UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998 Commission File No. 00019678
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INFRACORPS INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1414643
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225
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(Address) (Zip Code)
(804) 272-6600
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Registrant's telephone number, including area code
ETS INTERNATIONAL, INC.
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(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to fill such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes x No
--------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of November 13, 1998.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 16,492,043
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
ASSETS (unaudited) (audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 100,023 $ 206,750
Accounts receivable:
Trade (net of allowance of $50,000 in 1998 and 1997) 3,687,891 2,540,810
Other 221,021 78,936
Costs and estimated earnings in excess of billings
on uncompleted contracts 509,005 563,924
Notes receivable 200,000
Inventory683,619 931,590
Prepaid expenses 120,879 143,174
------------ -------------
Total current assets 5,322,456 4,665,184
Property, plant and equipment:
Furniture and fixtures 376,329 345,857
Machinery, tools and equipment 4,123,898 4,027,556
Vehicles 1,331,372 1,373,657
Leasehold improvements 303,795 340,282
------------ -------------
6,135,394 6,087,352
Less accumulated depreciation 3,604,928 3,475,318
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Total property, plant and equipment, net 2,530,466 2,612,034
Other assets:
Restricted cash 600,000 600,000
Franchise agreements 47,666 50,916
Notes receivable from officers 151,040 151,040
Note receivable from ETS, Inc. 99,693 100,000
Cash value of life insurance 6,693 6,693
Other assets 15,146 97,338
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Total other assets 920,238 1,005,987
Assets of business transferred under
contractual agreements 221,532 267,666
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Total assets $ 8,994,692 $ 8,550,871
============ =============
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
(unaudited) (audited)
Current liabilities:
Bank overdraft $ 772,061 $ 173,493
Notes payable to bank 89,062 89,062
Notes payable to stockholders 850,000 3,410,000
Notes payable to affiliates 374,573 966,159
Notes payable 24,375 0
Current portion of long-term debt 487,477 480,543
Accounts payable 2,312,364 1,846,539
Accrued expenses and other current liabilities 283,498 768,638
Reserve for loss on closing subsidiary 500,000 0
--------------- ---------------
Total current liabilities 5,693,410 7,734,434
Long-term liabilities:
Long-term debt 641,198 907,896
Deferred gain on sale/leaseback 329,667 481,821
Liabilities of business transferred under contractual
arrangements 140,339 140,339
--------------- ---------------
Total liabilities 6,804,614 9,264,490
Stockholders' equity:
Preferred stock, no par value, authorized 5,000,000
shares; issued and outstanding 3,250,000 and 0 shares
at September 30, 1998 and March 31, 1998, respectively
net of valuation allowance of $1,950,000 1,321,667 0
Common stock, no par value; authorized 30,000,000
shares; issued and outstanding 16,492,043 shares 6,126,338 6,126,338
Retained earnings (accumulated deficit) (5,064,815) (6,646,845)
Less notes receivable from officers (193,112) (193,112)
--------------- ---------------
Total stockholders' equity 2,190,078 (713,619)
--------------- ---------------
Total liabilities and stockholders' equity $ 8,994,692 $ 8,550,871
=============== ===============
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three months ended Six months ended
September 30 September 30 September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Contract Revenues - Commercial $ 5,811,587 $ 5,425,099 $ 10,102,509 $ 11,079,506
Cost of goods and services 5,364,760 3,906,489 8,992,297 8,430,963
------------ ------------ ------------ ------------
Gross Profits (losses) 818,864 1,518,610 1,110,212 2,648,543
Selling, general and administrative expenses 725,037 545,232 1,558,241 1,104,956
------------ ------------ ------------ ------------
Net Operating Income (278,210) 973,378 (448,029) 1,543,587
Interest income 9,324 8,316 20,366 13,104
Interest expense (103,771) (276,967) (248,118) (442,395)
Gain on sale of equipment 0 0 329,478 0
------------ ------------ ------------ ------------
