Officer of
INFC
June 1994 to Present Executive Vice President
of INFC
May 1996 to Present Chief Operating Officer of
ICVA
Coleman S. Lyttle, 46 June 1994 to Present President of ICVA
Warren E. Beam, Jr., 42 April 1998 to Present Secretary of INFC
January 1993 to January 1998 Treasurer of Spurlock
Adhesives, Inc. and
Spurlock Industries, Inc.
and their predecessors
(chemical manufacturing)
</TABLE>
<PAGE>
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 5 of the 1999 Annual Report to Shareholders is incorporated
herein by reference.
In October 1997, there were 225,000 warrants issued for services
rendered. The Company issued options to purchase 850,000 shares of
stock to employees and consultants under the 1995 Non-Statutory Stock
Option Plan and options to purchase 1,110,000 shares of stock to
employees, directors and consultants under the 1997 Non- Statutory
Stock Option Plan.
ITEM 6-SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
on page 6 of the 1999 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on
pages 7 through 13 of the 1999 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of INFC and the
Independent Auditors' Report set forth on pages 14 through 48 of the
1999 Annual Report to Shareholders are incorporated herein by
reference:
1. Independent Auditors' Report.
2. Consolidated Balance Sheets as of March 31, 1999 and March
31, 1998.
3. Consolidated Statements of Operations for the Ten-Month
Period Ended March 31, 1998 and Years Ended March 31, 1999
and May 31, 1997.
4. Consolidated Statements of Stockholders' Equity (Deficit)
for the Ten-Month Period Ended March 31, 1998 and Years
Ended March 31, 1999 and May 31, 1997.
5. Consolidated Statements of Cash Flows for the Ten-Month
Period Ended March 31, 1998 and Years Ended March 31, 1999
and May 31, 1997.
6. Notes to Consolidated Financial Statements as of March 31,
1999 and 1998 and May 31, 1997.
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG LLP ("KPMG") served as the Company's independent public
accountants for the fiscal years ended May 31, 1990 through March 31,
1998. For various business reasons, the Company's Board of Directors
recommended the dismissal of KPMG, and on February 16, 1999, the
Company officially terminated its business relationship with KPMG.
KPMG's reports on that Company's financial statements for each of the
last two fiscal years did not contain an adverse opinion or
disclaimer of opinion. Similarly, KPMG did not modify either such
report as to uncertainty, audit scope or accounting principles,
except that KPMG's auditors' report on the consolidated financial
statements of InfraCorps Inc. (name of company changed to InfraCorps
Inc. at shareholder meeting on August 17, 1998) and subsidiaries as
of March 31, 1998 and May 31, 1997 and for the ten-month period ended
March 31, 1998 and for the years ended May 31, 1997 and 1996,
contained a separate paragraph stating that "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.
In connection with the audits of fiscal year 1998 and the fiscal year
ended May 31, 1997, there were no disagreements between the Company
and KPMG regarding any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the
subject matter of the disagreement. In addition, there were no
disagreements between the Company and KPMG regarding the matters
noted above during the interim period from March 31, 1998 through the
date of dismissal.
<PAGE>
On February 16, 1999, the Board of Directors of the Company appointed
subject to the approval of the Company's shareholders, the firm
Goodman & Company, LLP as independent public accountants to audit the
Company's consolidated financial statements for fiscal year 1999.
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 9 and 10 of
the Proxy Statement for the Annual Meeting of Shareholders to be held
July 26, 1999, 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 11 of the Proxy Statement
for the Annual Meeting of Shareholders to be held July 26, 1999, 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 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 July 26, 1999, 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 through 4 of the Proxy Statement for the
Annual Meeting of Shareholders to be held July 26, 1999, 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 page 9 of the Proxy Statement for the Annual
Meeting of Shareholders to be held on July 26, 1999, is incorporated
herein by reference.
<PAGE>
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:
Independent Auditors' Report of KPMG LLP covering the
consolidated financial statements of InfraCorps Inc.,
(formerly ETS International, Inc.) as of March 31, 1998 and
for the ten-month period ended March 31, 1998 and year ended
May 31, 1997, is filed as an exhibit and is incorporated by
reference herein.
All schedules are omitted, as the required information is
inapplicable or the information is presented in the
consolidated financial statements or related notes thereto.
3. Exhibits to this Form 10-K are as follows:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------
<S> <C>
13 1999 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
23.1 Accountant's Consent (Goodman & Co., LLP Consent to
Incorporate by Reference Report into S-8 Filing)
23.2 Accountant's Consent (KPMG LLP Consent to Incorporate
by Reference Report into S-8 Filing)
24 Power of Attorney
27 Financial Data Schedule
99 Independent Auditors' Report
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated February 16, 1999, reporting
change in accountants.
</TABLE>
<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.
INFRACORPS INC.
By: /s/ Warren E. Beam, Jr. 7/14/99
----------------------- -------
Warren E. Beam, Jr. Date
Secretary
<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.
<TABLE>
<CAPTION>
<S> <C>
/s/ James B. Quarles 7/14/99 * President, Chief Executive Officer
- --------------------------------------------- and Director
James B. Quarles Date
/s/ Navin D. Sheth 7/14/99 * Chief Financial Officer, Treasurer
- --------------------------------------------- (Principal Financial Officer)
Navin D. Sheth Date
/s/ Warren E. Beam, Jr. 7/14/99 Secretary
- --------------------------------------------- (Principal Accounting Officer
Warren E. Beam, Jr. Date
/s/ Coleman S. Lyttle 7/14/99 * Director
- ---------------------------------------------
Coleman S. Lyttle Date
/s/ Terence R. Dellecker 7/14/99 * Director
- ---------------------------------------------
Terence R. Dellecker Date
/s/John R. Potter 7/14/99 * Director
- ---------------------------------------------
John R. Potter Date
/s/ Allen Kahn 7/14/99 * Director
- ---------------------------------------------
Allen Kahn Date
/s/ James G. Zumwalt 7/14/99 * Director
- ---------------------------------------------
James G. Zumwalt
</TABLE>
* By /s/ Warren E. Beam, Jr.
- --------------------------------
Warren E. Beam, Jr.
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
13 1999 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
23.1 Accountant's Consent (Goodman & Co., LLP Consent to
Incorporate by Reference Report into S-8 Filing)
23.2 Accountant's Consent (KPMG LLP Consent to Incorporate by
Reference Report into S-8 Filing)
24 Power of Attorney
27 Financial Data Schedule
99 Independent Auditors' Report
EXHIBIT 13
INFRACORPS INC.
1999
ANNUAL
REPORT
TO
SHAREHOLDERS
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225 - (804) 272-6600
<PAGE>
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Message to Shareholders................................................... 1
Company Profile........................................................... 4
Market Information........................................................ 5
Selected Financial Data................................................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 7
Independent Auditors' Report..............................................14
Consolidated Balance Sheets...............................................16
Consolidated Statements of Operations.....................................18
Consolidated Statements of Stockholders' Equity (Deficit).................19
Consolidated Statements of Cash Flows.....................................21
Notes to Consolidated Financial Statements................................24
Directors and Officers....................................................50
Shareholder Information...................................................51
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:
InfraCorps Inc. moved forward during fiscal 1999 in its mission to
become a leader in the deployment of proprietary trenchless technologies for the
installation and rehabilitation of subsurface pipelines for the transmission of
water, waste and natural gas. The Company's financial performance for the year
reported herein indicates that the strategy pursued by new management is a
viable one. Specifically, InfraCorps produced pipeline-associated revenues of
more than $1,500,000 per month during fiscal 1999, as compared to approximately
$1,200,000 per month for the prior year, representing an increase of
approximately twenty-five percent. The Company's authorized backlog is
approximately $15,000,000 as of June 15, 1999 as compared to approximately
$12,000,000 a year ago, also representing an increase of twenty five percent. In
addition, InfraCorps significantly increased the percentage of its deployment of
proprietary trenchless technologies, as compared to the utilization of
traditional "open-cut" methods during prior years, in its generation of revenue.
InfraCorps converted its $4,250,000 long term debt to equity via the
issuance of 4,250,000 shares of convertible preferred stock during the course of
fiscal 1999. In addition, a line-of-credit is now available to the Company by a
reputable banking institution. These events demonstrate the former and new
lenders' optimism in the Company's prospects for the future. InfraCorps had a
net worth of a negative $713,619 as of March 31, 1998. The Company's net worth
as of March 31, 1999 was $2,574,917.
Your management team is dedicated to the mission of increasing the
net worth of InfraCorps and enhancing shareholder value. The following briefly
describes the steps taken during the first quarter of fiscal 2000:
* Negotiations continue for the transfer of the Company's
contract with China Steel Corporation for the delivery of
three patented air pollution control (Limestone Emission
Control or "LEC") units to China Steel's facility in
Taiwan. Representatives of both China Steel and Air
Technologies, Inc., the latter being owned by former
officers of the Company and having agreed to manage the
contract on behalf of InfraCorps, report the construction
and testing of the units to be approximately eighty five
percent complete. InfraCorps looks forward to the ultimate
elimination, either through contract completion or
transfer, of this last aspect of the Company's former
environmental business. InfraCorps maintains a fifty
percent interest in any future royalties associated with
the patented LEC system but no additional units have been
sold since those contracted for by China Steel Corporation
approximately two years ago;
-1-
<PAGE>
* InfraCorps Technology, Inc., a Virginia corporation, was
established as a wholly-owned subsidiary of the Company to
acquire the rights to additional trenchless technologies
for deployment by the InfraCorps organization. A
"cured-in-place" pipe process was recently licensed by
Firstliner USA to InfraCorps for the Eastern United States
region for sewer and storm sewer rehabilitation. Mr.