Income (Loss) from continuing operations $ (372,657) $ 704,727 $ (346,303) $ 1,114,296
Loss from discontinued operations 0 (492,559) 0 (339,438)
Valuation allowance on preferred shares 1,950,000 0 1,950,000 0
------------ ------------ ------------ ------------
Net income (loss) $ 1,577,343 $ 212,168 $ 1,603,697 $ 774,858
============ ============ ============ ============
Earnings (Loss) from continuing operations
per common share:
Basic $ (.02) $ .05 $ (.02) $ .08
Diluted $ (.02) $ .05 $ (.02) $ .08
Earnings (Loss) per common share:
Basic $ 0.10 $ .01 $ 0.10 $ .05
Diluted $ 0.08 $ .01 $ 0.09 $ .05
Average shares of common stock used for above
computation:
Basic 16,492,043 14,999,955 16,492,043 14,548,333
Diluted 19,742,043 14,999,955 18,117,043 14,548,333
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED SEPTEMBER 30, 1998
<CAPTION>
Retained Notes
Earnings Receivable
Common Stock Preferred Stock Accumulated from
Shares Amount Shares Amount (Deficit) Officer Total
------ ------ ------ ------ --------- ------- -----
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Balances at March 31, 1998 16,492,043 $ 6,126,338 0 $ 0 $ (6,646,845) $ (193,112) $ (713,619)
Net Income 26,354 26,354
---------- ----------- --------- ----------- ------------ ---------- -----------
Balances at June 30, 1998 16,492,043 $ 6,126,338 0 $ 0 $ (6,620,491) $ (193,112) $ (687,265)
Conversion of debt to
preferred shares 3,250,000 $ 3,250,000 $ 3,250,000
Valuation Allowance (1,950,000) (1,950,000)
Accrued dividends
preferred shares 21,667 (21,667) 0
Net Income 1,577,343 1,577,343
---------- ----------- --------- ----------- ------------ ---------- -----------
Balances at
September 30, 1998 16,492,043 $6,126,338 3,250,000 $ 1,321,667 $(5,064,815) $ (193,112) $ 2,190,078
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Six months ended
September 30, 1998 September 30, 1997
------------------ ------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 1,603,697 $ 774,856
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 276,628 612,921
Amortization of convertible debentures discount 0 252,289
Professional services received in exchange for common stock 0 133,444
Amortization of deferred gain on sale/leaseback (152,154) (152,154)
Gain on disposal of equipment (329,478) 0
Reserve for closing subsidiary (500,000) 0
Valuation allowance on preferred shares (1,950,000) 0
Increase/decrease in operating assets and liabilities:
Accounts receivable (1,289,166) (878,938)
Costs and estimated earnings in excess of billings on uncompleted contracts 54,919 (440,743)
Inventories247,971 (287,577)
Prepaid expenses 22,277 (70,342)
Cash surrender value of life insurance, net 0 (17,611)
Accounts payable 82,192 (361,841)
Accrued expenses and other liabilities 465,825 (651,046)
Other Assets (485,140) 333,094
----------- -----------
Net cash used in operating activities (952,429) (753,655)
Cash flow from investing activities:
Purchase of property, plant and equipment (372,332) (804,966)
Proceeds from sale of Service Division 350,000 0
Notes Receivable decrease 200,307 0
Decrease in assets of business transferred under contractual agreement 46,134 0
----------- -----------
Net cash used in investing activities 224,109 (804,966)
Cash flows from financing activities:
Bank overdraft 598,568 884,318
Notes payable increase (decrease) (3,817,211) 0
Issuance of preferred stock 3,250,000 0
Principal payments on long-term debt (259,764) (1,160,236
Proceeds from exercise of stock options 0 492,188
Proceeds from notes payable to stockholder 850,000 1,696,972
----------- -----------
Net cash provided by financing activities 621,593 1,913,242
----------- -----------
Increase (decrease) in cash and cash equivalents (106,727) 354,621
Cash and cash equivalents at beginning of year 206,750 377,313
----------- -----------
Cash and cash equivalents at end of period $ 100,023 $ 731,934
=========== ===========
</TABLE>
Supplemental disclosures of cash flow information and noncash investing
activities: Interest paid on notes payable and long-term debt was $248,118 and
$442,395 for the six months ended September 30, 1998 and September 30, 1997
respectively. There were no capital lease obligations for the periods
represented. Dividends on preferred shares of $21,667 and $0 were accrued for
the six months ended September 30, 1998 and September 30, 1997 respectively.
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
as set forth in Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
necessary adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 1999. On April
6,1998, the Company changed its year end from May 31 to March 31.
The accompanying financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. For the six month
period ended September 30, 1998, the Company had cash used in operating
activities of $952,429, and at September 30, 1998, the Company had an
accumulated deficit of $5,064,815 from operations and a stockholders' equity of
$2,190,078.
These factors, plus significant losses and cash flow deficits from operations in
prior years, indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's working capital
requirements for the first six months of fiscal 1999 were met principally
through the proceeds of $350,000 from the sale of the ETSW Service Division,
$200,000 payment on notes receivable and $850,000 loan from a shareholder.
Management's plans to continue as a going concern include the following efforts
to generate necessary cash flow to meet the Company's working capital needs: (i)
raising additional capital, (ii) obtaining a line of credit, (iii) increasing
sales of its infrastructure products, systems and services and (iv) continuing
to evaluate and manage costs and expenses and utilizing resources effectively to
increase gross profit and reduce selling and general administrative expenses.
Management has negotiated with certain note holders to convert their debt to
preferred stock (see Note H of Notes to Consolidated Financial Statements) and
is currently in negotiation with lenders to obtain a line of credit to provide
working capital. Management believes it can return the Company to profitable
operations in fiscal 1999. There can be no assurance that management's
negotiations with lenders will be successful or the Company will have profitable
operations in fiscal 1999.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE B - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ETS International,
Inc. and its wholly-owned subsidiaries, IC Subsidiary, Inc.(formerly ETS, Inc.)
("ETS"), ETS Analytical Services, Inc. and InfraCorps of Virginia, Inc.
(formerly ETS Water and Waste Management, Inc.) ("ETSW") and its subsidiary
InfraCorps of Florida, Inc. (formerly ETS Liner, Inc.). Significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE C - EARNINGS PER SHARE
Basic earnings per share have been computed on the basis of weighted-average
number of shares outstanding. Diluted earnings per share did not include shares
related to stock options and warrants for the quarter ended September 30, 1998
as their effect was antidilutive.
NOTE D - RESTRICTED CASH
Restricted cash of $600,000 is included in other assets as it is restricted for
a performance bond relating to the Company's contract with China Steel
Corporation (the "China Steel Contract"). Potential issues have been 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 limestone
emission control ("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. See note E of Notes to
Consolidated Financial Statements for additional information.
NOTE E - DISPOSAL OF ENVIRONMENTAL OPERATIONS SEGMENT
On October 31, 1997, ETS Analytical Services, Inc. ("ETSAS"), a wholly owned
subsidiary of the Company, sold substantially all of its assets in return for a
ten-year 8.5% promissory note in the amount of $1,000,000, which exceeded the
net book value of the assets and liabilities sold. Also, since the risks of
ownership were not transferred to the purchaser, no sale was recognized for
accounting purposes. Accordingly, the assets and liabilities transferred to the
purchaser remain in the noncurrent sections of the balance sheet and are
designated as "assets of business transferred under contractual arrangements"
and "liabilities of business transferred under contractual arrangements." At
March 31 and September 30, 1998, "assets of business transferred under
contractual arrangements" was stated net of a valuation allowance of $858,000.
<PAGE>
On March 12, 1998, substantially all of the assets and certain liabilities of
ETS, a wholly owned subsidiary of the Company, were sold to ETS
Acquisition,Inc., a newly formed firm based in Roanoke, Virginia. In connection
with this sale, the Company sold a portion of its assets and business relating
to the LEC technology, including patents and licenses, to Christel Clear
Technologies, Inc. ("CCTI"), a newly formed firm based in Roanoke, Virginia. The
total purchase price was $1,896,124 for all of the aforementioned. The purchase
price was paid in cash, stock of the Company, assumption of certain liabilities
of ETS, delivery of a $200,000 thirty-day note bearing 8 1/2% interest and
delivery of a ten-year $100,000 note bearing 8 1/2% interest. Also, the Company
will receive 50% of all royalties received by CCTI in connection with the
license of the LEC technology. While there is no indication that the LEC will be
resold by CCTI, the agreement further provides that the Company will receive 50%
of the net sales price from a resale of the LEC technology on or before March
12, 1999, and 25% of the net sales price from a resale after March 12, 1999 but
on or before March 12, 2000.