Richard E. Herrick was appointed President of InfraCorps
Technology and immediately brought his 30 years of
experience in our chosen industry to bear on behalf of the
Company. InfraCorps Technology already has an authorized
backlog exceeding $500,000 and is in pursuit of additional
opportunities with municipal, state, federal and commercial
customers;
* InfraCorps International, Inc., a Virginia corporation, was
formed as a wholly-owned subsidiary of the Company to
provide engineering consulting services on behalf of
clients requiring design and management support for
projects involving the utilization of trenchless
technologies. We expect InfraCorps International to more
than carry its own weight financially; most importantly, it
will evaluate and alert the Company to additional
trenchless technologies as they are developed for
deployment, as well as assist in the identification of
additional operating companies to be considered for
acquisition. Mr. Michael J. Kirby, P.E., was appointed
President of InfraCorps International. With 20 years
experience in the trenchless industry, Mike brings a wealth
of knowledge and valuable contacts with him. InfraCorps
International commenced its play on our team with the
execution of a contract with Baltimore Gas and Electric.
Looking forward, management will continue to focus on the additional
strengthening of the Company's financial base to support continued growth
internally, seeking opportunities to expand geographically and increase our
range of trenchless capabilities. In addition, we will identify and review
candidates for potential acquisition.
Coleman S. Lyttle, President of InfraCorps of Virginia, Inc., has
done a fine job and deserves our appreciation in recognition for keeping that
subsidiary focused on its evolving transition from a contracting firm to a
design/build firm and increasing its revenues, profit and authorized backlog.
Navin D. Sheth, InfraCorps Chief Financial Officer, also deserves our gratitude
for his efforts in successfully working through the challenges associated with
the prior financial condition of the Company.
-2-
<PAGE>
Thanks to our Board of Directors, Employees, Management Advisory
Committee and you, the Shareholders, for the efforts, continued support and
patience you showed management during the past year. It is greatly appreciated.
My enthusiasm for our Company's prospects continues to grow and I am
increasingly motivated to aim high.
Sincerely,
James B. Quarles
Chairman and President
-3-
<PAGE>
COMPANY PROFILE
InfraCorps Inc. ("INFC"), 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, INFC
made a determination to focus on its construction lines of business and to
de-emphasize its environmental products and services. Specifically, INFC 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."
INFC operates its infrastructure business through a wholly-owned
affiliate, InfraCorps of Virginia, Inc. ("ICVA"), a Virginia corporation
headquartered in Richmond, Virginia. ICVA was formed as a result of INFC'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, ICVA. ICVA, along with its
subsidiary, InfraCorps of Florida, Inc. ("ICFL"), a Virginia corporation
headquartered in Orlando, Florida and closed November 30, 1998, utilizes
trenchless technologies to install and rehabilitate subsurface pipelines. INFC's
infrastructure customers include municipalities, government agencies, Fortune
500 companies and developers. ICVA, through its Service Division, also designed
and installed septic and irrigation systems and provided related repair and
maintenance services. As part of INFC's effort to focus on the infrastructure
business, INFC, in April 1998, sold the Service Division of ICVA to a new
corporation formed by Coleman S. Lyttle, a director of INFC and President of
ICVA.
INFC's principal executive offices are located at 7400 Beaufont
Springs Drive, Suite 415, Richmond, Virginia 23225, and its telephone number is
(804) 272-6600.
-4-
<PAGE>
MARKET INFORMATION
Prior to March 6, 1998, the Common Stock of INFC 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 INFC was delisted from the AMEX-EMC because INFC was unable to achieve
compliance with the EMC's financial guidelines for continued listing. The Common
Stock of INFC then traded in the over-the-counter market and was quoted under
the symbol ETSI on the OTC Bulletin Board, an electronic quotation and trade
reporting service of the National Association of Securities Dealers. On August
17, 1998, the Company changed its name to InfraCorps Inc. and is currently
quoted under the symbol INFC.
The table below sets forth for each of the fiscal years during INFC's
last two fiscal years the range of the high and low bid information for INFC
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 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
Quarter ended March 31, 1998........................ $0.125 $0.125
Fiscal 1999
Quarter ended June 30, 1998......................... $0.1562 $0.0725
Quarter ended September 30, 1998.................... $0.0937 $0.0937
Quarter ended December 31, 1998..................... $0.15 $0.15
Quarter ended March 31, 1999........................ $0.15 $0.15
-5-
<PAGE>
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
and for 1999 which is as of and for the 12 month period ended March 31
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- -----
<S> <C>
Total revenue $ 18,877,867 $ 11,267,909 $ 16,209,501 $ 13,743,857 $ 13,172,142
Gross profit 2,589,255 1,695,185 2,427,278 819,587 1,960,245
Operating income (loss) 315,998 19,530 1,001,017 (988,446) 272,210
Income (loss) from continuing
operations 378,460 (658,861) 810,533 (1,163,241) 112,115
Income (loss) from discontinued
operations (343,110) (2,756,617) (662,098) (835,550) 390,551
Loss on disposal of discontinued
operations (747,214) (1,391,873) -- -- --
Extraordinary Gain 2,550,000 -- -- -- --
Net income (loss) 1,838,136 (4,807,351) 148,435 (1,998,791) 502,666
Total assets 8,570,447 8,550,871 12,111,437 9,651,799 9,397,411
Long term debt, net of current portion 682,046 907,896 1,063,831 1,260,133 867,817
Total stockholders' equity (deficit) 2,574,917 (713,619) 2,969,523 1,305,089 3,068,464
Income (loss) from continuing
operations per common share:
Basic 0.02 (0.04) 0.06 (0.09) 0.01
Diluted 0.02 (0.04) 0.06 (0.09) 0.01
Income (loss) from discontinued
operations per common share:
Basic (0.02) (0.18) (0.05) (0.07) 0.03
Diluted (0.02) (0.18) (0.05) (0.07) 0.03
Loss on disposal of discontinued
operations per common share:
Basic (0.04) (0.09) -- -- --
Diluted (0.04) (0.09) -- -- --
Extraordinary Gain
Basic 0.15 -- -- -- --
Diluted 0.14 -- -- -- --
Net Income (loss) per common share:
Basic 0.11 (0.31) 0.01 (0.16) 0.04
Diluted 0.10 (0.31) 0.01 (0.16) 0.04
</TABLE>
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
operation results of INFC 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. As the year ended March 31, 1999 was a twelve-month period, the Company
will compare its results of operations for the year ended March 31, 1999 to the
twelve-month period ended March 31, 1998. See Note 16 of Notes to Consolidated
Financial Statements for unaudited results of operations for the ten-month
period ended March 31, 1997, and for unaudited results of operation for the
twelve-month period ended March 31, 1998.
Fiscal year ended March 31, 1999 compared to twelve months ended March 31, 1998.
Substantially all of the assets and certain liabilities relating to
the Company's environmental operations have been sold and revenues from
environmental operations have been removed from continuing operations for the
twelve-month period ended March 31, 1998. As this sale occurred in March 1998,
no revenues or expenses are included in fiscal year ended March 31, 1999. In
November 1998, the Company closed the Florida operations and all assets and
certain liabilities were moved to the Virginia operations. The revenues and
expenses have been removed from continuing operations for the periods ended
March 31, 1999 and 1998 and May 31, 1997.
Revenues for the fiscal year ended March 31, 1999 (the "fiscal year
1999") were $18,877,867 compared to $15,130,953 for the twelve-month period
ended March 31, 1998, resulting in a 25% increase in revenues. This increase
largely was the result of increase in new orders and several large contracts
awarded to the Company during this period.
Cost of goods and services for the fiscal year 1999 was $16,288,612
or 86% of sales compared to $12,840,717 or 85% of sales for the twelve-month
period ended March 31, 1998. Gross profits for the fiscal year 1999 were
$2,589,255 or 14% of sales compared to $2,290,236 or 15% of sales for the
twelve-month period ended March 31, 1998. These decreases in gross profits were
due to the decreases in margins on the larger contracts awarded.
Selling, general and administrative expenses were $2,273,257 for the
fiscal year 1999 or 12% of net sales compared to $1,976,890 or 13% of net sales
for the twelve-month period ended March 31, 1998. The general and administrative
expense decrease as a percentage was due to reduced costs associated with the
management reorganization and the higher amount is attributable to higher
professional fees and the move of the corporate offices.
-7-
<PAGE>
Gain on sale of assets of $332,575 for the fiscal year 1999 reflected
the sale of the Service Division of ICVA. Interest expense for the fiscal year
1999 was $324,499 compared to $948,358 for the twelve-month period ended March
31, 1998. Interest expense reflects interest paid on notes payable and long-term
debt, including credit lines, amortization of discount associated with the
convertible debentures and capital leases. The reduction was due to the
conversion of $4,250,000 of debt to equity during the fiscal year 1999.
Income from continuing operations for the fiscal year 1999 was
$378,460 compared to a loss of $582,151 for the twelve-month period ended March
31,1998. Discontinued operations include Florida's operations which was closed
November 30, 1998 for the fiscal year 1999 and Florida operations and
environmental operations which were sold in October 1997 and March 1998 for the
twelve-month period ended March 31, 1998. Loss from discontinued operations was
$343,110 for the fiscal year 1999 as compared to $2,657,574 for the twelve-month
period ended March 31, 1998. Revenues of $1,042,446 and $1,809,671 for the
fiscal year 1999 and the twelve months ended March 31, 1998 related to the
Florida infrastructure operations. Revenues of $964,571 for the twelve months
ended March 31, 1998 related to the discontinued environmental operations.
Loss on disposal of discontinued operations was $1,391,873 for the
twelve-month period ended March 31, 1998, 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. Loss on disposal of discontinued
operations was $747,214 for the fiscal year 1999, includes the loss on sale and
abandonment of the assets, as well as phase-out period operating losses of
$677,031 from the measurement date to March 31, 1999.
On July 30, 1998, certain shareholders converted debt to preferred
shares. As a result, a gain on extinguishment of debt arose due to the effective
value of the shares being less than the amount converted. This was based on a
presumption of effective interest rate earned on the preferred shares as well as
the price of the preferred shares on an as-if converted to common stock basis.
Therefore, an extraordinary gain on extinguishment of debt in the amount of
$1,950,000 was recognized. On December 31, 1998, a shareholder converted debt to
preferred shares in the amount of $1,000,000 and an extraordinary gain on
extinguishment of debt of $600,000 was recognized.