In connection with the foregoing transaction, the Company 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 the
Company's China Steel Contract. ATI and CCTI agreed to accept responsibility for
any potential liabilities associated with the China Steel Contract and to
provide its best effort to have the contract transferred from the Company to
ATI. ETS Acquisition, Inc., CCTI and ATI are owned by six former executive
officers of the Company and former members of the Company's Board of Directors.
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. See note D of Notes to
Consolidated Financial Statements above for additional information. See note G
of Notes to Consolidated Financial Statements for additional information.
In connection with the Company's disposal of its environmental operations in
October 1997 and March 1998, income from these discontinued operations has been
reclassified in the consolidated statements of income for the six-month period
ended September 30, 1997. Revenues of $1,865,431 for the three-months ended
September 30, 1997 and $3,650,077 for the six-months ended September 30, 1997
related to the discontinued environmental operations.
NOTE F- SALE OF SERVICE DIVISION OF ETSW
On April 29, 1998, the Company sold the Service Division of ETSW (e.g., septic
system installation and repair, plumbing, jacuzzi service contracts and
incidental concrete manufacturing/concrete products) to a new corporation formed
by Coleman S. Lyttle, a director of the Company and President of ETSW, for a
total purchase price of $550,000, payable as follows: $350,000 cash at closing,
assumption of certain indebtedness of the Company and notes payable to the
Company in the aggregate amount of $200,000. Mr. Lyttle will continue to serve
as a director of the Company and as President of ETSW. A gain of $329,478 was
recognized on this sale.
NOTE G - CONTINGENT LIABILITIES AND OTHER MATTERS
Management believes that the existing potential liabilities under the China
Steel Contract will make obtaining significant outside capital difficult.
Management is negotiating to obtain a line of credit from a bank. Management
believes that it can return the Company to positive cash flow from operations in
fiscal 1999. There can be no assurance of the extent to which management's
negotiations will be successful or that the Company will generate positive cash
flow from operations in fiscal 1999. See notes D and E of Notes to Consolidated
Financial Statements for additional information.
NOTE H - PREFERRED STOCK
On July 30, 1998, the Company issued 3,250,000 shares of Series A Convertible
Preferred stock, no par value (the "Series A Convertible Preferred Stock"), to
convert and retire an aggregate of $3,250,000 of Company debt evidenced by
promissory notes of the Company held by certain shareholders. The Company sold
shares of Series A Convertible Preferred Stock to each shareholder, at a price
of $1.00 per share, which was paid by the shareholder's delivery and surrender
to the Company of his promissory note and any security agreements, guarantees or
liens executed by the Company or any of its affiliates in relation to the
promissory note.
In relation to the issuance of the preferred shares a valuation allowance was
recorded of $1,950,000. This valuation was determined by reference to the common
stock price and the effective interest rate a third party would expect to
receive in a similar transaction. As a result, a valuation allowance arose due
to the effective value of the shares was less than the amount being converted.
This was based on a presumption of effective interest rate earned on the
preferred shares as well as the price of the preferred stock on a converted to
common basis.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months and six months ended September 30, 1998 compared to three months
and six months ended September 30, 1997.
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
three-month and six-month period ended September 30, 1997. Revenues for the
three-month period ended September 30, 1998 (the "second quarter of fiscal
1999") were $5,811,587 compared to $5,425,099 for the three-month period ended
September 30, 1997, resulting in a 7% increase in revenues. This increase
largely was the result of increase in new orders in previous quarters. Revenues
for the six-month period ended (the "year to date of fiscal 1999") were
$10,102,509 compared to $11,079,506 for the six-month period ended September
30,1997 resulting in a 9% decrease. This decrease largely was the result of
inclement weather, slowness in orders in the first quarter of the year and the
sale of the Service Division of ETSW.
Cost of goods and services for the second quarter of fiscal 1999 was $5,364,760
or 92% of sales compared to $3,906,489 or 72% of sales for the three-month
period ended September 30, 1997. Cost of goods and services for the year to date
of fiscal 1999 was $8,992,297 or 89% of sales as compared to $8,430,963 or 76%
for the six-month period ended September 30, 1997. Gross profits for the second
quarter of fiscal 1999 were $446,827 or 8% of sales compared to $1,518,610 or
28% of sales for the three-month period ended September 30, 1997. Gross profits
for the year to date of fiscal 1999 was $1,110,212 as compared to $2,648,543 for
the six-month period ended September 30, 1997. These decreases in gross profits
were due to the decreases in margins for the period. The cost of goods and
services included a charge of $372,000 for closing the Florida operations.