On December 31, 1998, the Company redeemed 2,500,000 shares of Series
A Convertible Preferred Stock held by The Thomas W. Marmon Trust at $0.50 per
share payable with $250,000 cash and a promissory note for $1,000,000 bearing 8%
interest due March 31, 1999 and secured by 2,000,000 shares of Series A
Convertible Preferred Stock. In a related matter, Mr. Thomas W. Marmon resigned
from the Board of Directors. At March 31, 1999, Mr. Marmon agreed to convert the
$1,000,000 promissory note and accrued interest to 10,421 shares of Series B
Preferred Stock bearing 8% dividend payable monthly. There are no conversion
rights.
In a subsequent transaction on December 31, 1998, Dr. Allen Kahn
agreed to purchase 1,000,000 shares of Series A Convertible Preferred Stock at
$1.00 per share, in exchange for $150,000 in cash and cancellation of a
promissory note for $850,000 which was secured by the Company's assets. Dr. Kahn
joined the Board of Directors of the Company as elected by the holders of the
Series A Convertible Preferred Stock.
-8-
<PAGE>
Effective November 30, 1998, the Company closed InfraCorps of
Florida, Inc. ("Florida"). This is due to the losses that have been sustained by
that operation in the past year. The Company attempted to find a buyer for
Florida, but no buyer stepped forward so certain fixed assets were sold. All
other fixed assets were either abandoned or moved to Virginia, and will be
utilized in Virginia's operation or sold. All current contracts will be
completed within the next six months.
Net income for the fiscal year 1999 was $1,838,136 compared to net
loss of $4,631,598 for the twelve-month period ended March 31, 1998.
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
$11,267,909 from continuing operations compared to $12,345,398 for the ten-month
period ended March 31, 1997, for a 8.7% 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 $9,572,724 or 85% of total revenues
for the ten-month period ended March 31, 1998, compared to $10,395,426 or 84.2%
of the total revenues for the same period ended March 31, 1997. Gross profit for
the current ten-month period was $1,695,185 or 15% of total revenues compared to
$1,949,973 or 15.8% 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 $1,675,655 or 14.9% of revenues compared to $1,630,692
or 13.2% 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 ICFL to Orlando, Florida coupled with
lower sales.
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
$726,956 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 INFC's convertible debentures. Gain on sale of equipment
was $30,386 for the current ten-month period compared to $101,037 for the same
period last year.
Loss from continuing operations for the ten-month period ended March
31, 1998 was $658,861 compared to profit of $269,918 for the same period last
year. Such loss reflects lower revenues, increased selling, general and
administrative expenses and increased interest expense during fiscal 1998.
-9-
<PAGE>
Loss from discontinued operations was $2,756,617 for the ten-month
period ended March 31, 1998 compared to $747,412 for the same period in 1997.
These discontinued operations were the analytical laboratory and environmental
services along with Florida infrastructure operations. 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, INFC considered the
environmental services operations no longer viable and disposed of these
operations. Revenues from Florida infrastructure operations for the ten-month
period ended March 31, 1998 were $1,376,522 compared to $1,874,467 for the same
period last year. Losses sustained in Florida made the operations no longer
viable to keep operating. Loss on disposal of discontinued operations for
environmental services 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.
Liquidity and Capital Resources as of March 31, 1999
The Company continues to be cash deficient. For the fiscal year 1999,
the Company had cash used in operating activities of $125,578 and at March 31,
1999, the Company had an accumulated deficit of $5,130,720 from operations and a
stockholders' equity of $2,574,917.
During fiscal 1998, InfraCorps 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 negotiated a line of credit from BB&T for $1,000,000
effective April 16, 1999. The interest rate is prime plus one percent payable
monthly. Additional equity or credit is being sought. Management's success in
this regards will, to a large extent, depend upon whether InfraCorps is able to
accomplish the assignment without recourse of the China Steel Contract to ATI.
While negotiations with China Steel Corporation are on-going, there can be no
assurance that such negotiations will be successful.
Effective May 1, 1998, the Company restructured its credit facility
with Thomas W. Marmon, a former director and a large shareholder of the Company.
The new note for the credit facility, which in part is a renewal of the previous
note, permitted total aggregate borrowings by ETSI of up to $3.5 million. The
new note provided for monthly interest payments at a rate of 10% until the
credit facility's maturity at May 1, 1999 and 12% thereafter and was subject to
call by the holder upon sixty days written notice. The new note was secured by
the assets of InfraCorps and its subsidiaries. On July 30, 1998, Mr. Marmon's
debt was retired through the issuance of 2,500,000 shares of Series A
Convertible Preferred Stock of the Company and a cash payment of $696,655,
including accrued interest. The Company financed the cash payment through an
existing shareholder by delivery of a promissory note secured by the assets of
the Company. The note, which pays interest monthly at 10%, maturing on October
31, 1999.
-10-
<PAGE>
On July 30, 1998 and December 31, 1998, certain shareholders
converted debt to preferred shares. As a result, a extraordinary gain on
extinguishment of debt arose due to the effective value of the shares being less
than the amount converted. This was based on a presumption of effective interest
rate earned on the preferred shares as well as the price of the preferred shares
on an as-if converted to common stock basis. Therefore, a extraordinary gain on
extinguishment of debt in the amount of $2,550,000 was recognized.
On December 31, 1998, the Company redeemed 2,500,000 shares of Series
A Convertible Preferred Stock held by The Thomas W. Marmon Trust at $0.50 per
share payable with $250,000 cash and a promissory note for $1,000,000 bearing 8%
interest due March 31, 1999 and secured by 2,000,000 shares of Series A
Convertible Preferred Stock. In a related matter, Mr. Thomas W. Marmon resigned
from the Board of Directors. At March 31, 1999, Mr. Marmon agreed to convert the
$1,000,000 promissory note and accrued interest to 10,421 shares of
non-cumulative Series B Preferred Stock bearing an 8% dividend payable monthly.
There are no conversion rights.
In a subsequent transaction on December 31, 1998, Dr. Allen Kahn
agreed to purchase 1,000,000 shares of Series A Convertible Preferred Stock at
$1.00 per share, in exchange for $150,000 cash and cancellation of a promissory
note for $850,000 which was secured by the Company's assets. Dr. Kahn will join
the Board of Directors of the Company as elected by the holders of the Series A
Convertible Preferred Stock.
On April 28, 1998, InfraCorps sold the Service Division of ICVA
(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 InfraCorps and
President of ICVA, for a total purchase price of $550,000, payable as follows:
$350,000 cash at closing, assumption of certain indebtedness of ICVA and notes
payable to ICVA in the aggregate amount of $175,000. A gain of $329,478 was
recognized on the sale.
Net cash used by operating activities in 1999 was $125,578. Major
components of cash flows used in operating activities include an increase in
inventories of $182,139, an increase in prepaid expenses of $95,562, and an
increase in accounts payable of $1,151,270. These increases were a result of
higher sales. Adjustments to net cash flows are the extraordinary gain on
extinguishment of debt of $2,550,000, the gain on the sale of fixed assets of
$332,575, depreciation and amortization of $570,059 and amortization of deferred
gain on sale/leaseback of $481,821.
Net cash provided by investing activities of $300,066 consisted
mainly of purchase of property, plant and equipment in the amount of $410,889,
proceeds from sale of fixed assets of $372,398 and payments from notes
receivable of $261,631. Net cash used by financing activities of $108,979
includes in part proceeds from notes payable to stockholder of $648,400, payment
of debt principal of $422,496, and redemption of preferred stock of $250,000.
This reflected the conversion of debt to equity. The cash and cash equivalents
at March 31, 1999 were $872,259 including $600,000 of restricted cash.
-11-
<PAGE>
New orders received for the fiscal year 1999 were $21,698,835
compared to $17,506,274 for the twelve months ended March 31, 1998. The increase
in new orders were due to several large contracts received during the year.
Backlog at March 31, 1999 was $12,286,247 compared to $5,527,124 at March 31,
1998. This increase reflects Management's rededication to the infrastructure
business.
Year 2000
Many currently installed computer systems and software products are
programmed to assume that the century portion of a date as "19" to conserve the
use of storage and memory. This assumption resulted in the use of two digits
(rather than four) to define an applicable year.
Accordingly, computer systems that rely on two digits to define an
applicable year may recognize a date using "00" as the year 1900, rather than
the year 2000. This could result in a system failure to miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process or transmit data or engage in normal business activities. The
Company's ability to operate is, to a large extent, dependent upon the proper
operation of its computer system and those of its customers. To the extent that
Year 2000 issues result in the long-term inoperability of Company's computer
systems or those of its customers, the Company's results of operation and
financial condition will be materially and adversely affected.
The Company believes that it has fully assessed its Year 2000
readiness. This assessment included a review of the Company's internal
information technology systems and non-information technology systems. Based on
this review, the Company does not anticipate any disruption of its internal
technology systems.
The Company is currently in the process of initiating formal
communications with all of its customers to determine the extent to which the
company is vulnerable to those third parties' failures to remediate their own
Year 2000 issues. The Company expects to complete this process by December 31,
1999. Although the cost of the Company's Year 2000 remediation program has not
yet been finalized, the Company estimates that these costs will not exceed
$30,000 and, in any event, believes that such costs will not have a material,
adverse effect upon the Company's results of operation or financial condition.
-12-
<PAGE>
Impact of Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management will assess the impact, if any,
on the Company's financial statements.
The American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use. This SOP is effective for financial
statements for fiscal years beginning after December 31, 1998. The SOP requires
entities to capitalize certain internal-use software costs once certain criteria
are met. Generally, internal costs with respect to software configuration and
interface, coding, installation to hardware, testing (including parallel
processing), and date conversion costs allowing access of old data by new
systems should be capitalized. All other data conversion costs, training,
application maintenance, and ongoing support activities should be expensed. The
Company will adopt this SOP in 1999 and does not expect it to have a material
effect on the Company's consolidated financial condition or consolidated results
of operations.
The American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Startup Activities,
in April 1998. The SOP requires such costs to be expensed as incurred instead of
being capitalized and amortized. It applies to startup activities and costs of
organization of both development stage and established operating activities, and
it changes existing practice for some industries. The SOP broadly defines
startup activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will adopt this SOP in 1999 and does not expect
it to have a material effect on the Company's consolidated financial condition
or consolidated results of operations.
Fourth Quarter Adjustments
During the fourth quarter, a $100,000 accrual for warranty expense
was recognized for projects completed in Florida that will need to be corrected.
In addition, loans to employees in the amount of $151,000 were written off in
the fourth quarter.
-13-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InfraCorps, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
InfraCorps, Inc. and Subsidiaries as of March 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of InfraCorps, Inc. (formerly ETS
International, Inc.) and Subsidiaries as of March 31, 1998, and the ten month
period and year ended March 31, 1998, and May 31, 1997, respectively, were
audited by other auditors whose report, dated May 8, 1998, on those statements
included an explanatory paragraph describing conditions that raised substantial
doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides 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
InfraCorps, Inc. and Subsidiaries as of March 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Goodman & Company, LLP
Norfolk, Virginia
June 4, 1999
-14-
<PAGE>
INFRACORPS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999
(NEXT PAGE)
-15-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 272,259 $ 206,750
Accounts receivable:
Trade (net of allowance of $50,000 in 1999 and 1998) 3,389,342 2,540,810
Other 12,917 78,936
Costs and estimated earnings in excess of billings
on uncompleted contracts 868,061 563,924
Notes receivable 23,085 200,000
Inventory 599,451 931,590
Prepaid expenses 47,612 143,174
---------------------------------------
Total current assets 5,212,727 4,665,184
---------------------------------------
Property, plant and equipment
Furniture and fixtures 364,236 345,857
Machinery, tools and equipment 3,766,096 4,027,556
Vehicles 1,567,493 1,373,657
Leasehold improvements 301,370 340,282
------------------------------------------
5,999,195 6,087,352
Less accumulated depreciation 3,829,184 3,475,318
-----------------------------------------
Total property, plant and equipment, net 2,170,011 2,612,034
-------------------------------------------
Other assets
Restricted cash 600,000 600,000
Notes receivable 321,454 --
Notes receivable from employees -- 151,040
Cash surrender value of life insurance (net of
outstanding loan of $156,339 in 1999 and 1998) 22,879 6,693
Assets under contractual arrangements (net of
valuation allowance of $858,000) 190,740 267,666
Other assets 52,636 248,254
-----------------------------------------
1,187,709 1,273,653
---------------------------------------
$ 8,570,447 $ 8,550,871
=========================================
</TABLE>
-16-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Bank overdraft $ 241,931 $ 173,493
Notes payable to bank -- 89,062
Notes payable to stockholders -- 3,410,000
Notes payable to affiliates 609,900 966,159
Current portion of long-term debt 364,248 480,543
Accounts payable 3,574,837 1,846,539
Accrued expenses and other current liabilities 382,229 768,638
------------------------------------------
Total current liabilities 5,173,145 7,734,434
-----------------------------------------
Long-term debt 682,046 907,896
Deferred gain on sale/leaseback -- 481,821
Liabilities under contractual arrangements 140,339 140,339
-------------------------------------------
822,385 1,530,056
------------------------------------------
Stockholders' equity (deficit)
Preferred stock, no par value; authorized 5,000,000 shares:
4% cumulative Series A, $1 convertible, 1,750,000 shares
outstanding at March 31, 1999 (liquidation
value of $1,750,000) 730,311 --
8% Series B, 10,421 shares outstanding at March
31, 1999 (liquidation value of $1,042,100) 1,042,100 --
Common stock, no par value; authorized 30,000,000 shares
outstanding 16,492,043 at March 31, 1999 and 1998 6,126,338 6,126,338
Accumulated deficit (5,130,720) (6,646,845)
Less notes receivable from officers (193,112) (193,112)
-----------------------------------------
Total stockholders' equity (deficit) 2,574,917 (713,619)
-----------------------------------------
$ 8,570,447 $ 8,550,871
==========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-17-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------
<S> <C>
Contract revenues $ 18,877,867 $ 11,267,909 $ 16,209,501
-------------------------------------------------------------
Cost of goods and services 16,288,612 9,572,724 13,782,223
Selling, general and administrative expenses 2,273,257 1,675,655 1,426,261
-------------------------------------------------------------
18,561,869 11,248,379 15,208,484
-------------------------------------------------------------
315,998 19,530 1,001,017
-------------------------------------------------------------
Interest income 54,386 19,842 20,024
Interest expense (324,499) (726,956) (312,271)
Gain on sale of equipment 332,575 30,386 101,037
Other, net - (1,663) 726
-------------------------------------------------------------
Income (loss) from continuing operations $ 378,460 $ (658,861) $ 810,533
Income tax expense - - -
-------------------------------------------------------------
Income (loss) from continuing operations 378,460 (658,861) 810,533
Loss from discontinued operations (343,110) (2,756,617) (662,098)
Loss on disposal of discontinued operations (747,214) (1,391,873) --
-------------------------------------------------------------
Income (loss) before extraordinary item (711,864) (4,807,351) 148,435
Extraordinary gain on extinguishment of debt 2,550,000 -- --
-------------------------------------------------------------
Net income (loss) $ 1,838,136 $ (4,807,351) $ 148,435
=============================================================
Basic earnings per common share
Income (loss) from continuing operations $ 0.02 $ (0.04) $ 0.06
Loss from discontinued operations (0.02) (0.18) (0.05)
Loss on disposal of discontinued operations (0.04) (0.09) --
Extraordinary gain 0.15 -- --
-------------------------------------------------------------
Net income (loss) $ 0.11 $ (0.31) $ 0.01
=============================================================
Diluted earning per common share
Income (loss) from continuing operations $ 0.02 $ (0.04) $ 0.06
Loss from discontinued operations (0.02) (0.18) (0.05)
Loss on disposal of discontinued operations (0.04) (0.09) --
Extraordinary gain 0.14 -- --
-------------------------------------------------------------
Net income (loss) $ 0.10 $ (0.31) $ 0.01
=============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
-18-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock
--------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
<S> <C>
Balances at May 31, 1996 0 $ 0 0 $ 0 12,580,733 $ 3,476,235
Proceeds from issuance of common stock 0 0 0 0 461,525 300,000
Proceeds from exercise of vendor options 0 0 0 0 212,000 1,060
Proceeds from exercise of employee stock
options 0 0 0 0 5,014 3,929
Repurchase of common stock 0 0 0 0 (65,617) (75,000)
Issuance of common stock and options for
services 0 0 0 0 43,500 160,881
Issuance of common stock for payment of
note payable to stockholder 0 0 0 0 833,333 500,000
Issuance of warrants with convertible
debentures to acquire 1,000,000 shares
of common stock 0 0 0 0 0 173,334
Discount on issuance of convertible
debentures 0 0 0 0 0 410,914
Conversion of convertible debentures 0 0 0 0 145,335 50,776
Addition to notes receivable for accrued
interest 0 0 0 0 0 0
Net income 0 0 0 0 0 0
---------------------------------------------------------------------------------
Balances at May 31, 1997 0 0 0 0 14,215,823 5,002,129
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
Accumulated from
Deficit Officers Total
--------------------------------------------------
<S> <C>
Balances at May 31, 1996 $ (1,987,929) $ (183,217) $ 1,305,089
Proceeds from issuance of common stock 0 0 300,000
Proceeds from exercise of vendor options 0 0 1,060
Proceeds from exercise of employee stock
options 0 0 3,929
Repurchase of common stock 0 0 (75,000)
Issuance of common stock and options for
services 0 0 160,881
Issuance of common stock for payment of
note payable to stockholder 0 0 500,000
Issuance of warrants with convertible
debentures to acquire 1,000,000 shares
of common stock 0 0 173,334
Discount on issuance of convertible
debentures 0 0 410,914
Conversion of convertible debentures 0 0 50,776
Addition to notes receivable for accrued
interest 0 (9,895) (9,895)
Net income 148,435 0 148,435
--------------------------------------------------
Balances at May 31, 1997 (1,839,494) (193,112) 2,969,523
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-19-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series A Series B Common Stock
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
<S> <C>
Balances at May 31, 1997 0 0 0 0 14,215,823 5,002,129
Proceeds from exercise of
employee stock options 0 0 0 0 20,000 10,000
Issuance of warrants and stock options 0 0 0 0 0 82,999
Common stock received as part of
sale of discontinued operations 0 0 0 0 (500,000) (125,000)
Reclassification of common stock
subject to repurchase agreement 0 0 0 0 269,565 387,500
Conversion of convertible debentures 0 0 0 0 2,486,655 768,710
Net loss 0 0 0 0 0 0
----------------------------------------------------------------------------------------
Balances at March 31, 1998 0 0 0 0 16,492,043 6,126,338
Issuance of series A preferred stock for
payment of note payable to stockholders 4,250,000 1,730,311 0 0 0 0
Redemption of Series A preferred stock (2,500,000) (1,000,000) 0 0 0 0
Issuance of series B preferred stock for
payment of note payable to stockholders 0 0 10,421 1,042,100 0 0
Dividends 0 0 0 0 0 0
Net income 0 0 0 0 0 0
----------------------------------------------------------------------------------------
Balances at March 31, 1999 1,750,000 $ 730,311 10,421 $ 1,042,100 16,492,043 $ 6,126,338
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
Accumulated from
Deficit Officers Total
---------------------------------------------------
<S> <C>
Balances at May 31, 1997 (1,839,494) (193,112) 2,969,523
Proceeds from exercise of
employee stock options 0 0 10,000
Issuance of warrants and stock options 0 0 82,999
Common stock received as part of
sale of discontinued operations 0 0 (125,000)
Reclassification of common stock
subject to repurchase agreement 0 0 387,500
Conversion of convertible debentures 0 0 768,710
Net loss (4,807,351) 0 (4,807,351)
---------------------------------------------------
Balances at March 31, 1998 (6,646,845) (193,112) (713,619)
Issuance of series A preferred stock for
payment of note payable to stockholders 0 0 1,730,311
Redemption of Series A preferred stock (250,000) 0 (1,250,000)
Issuance of series B preferred stock for
payment of note payable to stockholders 0 0 1,042,100
Dividends (72,011) 0 (72,011)
Net income 1,838,136 0 1,838,136
---------------------------------------------------
Balances at March 31, 1999 $ (5,130,720) $ (193,112) $ 2,574,917
===================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-20-
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C>
Cash flows from operating activities
Net income (loss) 1,838,136 (4,807,351) 148,435
Adjustments to reconcile to net cash used
by operating activities:
Loss on disposal of discontinued operations 747,214 1,391,873 0
Depreciation and amortization 570,059 683,361 830,687
Write-down of notes receivable 151,040 204,101 0
Write-off of goodwill and other intangibles,
due to impairment 0 145,474 0
Provision for bad debts 0 0 75,307
Amortization of convertible debentures
discount 0 438,028 139,152
Conversion of accrued interest on convertible
debentures to common stock 0 68,710 0
Stock options issued to the president at
less than market value 0 44,000 0
Professional services received in exchange
for warrants 0 38,999 29,437
Amortization of deferred gain on sale/leaseback (481,821) (253,591) (304,308)
Gain on extinguishment of debt (2,550,000) 0 0
(Gain) loss on sale of equipment (332,575) 14,264 (101,037)
Other 0 0 7,844
Changes in:
Accounts receivable (848,532) 1,692,623 (1,235,534)
Costs and estimated earnings in excess of
billings on uncompleted contracts (304,137) (257,444) (447,606)
Inventories 182,139 (208,641) (221,060)
Prepaid expenses 95,562 260,856 (159,591)
Cash surrender value of life insurance, net (16,186) (20,304) (26,445)
Accounts payable 1,151,270 (989,296) 360,808
Accrued expenses and other liabilities (391,395) 510,584 (193,441)
Customer advances 0 292,465 0
Other - accounts receivable 63,648 (19,566) 32,487
--------------------------------------
Net cash used by operating activities (125,578) (770,855) (1,064,865)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-21-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C>
Cash flows from investing activities
Purchase of property, plant and equipment $ (410,889) $(1,209,611) $ (820,374)
Prepublication costs 0 0 (105,913)
Patent costs incurred 0 0 (54,345)
Proceeds from sale of discontinued operations 0 200,000 0
Proceeds from sale of equipment 372,398 26,750 1,751
Decrease in assets under contractual
arrangements 76,926 7,689 0
Notes receivable payments 261,631 64,694 (17,047)
------------------------------------------
Net cash provided (used) by investing activities 300,066 (910,478) (995,928)
------------------------------------------
Cash flows from financing activities
Bank overdraft increase 68,438 128,933 35,814
Notes payable to banks decrease (89,062) (775) (981,590)
Proceeds from(payments on) notes payable affiliates (64,259) 775,542 140,006
Proceeds from notes payable to stockholders 648,400 1,410,000 1,900,000
Proceeds from convertible debentures 0 0 750,000
Proceeds from long-term debt 0 645,036 507,382
Proceeds from loan against cash surrender value 0 156,339 0
Principal payments on long-term debt (422,496) (344,226) (547,791)
Proceeds from issuance of common stock 0 10,000 304,993
Repurchase of common stock subject to
repurchase agreement 0 (387,500) (75,000)
Redemption of preferred stock (250,000) 0 0
------------------------------------------
Net cash provided (used) by financing activities (108,979) 2,393,349 2,033,814
------------------------------------------
Increase (decrease) in cash and cash equivalents 65,509 712,016 (26,979)
Cash and cash equivalents at beginning of year
including $600,000 of restricted cash 806,750 94,734 121,713
------------------------------------------
Cash and cash equivalents at end of year
including $600,000 of restricted cash $ 872,259 $ 806,750 $ 94,734
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-22-
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Ten Month Period Ended March 31, 1998 and
Years Ended March 31, 1999 and May 31, 1997
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information and noncash investing and
financing activities
During 1999, the Company sold fixed assets with a book value of $146,522 and
inventory with a book value of $150,000 related to its service division for
$350,000 in cash, assumption of $100,000 of indebtedness by the buyer, and
notes payable to the Company in the aggregate amount of $175,000.
Additionally during the fiscal year ended March 31, 1999, in a series of
transactions, the Company converted $4,250,000 of debt into 4,250,000
shares of Series A preferred stock with a fair value of $1,700,000.
Subsequently, 2,500,000 shares of this stock with a fair value of
$1,000,000 was redeemed for $250,000 in cash and a note for $1,000,000. In
March, 1999, the $1,000,000 note, along with $42,100 in other payables due
to the noteholder, were converted into 10,421 shares of Series B preferred
stock.
Interest paid on notes payable and long-term debt was $558,513, $213,137, and
$392,126 for the years 1999, 1998 and 1997, respectively. Capital lease
obligations of $35,939 $260,394, and $94,210 were incurred during 1999,
1998, and 1997, respectively, under leases entered into for vehicles,
furniture and fixtures, and laboratory equipment.
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, reclassified
$387,500 of common stock subject to repurchase agreement 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.
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.
The accompanying notes are an integral part of these
consolidated financial statements.
-23-
<PAGE>
INFRACORPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998 AND MAY 31, 1997
NOTE 1 - BUSINESS AND ORGANIZATION
InfraCorps, Inc; formerly ETS International, Inc., (the "Company") is
a Virginia corporation formed in 1987. The Company and its wholly-owned
subsidiaries provide environmental products and services, and infrastructure
products and services primarily related to the installation and rehabilitation
of underground pipelines. See Note 4 - Business Segment Information and Note 11
Disposal of Segments for additional information.
NOTE 2 - SUMMARY OF 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
InfraCorps, Inc. and its wholly-owned subsidiaries, IC Subsidiary, Inc.
(formerly ETS, Inc.), ETS Analytical Services, Inc., InfraCorps of Florida, Inc.
(formerly ETS Liner, Inc.) and InfraCorps of Virginia, Inc. (formerly ETS Water
and Waste Management, Inc.). Significant intercompany accounts and transactions
have been eliminated in consolidation. During fiscal 1999, the operations of
InfraCorps of Florida, Inc. were discontinued. During fiscal 1998, substantially
all assets and certain liabilities of ETS, Inc. and ETS Analytical Services,
Inc. were sold.
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.
(Notes continued on next page)
-24-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Inventories
Inventories, consisting of raw materials and supplies 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.
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
(Notes continued on next page)
-25-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on the 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 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
basis. 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 ("FASB") issued
Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Statement 128 establishes new
(Notes continued on next page)
-26-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 No. 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.
Business Segments and Related Information
The Company adopted FASB Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, as of April 1, 1998.
Statement No. 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. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance.
Stock Options and Warrants
The Company accounts 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 is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement 123), permits entities to recognize as expense over the vesting
period
(Notes continued on next page)
-27-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the fair value of all stock-based awards on the date of grant. Alternatively,
Statement No. 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 No. 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 No. 123.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses and disclosure of contingent assets and
liabilities for the reported periods. Actual results could differ from those
estimates and assumptions.
Reclassification
Certain reclassifications have been made to the prior periods'
consolidated financial statements to place them on a basis comparable with the
current year's consolidated financial statements.
NOTE 3 - RESTRICTED CASH
Restricted cash represents 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.
(Notes continued on next page)
-28-
<PAGE>
NOTE 4 - BUSINESS SEGMENT INFORMATION
The Company has three reportable segments: environmental operations,
infrastructure operations - Florida, and infrastructure operations - Virginia.
The environmental and infrastructure operations are differentiated based on
differences in products and services. The Florida and Virginia segments are
further differentiated by their geographical locations and construction
techniques. The environmental operations segment specialized in toxic emission
measurement and control, but was discontinued during the ten-month period ended
March 31, 1998. The infrastructure operations segments specialize in the design,
construction and maintenance of subsurface pipelines. The Florida infrastructure
operation segment was discontinued during the year ended March 31, 1999.
Segments are regularly evaluated by management in deciding how to allocate
resources and in assessing performance.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on net income or loss. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices. The information related to
infrastructure operations in prior periods has been restated to differentiate
the Florida segment.
The Company currently derives its primary contract revenues from
domestic customers.
For the year ended March 31, 1999, the Company had infrastructure
contract revenues from six customers, each of which accounted for more than 5
percent of contract revenues, aggregating approximately $8,403,100 or 45 percent
of contract revenues. At March 31, 1999, five customers had accounts receivable
balances which exceeded 5 percent of the trade accounts receivable balance. The
accounts receivable balances for these customers totaled $1,477,180.
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.
(Notes continued on next page)
-29-
<PAGE>
NOTE 4 - BUSINESS SEGMENT INFORMATION (Continued)
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 balance of this customer totaled approximately $767,000.
Information related to the environmental and infrastructure
operations for Virginia and Florida follows:
<TABLE>
<CAPTION>
Environmental Infrastructure Operations Reclassifications/
1999: Operations Florida Virginia Eliminations Totals
-------------- --------- ----------- ----------------- -------
<S> <C>
Total assets $ 190,740 $ 481,409 $ 7,898,298 $ -- $ 8,570,447
Total liabilities $ 351,605 620,137 5,023,788 -- 5,995,530
Contract revenues -- 1,042,446 18,877,867 (1,042,446) 18,877,867
Depreciation and
amortization -- 144,977 425,082 (144,977) 425,082
Interest income -- -- 54,386 -- 54,386
Interest expense -- 39,076 324,499 (39,076) 324,499
Income from continu-
ing operations -- -- 378,460 -- 378,460
Loss from discontinued
operations -- (343,110) -- -- (343,110)
Loss from disposal of
discontinued
operations -- (747,214) -- -- (747,214)
Extraordinary gain on
extinguishment of
debt -- -- 2,550,000 -- 2,550,000
Net income (loss) -- (1,090,324) 2,928,460 -- 1,838,136
Capital expenditures -- -- 410,889 -- 410,889
</TABLE>
(Notes continued on next page)
-30-
<PAGE>
NOTE 4 - BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
1998: Environmental Infrastructure Operations Reclassifications/
Operations Florida Virginia Eliminations Totals
-------------- --------- ----------- ----------------- -------
<S> <C>
Total assets $ 267,666 $ 1,619,387 $ 6,663,818 $ -- $ 8,550,871
Total liabilities 440,930 786,860 8,036,700 -- 9,264,490
Contract revenues 2,640,195 1,376,522 11,267,909 (4,016,717) 11,267,909
Depreciation and
amortization 282,986 144,500 255,875 (427,486) 255,875
Interest income -- -- 19,842 -- 19,842
Interest expense 301,678 31,610 726,956 (333,288) 726,956
Loss from continu-
ing operations -- -- (658,861) -- (658,861)
Loss from discontinued
operations (1,879,374) (877,243) -- -- (2,756,617)
Loss from disposal of
discontinued
operations (1,391,873) -- -- -- (1,391,873)
Net income (loss) (3,271,247) (877,243) (658,861) -- (4,807,351)
Capital expenditures 27,542 441,437 740,632 -- 1,209,611
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Environmental Infrastructure Operations Reclassifications/
Operations Florida Virginia Eliminations Totals
-------------- --------- ----------- ----------------- -------
<S> <C>
1997:
Total assets $ 4,660,039 $ 697,504 $ 6,753,894 $ -- $12,111,437
Total liabilities 3,361,085 289,824 5,103,505 -- 8,754,414
Contract revenues 5,607,133 2,308,626 16,352,210 (8,058,468) 16,209,501
Depreciation and
amortization 537,373 112,257 181,057 (649,630) 181,057
Interest income -- -- 20,024 -- 20,024
Interest expense 186,860 73,698 312,271 (260,558) 312,271
Income from continu-
ing operations -- -- 810,533 -- 810,533
Loss from discounted
operations (502,380) (159,718) -- -- (662,098)
Net income (loss) (502,380) (159,718) 810,533 -- 148,435
Capital expenditures 156,605 32,678 631,091 -- 820,374
</TABLE>
(Notes continued on next page)
-31-
<PAGE>
NOTE 5 - ACCOUNTS RECEIVABLE
A summary of the changes in the allowance for doubtful accounts
follows:
<TABLE>
<CAPTION>
Ten Month Year
Year Ended Period Ended Ended
March 31, March 31, May 31,
1999 1998 1997
------------ ------------ ----------
<S> <C>
Balances, beginning of period $ 50,000 $ 119,424 $ 95,100
Provision for bad debts -- -- 75,307
Accounts written off -- (69,424) (50,983)
----------------------------------------------
Balances, end of period $ 50,000 $ 50,000 $ 119,424
==============================================
</TABLE>
NOTE 6 - NOTE PAYABLE TO BANK AND LONG-TERM DEBT
Note payable to bank consists of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- -----
<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, 1999 and March 31, 1998,
respectively, collateralized by certain equipment $ -- $ 89,062
==================================
Long-term debt consists of the following:
March 31, March 31,
1999 1998
----- ----
$327,841 term note payable to bank, due February, 2002, bearing
interest at 10.5%, payable in monthly installments of $10,178 including
interest, collateralized by certain vehicles $ 305,613 $ --
$373,500 term note payable to bank, due October 2002, bearing interest at 9.35%,
payable in monthly installments of $7,819 including interest,
collateralized by equipment 279,126 349,176
$400,000 term note payable to bank, due February 2001, bearing interest at 11%,
payable in monthly installments of $10,322 including interest,
collateralized by certain vehicles; refinanced during year ended March
31, 1999 -- 308,561
$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, collateralized by equipment 122,983 190,139
$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, collateralized by certain vehicles and equipment; satisfied
during year ended March 31, 1999 -- 103,133
</TABLE>
(Notes continued on next page)
-32-
<PAGE>
NOTE 6 - NOTE PAYABLE TO BANK AND LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ----------
<S> <C>
$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, collateralized by certain vehicles 27,491 56,186
Installment loans with maturities to 2002, bearing interest at varying interest
rates from 8.50% to 9.50%, payable in varying monthly installments of
$833 to $3,500 including interest, secured by vehicles and equipment 97,976 112,715
Capital lease obligations, with maturities to 2003 213,105 268,529
--------------------------------------
1,046,294 1,388,439
Less current maturities 364,248 480,543
======================================
$ 682,046 $ 907,896
======================================
</TABLE>
Maturities of notes payable and long-term debt for future years are
as follows:
2000 $ 364,248
2001 312,655
2002 274,289
2003 95,102
------------
$ 1,046,294
============
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 $.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.
(Notes continued on next page)
-33-
<PAGE>
NOTE 6 - NOTE PAYABLE TO BANK AND LONG-TERM DEBT (Continued)
Effective April 16, 1999, the Company secured a $1,000,000 line of
credit with Branch Banking & Trust Co. The line of credit is collateralized by a
first lien on inventory, accounts receivable, and certain equipment and is
guaranteed by the Company. The line has a variable interest rate equal to the
bank's prime rate plus 1% and will expire on March 15, 2000. The line of credit
agreement specifies certain financial covenants. As of March 31, 1999, the
Company was in compliance with the financial covenants.
NOTE 7 - LEASES
Property, plant and equipment included the following amounts of
assets under capital lease obligations:
March 31, March 31,
1999 1998
--------- -------
Furniture and fixtures $ 75,822 $ 75,822
Tools and equipment 264,697 228,758
Vehicles 31,635 31,635
-----------------------------
372,154 336,215
(114,564) (48,060)
------------------------------
$ 257,590 $ 288,155
==============================
Capital lease payments were $90,400 in 1999, $171,054 in 1998 and
$243,536 in 1997. Future minimum payments under capital and operating leases are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- -----------
<S> <C>
2000 $ 79,156 $ 610,659
2001 68,275 506,392
2002 67,899 348,718
2003 44,772 316,310
2004 151,715
--
--------------------------------------
260,102 $ 1,933,794
==============
Less amounts representing interest (rates 8.5% - 16.5%) 46,997
--------------------
Present value of lease payments (including $58,462 classified
as current) $ 213,105
====================
</TABLE>
(Notes continued on next page)
-34-
<PAGE>
NOTE 7 - LEASES (Continued)
Rent expense for operating leases of approximately $738,417,
$1,001,000 and $1,302,000 was recognized for the year ended March 31, 1999, the
ten-month period ended March 31, 1998 and the year ended May 31, 1997,
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 the equipment is being amortized
over the life of the operating lease and had a remaining balance of $481,821 at
March 31, 1998. Subsequently, this lease was cancelled by the lessors and the
lessor's interest in this equipment was terminated, therefore, the remaining
unamortized gain was recognized in the current year as income.
NOTE 8 - COMMON STOCK SUBJECT TO REPURCHASE AGREEMENT
In connection with a prior year asset acquisition, 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 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.
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, the
seller 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, the seller agreed to retain the remaining 269,565
shares, and this common stock subject to repurchase of $387,500 was reclassified
to stockholders' equity.
(Notes continued on next page)
-35-
<PAGE>
NOTE 9 - PREFERRED STOCK
During the year ended March 31, 1999, the Company converted
$4,250,000 of debt to related parties into 4,250,000 shares of Series A 4%
cumulative convertible preferred stock with a fair value of $1,700,000. The
stock has no par value, but is convertible into the Company's common stock on a
share for share basis. The stock is redeemable at the option of the Company.
Dividends on the Series A preferred stock are cumulative from the date of
original issuance and are payable quarterly. The Company subsequently converted
2,500,000 shares of Series A preferred stock to $250,000 in cash and a note for
$1,000,000.
In March 1999, the Company converted $1,042,100 in debt obligations
to related parties into 10,421 shares of 8% non-cumulative, non-convertible
Series B preferred stock. Dividends are paid monthly.
NOTE 10 - 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 March 31, 1999 and May 31, 1997.
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, loss from disposal of discontinued
operations and extraordinary gain before income taxes as follows:
<TABLE>
<CAPTION>
Ten Month
Year Period
Ended Ended Year Ended
March 31, March 31, May 31,
1999 1998 1997
------------------------------------------------------
<S> <C>
Expected federal income tax expense (benefit) $ 624,966 $(1,634,499) $ 50,468
Increase (decrease) resulting from:
State income tax, net of federal income tax
impact 75,890 (185,467) 8,588
Meals and entertainment 9,734 8,016 12,897
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 (724,286) 1,555,909 (60,482)
Adjustment of prior year's tax estimates -- 221,951 --
Other 13,696 2,204 (11,471)
-----------------------------------------------------
Income tax expense (benefit) $ -- $ -- $ --
=====================================================
</TABLE>
(Notes continued on next page)
-36-
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
The significant components of deferred income tax expense (benefit)
for the ten-month period ended March 31, 1998, and years ended March 31, 1999
and May 31, 1997 are as follows:
<TABLE>
<CAPTION>
Ten Month
Year Period
Ended Ended Year Ended
March 31, March 31, May 31,
1999 1998 1997
-----------------------------------------------------
<S> <C>
Deferred tax expense (benefit) exclusive of the
components listed below $ 724,286 $(1,777,860) $ 82,395
Expiration of investment tax credit carryforwards -- -- (21,913)
increase (decrease) in beginning of the year
balance of the valuation allowance for deferred tax assets
(724,286) 1,555,909 (60,482)
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, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C>
Deferred tax assets:
Net operating loss and tax credit carryforwards $ 1,621,873 $ 2,055,813
Property, plant and equipment, principally due to differences
in depreciation for financial reporting and tax purposes 278,519 268,722
Deferred gain on sale/leaseback transaction due to accrual
versus cash basis of accounting for financial reporting
and tax purposes -- 182,899
Accrued costs, principally due to accrual for financial
purposes 11,183 180,797
Other 35,682 35,682
--------------------------------
Total gross deferred tax assets 1,947,257 2,723,913
Less valuation allowance (1,894,887) (2,619,173)
--------------------------------
Net deferred tax asset $ 52,370 $ 104,740
--------------------------------
Deferred tax liabilities:
Accounts receivable and accounts payable, principally due
to accrual versus cash basis of accounting for financial
reporting and tax purposes $ 52,370 $ 104,740
-------------------------------
Net deferred tax $ -- $ --
--------------------------------
</TABLE>
(Notes continued on next page)
-37-
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
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 in the foreseeable.
At March 31, 1999, the Company has loss carryforwards for income tax
purposes of $4,201,039 available to offset taxable income. If not utilized,
these loss carryforwards will expire as follows:
Expiration Date
2008 $ 412,477
2011 582,048
2012 100,841
2013 3,105,673
----------------
$ 4,201,039
----------------
In addition, the Company has various tax credit carryforwards of
approximately $27,000 which will expire between the years 2000 and 2004.
NOTE 11 - DISPOSAL OF SEGMENTS
During the year ended March 31, 1999, the Company discontinued its
Florida infrastructure operations ("Florida Segment"). Due to the unique
licensed construction techniques employed to accommodate the engineering
difficulties associated with trenchless technology in areas significantly below
sea level, Management believes that its Florida operations constitute a separate
line of business. Management does not intend to utilize trenchless technology
engineering methods used in Florida for the foreseeable future.
(Notes continued on next page)
-38-
<PAGE>
NOTE 11 - DISPOSAL OF SEGMENTS (Continued)
The loss from operations for the Florida Segment from the beginning
of the fiscal year to November 30, 1998, the measurement date for effective
disposal, was $343,110. Subsequent to November 30, 1998, certain fixed assets of
the segment were sold in exchange for a note receivable of $40,000. All other
fixed assets were either abandoned or transferred to the Virginia segment prior
to March 31, 1999. The loss on disposal of this segment of $747,214, includes
the loss on sale and abandonment of the assets above, as well as phase-out
period operating losses of $677,031 from the measurement date to March 31, 1999.
Assets remaining in the Florida Segment include cash, accounts receivable, costs
in excess of billings on uncompleted contracts, and notes receivable of
approximately $8,000, $238,000, $195,000, and $40,000, respectively.
Liabilities of approximately $620,000 include trade accounts payable
and accrued expenses associated with estimating the loss from discontinuing the
Florida Segment. All activity in the segment should be completed within six
months of the fiscal year end. Interest costs are allocated to the discontinued
operations of the Florida Segment based on debt that can be specifically
attributable to those operations. Other potentially allocable interest costs are
immaterial.
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 under contractual arrangements"
and "liabilities 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 under
contractual arrangements" until such time the Company determines a sale can be
recorded for accounting purposes. At March 31, 1998, "Assets under contractual
arrangements" of $267,666 were 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 the ten month period ended
March 31, 1998.
(Notes continued on next page)
-39-
<PAGE>
NOTE 11 - DISPOSAL OF SEGMENTS (Continued)
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 in the ten month period ended March 31,
1998.
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 their best efforts 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. Additional information with respect to the China
Steel Contract is included in the disclosures regarding restricted cash.
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 environmental operations were $301,678 and $186,860 for the
ten-month period ended March 31, 1998 and the year ended May 31, 1997,
respectively.
(Notes continued on next page)
-40-
<PAGE>
NOTE 12 - 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>
Weighted Average
Number of Shares Exercise Price
---------------- ---------------
<S> <C>
Options outstanding at March 31, 1996 2,469,573 $1.90 CDN and $1.46
Granted 1,726,000 $0.66
Exercised (217,014) $1.05 CDN and $.005
Expired (585,659) $1.50 CDN and $.42
---------------------
Options outstanding at May 31, 1997 3,392,900 $2.35 CDN and $1.12
Granted 850,000 $.39
Exercised (20,000) $.50
Expired (919,700) $2.35 CDN and $1.04
---------------------
Options outstanding at March 31, 1998 3,303,200 $.95
Granted 1,110,000 $.23
Exercised -- --
Expired (1,195,200) $1.21
----------------------
Options outstanding at March 31, 1999 3,218,000 $.61
----------------------
Price range - $.23 - $.75 (weighted-average
remaining contractual life of 3.8 years) 3,179,000 $.61
Price range - $1.00 - $1.81 (weighted-average
remaining contractual life of 2.2 years) 39,000 $1.52
Exercisable options:
March 31, 1999 3,164,000 $.61
March 31, 1998 3,190,000 $.93
</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.
(Notes continued on next page)
-41-
<PAGE>
NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)
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>
Weighted Average
Number of Shares Exercise Price
---------------- ---------------
<S> <C>
Warrants outstanding at May 31, 1996 98,679 $2.04
Granted 1,494,875 $.84
Expired (47,679) $1.87
------------------------
Warrants outstanding at May 31, 1997 1,545,875 $.88
Granted 225,000 $.63
------------------------
Warrants outstanding at March 31, 1998 1,770,875 $.85
Expired (461,525) $1.00
========================
Warrants outstanding at March 31, 1999 1,309,350 $.80
========================
</TABLE>
The per share weighted average fair values of stock options and
warrants granted during the periods ended in 1999, 1998 and 1997 were $.15, $.16
and $.29, respectively, on the various dates of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: 1999 -
expected dividend yield of 0 percent, risk free interest rate of 5.5 percent,
expected volatility of 314 percent and an expected life of 5 years; 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.
(Notes continued on next page)
-42-
<PAGE>
NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)
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 provision of Statement No. 123, the
Company's net income (loss) and net income (loss) per common share would have
been as shown in the following table:
<TABLE>
<CAPTION>
Ten-month
Year Ended Period Ended Year Ended
March 31, March 31, May 31,
1999 1998 1997
------ ----- ------
<S> <C>
Net income
As reported $ 1,838,136 $ (4,807,351) $ 148,435
Pro forma 1,920,652 (4,903,556) (340,489)
Net income (loss) per common share:
Basic, as reported $ 0.11 $ (0.31) $ 0.01
Basic, pro forma 0.12 (0.31) (0.03)
Diluted, as reported 0.10 (0.31) 0.01
Diluted, pro forma 0.11 (0.31) (0.02)
</TABLE>
Pro forma net income (loss) reflects only options granted from the
periods ended in 1996 through 1999, and applicable cumulative catch-up
adjustments for forfeitures. Therefore, the full impact of calculating
compensation cost for stock options under Statement No. 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.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company leases the premises of its subsidiary, Infracorps of
Virginia, Inc., from an estate in which a current director serves as executor.
Additionally, 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. Rent expense under these operating leases approximated $126,000,
$258,000 and $417,000 for 1999, 1998 and 1997, respectively.
(Notes continued on next page)
-43-
<PAGE>
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)
Other accounts receivable includes advances to officers, directors and other
employees. At March 31, 1999 and 1998, $2,500 and $32,918, respectively, were
the result of these advances.
The Company has notes receivable from officers and employees of
$193,112 and $344,152 as of March 31, 1999 and 1998, respectively. The notes
bear interest at six percent.
During the year ended March 31, 1999, the Company sold fixed assets
with a book value of $146,522 and inventory with a book value of $150,000
related to its service division to a corporation owned by one of its officers.
The Company received $350,000 in cash, assumption of $100,000 of indebtedness by
the buyer and notes in the aggregate amount of $175,000. At March 31, 1999, a
$125,000 note was still outstanding as a result of this transaction.
The Company has notes payable to affiliates of $609,900 and $966,159
as of March 31, 1999 and 1998, 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 twelve percent.
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
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 rated 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 collateralized by the assets of the
Company and its subsidiaries. Mr. Marmon resigned as a director of the Company
as of April 13, 1998. During the year ended March 31, 1999, $2,500,000 of this
note was converted to Series A preferred stock and the remaining principal and
accrued interest was paid to the noteholder.
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. During the year ended March 31, 1999, these notes were
converted to Series A preferred stock.
(Notes continued on next page)
-44-
<PAGE>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments (Statement 107), requires the Company
to disclose estimated fair values of its financial instruments. Statement 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 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. 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.
NOTE 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 previously mentioned contingencies related to the China Steel
Contract.
(Notes continued on next page)
-45-
<PAGE>
NOTE 16 - COMPARABLE PRIOR PERIOD INCOME STATEMENT INFORMATION (UNAUDITED)
As described in note 2, on April 6, 1998, the Company changed its
fiscal year from May 31 to March 31. Comparable results of operations for the
twelve month period ended March 31, 1998 and the ten-month period ended March
31, 1997 follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C>
Contract revenues $ 15,130,953 $ 12,345,398
Cost of goods and services 12,840,717 10,395,425
Selling, general and administrative expenses 1,976,890 1,630,692
------------- ------------
313,346 319,281
Interest income 24,138 15,729
Interest expense (948,358) (166,856)
Gain on sale of equipment 30,386 101,037
Other, net (1,663) 727
-------------- ------------
Income from continuing operations before
income taxes (582,151) 269,918
Loss from discontinued operations (2,657,574) (747,412)
Loss from disposal of discountinued operations (1,391,873) --
--------------- ------------
Net loss $ (4,631,598) $ (477,494)
================ ============
</TABLE>
(Notes continued on next page)
-46-
<PAGE>
NOTE 17 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
For the Year Ended March 31, 1999
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------ ---------------- --------------
<S> <C>
Income from continuing operations $ 378,460
Less: preferred stock dividends (72,011)
Basic EPS
Income available to common shareholders 306,449 16,492,043 $0.02
===========
Effect of dilutive securities:
Convertible preferred stock 72,011 1,791,667
-------------------------------------------
Diluted EPS
Income available to common shareholders and
assumed conversions $ 378,460 $ 18,283,710 $0.02
==============================================================
</TABLE>
Exercisable options and warrants to purchase 4,473,350 shares of common stock
were outstanding during the year ended March 31, 1999, but were not included in
the computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares. Therefore, the
effect of including these options and warrants would be antidilutive.
<TABLE>
<CAPTION>
For the Ten Months Ended March 31, 1998
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C>
Basic EPS
Loss from continuing operations $ (658,861) 15,644,998 $(0.04)
==============
Diluted EPS
Loss from continuing operations $ (658,861) 15,644,998 $(0.04)
==============
</TABLE>
(Notes continued on next page)
-47-
<PAGE>
NOTE 17 - EARNINGS PER SHARE RECONCILIATION (Continued)
Exercisable options and warrants to purchase 4,960,875 shares of common stock
were outstanding during the period ended March 31, 1998 but were not included in
the computation of diluted earnings per share as their effect was antidilutive
due to the fact that a loss from continuing operations was reported.
<TABLE>
<CAPTION>
For the Year Ended May 31, 1997
-------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
<S> <C>
Basic EPS
Income from continuing operations $ 810,533 13,232,108 $0.06
===============
Effect of dilutive securities:
Stock options and warrants -- 46,931
--------------------------------------
Diluted EPS
Income available to common shareholders and
assumed conversions $ 810,533 13,279,039 $0.06
==============================================================
</TABLE>
NOTE 18 - EXTRAORDINARY ITEM
During the year ended March 31, 1999, the Company realized a net gain
of $2,550,000 as a result of extinguishing certain debt obligations.
NOTE 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 3 for restricted cash of $600,000 relating to the China Steel
contract. Also, see note 11 for additional information relating to "assets 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.
* * * * *
-48-
<PAGE>
INFRACORPS INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
INFRACORPS INC.
7400 Beaufont Springs Drive
Suite 415
Richmond, VA 23225
Phone No. (804) 272-6600
James B. Quarles, Director, President, Chief Executive Officer
Navin D. Sheth, Director, Chief Financial Officer, Treasurer
Coleman S. Lyttle, Director
Terence R. Dellecker, Director
Dr. Allen Kahn, Director
John R. Potter, Director
James G. Zumwalt, Director
Warren E. Beam, Jr., Secretary
INFRACORPS OF VIRGINIA, INC.
2210 Belt Boulevard at Hopkins Road
P. O. Box 24205
Richmond, VA 23224
Phone No. (804) 231-3426
Coleman S. Lyttle, Director, President
Navin D. Sheth, Director, Chief Financial Officer, Secretary
David C. Paulette, Director, Vice President
-49-
<PAGE>
INFRACORPS INC.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
Annual Meeting
- ---------------
The 1999 Annual meeting of Shareholders will be held at 10:00 a.m. on July 26,
1999, at the Omni Hotel, 235 West Main Street, Charlottesville, Virginia 22902
Requests for Information
- ------------------------
Requests for information about INFC should be directed to Warren E. Beam, Jr.,
7400 Beaufont Springs Drive, Suite 415, Richmond, Virginia 23225, telephone
(804) 272-6600. A copy of INFC's Annual Report on Form 10-K for the period from
April 1, 1998 to March 31, 1999 is available without charge to any shareholder
requesting the same.
Shareholder Relations
- ---------------------
Warren E. Beam, Jr.
7400 Beaufont Springs Drive, Suite 415
Richmond, Virginia 23225
Phone No. (804) 272-6600
Transfer Agent
- ---------------
ChaseMellon Shareholder Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660-2108
Trading Information
- ---------------
OTC Bulletin Board
Symbol: INFC
-50-
Exhibit 21
SUBSIDIARIES OF INFRACORPS INC.
As of March 31, 1999
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
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
InfraCorps, Inc. and Subsidiaries
We consent to the incorporation by reference of our report, dated June 4, 1999
(relating to the consolidated financial statements of InfraCorps, Inc. and
Subsidiaries and included in the March 31, 1999 Annual Report on Form 10-K of
InfraCorps, Inc. and Subsidiaries), into the Form S-8 for the 1994 Nonstatutory
Stock Option Plan of InfraCorps, Inc. and Subsidiaries (formerly ETS
International, Inc. and Subsidiaries).
/s/ Goodman & Company, L.L.P.
- -----------------------------
Norfolk Virginia
July 12, 1999
EXHIBIT 23.2
ACCOUNTANT'S CONSENT
The Board of Directors
InfraCorps Inc.:
We consent to incorporation by reference in the registration
statements (No. 333-12167 and No. 333-12165) on Form S-8 of InfraCorps Inc.,
(formerly ETS International, Inc.) of our report dated May 8, 1998, relating to
the consolidated balance sheet of InfraCorps Inc., (formerly ETS International,
Inc.) and subsidiaries as of March 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
ten-month period ended March 31, 1998 and year ended May 31, 1997, which report
is incorporated by reference in the March 31, 1999 annual report on Form 10-K of
InfraCorps Inc. Our report dated May 8, 1998, contains an explanatory paragraph
that states that the Company has suffered recurring losses from operations and
has a net capital deficiency, which raise substantial doubt about its ability to
continue as a going concern. The aforementioned consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
KPMG LLP
Roanoke, Virginia
July 13, 1999
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or
director of InfraCorps 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 period from April 1, 1998 to March
31, 1999 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 20th day of
May, 1999.
/s/ James B. Quarles (SEAL)
-------------------------------
James B. Quarles
/s/ Navin D. Sheth (SEAL)
-------------------------------
Navin D. Sheth
/s/ Warren E. Beam, Jr (SEAL)
-------------------------------
Warren E. Beam, Jr.
/s/ Coleman S. Lyttle (SEAL)
-------------------------------
Coleman S. Lyttle
/s/ Terence R. Dellecker (SEAL)
-------------------------------
Terence R. Dellecker
/s/ John R. Potter (SEAL)
-------------------------------
John R. Potter
/s/ Allen Kahn (SEAL)
-------------------------------
Allen Kahn
/s/ James G. Zumwalt (SEAL)
------------------------------
James G. Zumwalt
<PAGE>
STATE OF VIRGINIA )
) to-wit:
COUNTY OF Chesterfield )
I, Trayce L. Pearman, a Notary Public in and for the County of Chesterfield, in
the State of Virginia, do hereby certify that:
James B. Quarles
Navin D. Sheth
Warren E. Beam, Jr.
whose names are signed to the foregoing writing bearing date the 20th day of
May, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 20th day of May, 1999.
/s/ Trayce L. Pearman
---------------------
Notary Public
My Commission Expires:
September 30, 2001
(SEAL)
<PAGE>
STATE OF VIRGINIA )
) to-wit:
CITY OF RICHMOND )
I, Jeanna Mitchell, a Notary Public in and for the City of Richmond, in the
State of Virginia, do hereby certify that:
Coleman S. Lyttle
whose names are signed to the foregoing writing bearing date the 26th day of
May, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 26th day of May, 1999.
/s/ Jeanna Mitchell
----------------------
Notary Public
My Commission Expires:
October 31, 2000
(SEAL)
<PAGE>
STATE OF NEW YORK )
) to-wit:
COUNTY OF NEW YORK )
I, Mary Ann Trilli, a Notary Public in and for the County of New York, in the
State of New York, do hereby certify that:
Terence R. Dellecker
whose names are signed to the foregoing writing bearing date the 2nd day of
June, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 2nd day of June, 1999.
/s/ Mary Ann Trilli
-------------------
Notary Public
My Commission Expires:
May 31, 2001
(SEAL)
<PAGE>
STATE OF WASHINGTON )
) to-wit:
CITY/COUNTY OF SEATTLE/KING )
I, Jeff Durgan, a Notary Public in and for the City/County of Seattle/King in
the State of Washington, do hereby certify that:
John R. Potter
whose names are signed to the foregoing writing bearing date the 21st day of
May, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 21st day of May, 1999.
/s/ Jeff Durgan
------------------
Notary Public
My Commission Expires:
July 1, 2000
(SEAL)
<PAGE>
STATE OF ILLINOIS )
) to-wit:
COUNTY OF COOK )
I, Lisa Ortiz, a Notary Public in and for the County of Cook, in the State of
Illinois, do hereby certify that:
Allen Kahn
whose names are signed to the foregoing writing bearing date the 21st day of
May, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 21st day of May, 1999.
/s/ Lisa Ortiz
------------------
Notary Public
My Commission Expires:
October 19, 2002
(SEAL)
<PAGE>
STATE OF VIRGINIA )
) to-wit:
CITY OF FAIRFAX )
I, Tom Wiltshire, a Notary Public in and for the City of Fairfax, in the State
of Virginia, do hereby certify that:
James G. Zumwalt
whose names are signed to the foregoing writing bearing date the 8th day of
June, 1999, this day personally appeared before me and acknowledged the same in
my City/County and State aforesaid.
GIVEN under my hand and seal this 8th day of June, 1999.
/s/ Tom Wiltshire
---------------------
Notary Public
My Commission Expires:
January 31, 2001
(SEAL)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD FROM APRIL 1, 1998 TO MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 272,256
<SECURITIES> 0
<RECEIVABLES> 3,439,342
<ALLOWANCES> (50,000)
<INVENTORY> 599,451
<CURRENT-ASSETS> 5,212,727
<PP&E> 5,999,195
<DEPRECIATION> (3,829,184)
<TOTAL-ASSETS> 8,570,447
<CURRENT-LIABILITIES> 5,173,145
<BONDS> 682,046
0
1,772,411
<COMMON> 6,126,338
<OTHER-SE> (5,323,832)
<TOTAL-LIABILITY-AND-EQUITY> 8,570,447
<SALES> 0
<TOTAL-REVENUES> 18,877,867
<CGS> 0
<TOTAL-COSTS> 18,561,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324,499
<INCOME-PRETAX> 378,460
<INCOME-TAX> 0
<INCOME-CONTINUING> 378,460
<DISCONTINUED> (1,090,324)
<EXTRAORDINARY> 2,550,000
<CHANGES> 0
<NET-INCOME> 1,838,136
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
EXHIBIT 99
Independent Auditors' Report
The Board of Directors and Stockholders
InfraCorps Inc.:
We have audited the consolidated balance sheet of InfraCorps Inc.,
(formerly ETS International, Inc.) and subsidiaries as of March 31, 1998, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the ten-month period ended March 31, 1998 and year
ended May 31, 1997. 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
InfraCorps Inc., (formerly ETS International, Inc.) and subsidiaries as of March
31, 1998, and the results of their operations and their cash flows for the
ten-month period ended March 31, 1998 and year ended May 31, 1997, in conformity
with generally accepted accounting principles.
The 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.
KPMG LLP
Roanoke, Virginia
May 8, 1998