Selling, general and administrative expenses were $725,037 for the second
quarter of fiscal 1999 or 12.5% of net sales compared to $545,232 or 10% of net
sales for the three-month period ended September 30, 1997. Selling, general and
administrative expenses were $1,558,241 for the year to date of fiscal 1999 or
15% of net sales compared to $1,104,956 or 10% of net sales for the six-month
period ended September 30, 1997. The general and administrative expense increase
was due to costs associated with the management reorganization, as well as the
timing of professional services for year-end reporting. There was a one time
charge of $128,000 for closing the Florida operations.
Gain on sale of $329,478 for the year to date of fiscal 1999 reflected the sale
of the Service Division of ETSW. Interest expense for the second quarter of
fiscal 1999 was $103,771 compared to $276,967 for the three-month period ended
September 30, 1997. Interest expense for the year to date of fiscal 1999 was
$248,118 as compared to $442,395 for the six-month period ended September 30,
1997. 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.
Loss from continuing operations for the second quarter of fiscal 1999 was
$372,657 compared to income of $704,727 for the three-month period ended
September 30,1997. Loss from continuing operations for the year to date of
fiscal 1999 was $346,303 compared to income of $1,114,296 for the six-month
period ended September 30,1997. Discontinued operations include environmental
operations which were sold in October 1997 and March 1998. Loss from
discontinued operations was $492,559 for the three-month period ended September
30, 1997 and loss from discontinued operations was $339,438 for the six-month
period ended September 30, 1997. Revenues of $1,865,431 for the three-months
ended September 30, 1997 and $3,650,077 for the six-months ended September 30,
1997 related to the discontinued environmental operations.
On July 30, 1998, certain shareholders converted debt to preferred shares. As a
result, a valuation allowance arose due to the effective value of the shares was
less than the amount being converted. This was based on a presumption of
effective interest rate earned on the preferred shares as well as the price of
the preferred stock on a converted to common basis. Therefore, a valuation
allowance in the amount of $1,950,000 was recognized.
Effective November 30, 1998, the Company will close InfraCorps of Florida, Inc.
("Florida"). This is due to the losses that have been sustained by that
operation in the past year. A reserve of $500,000 was expensed for the estimated
costs of closing the Florida operations. $372,000 was expensed to cost of goods
and services while the remaining $128,000 was expensed to selling, general and
administrative. The Company has attempted to find a buyer for Florida but if no
buyer steps forward the assets will be moved to Virginia and utilized in
Virginia's operation or sold. All current contracts will be completed within the
next six months.
Net income for the second quarter of fiscal 1999 was $1,577,343 compared to net
income of $212,168 for the three-month period ended September 30, 1997. Net
income for the year to date of fiscal 1999 was $1,603,697 compared to net income
of $774,858 for the six-month period ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 1998
The Company continues to be cash deficient. For the six-month period ended
September 30, 1998, the Company had cash used in operating activities of
$952,429, and at September 30, 1998, the Company had an accumulated deficit of
$5,064,815 from operations and a stockholders' equity of $2,190,078. See
discussion under "Going Concern" above.
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 currently is negotiating to obtain a line of credit.
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 or
that the Company will find sufficient sources of outside capital to support its
future operations. See Note E of Notes to Consolidated Financial Statements.
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. 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%, matures on October 31, 1998.
On July 30, 1998, certain shareholders converted debt to preferred shares. As a
result, a valuation allowance 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
valuation allowance in the amount of $1,950,000 was recognized.
On April 28, 1998, InfraCorps sold the Service Division of ETSW (e.g., septic
system installation and repair, irrigation, plumbing, jacuzzi service contracts
and incidental concrete manufacturing/concrete products) to a new corporation
formed by Coleman S. Lyttle, a director of InfraCorps and President of
InfraCorps of Virginia, Inc. ("Virginia"), for a total purchase price of
$550,000, payable as follows: $350,000 cash at closing, assumption of certain
indebtedness of Virginia and notes payable to Virginia in the aggregate amount
of $200,000. A gain of $329,478 was recognized on the sale.
Major components of cash flows used in operating activities include an increase
in accounts payable of $465,825, an increase in inventories of $247,971, a
decrease in accounts receivable of $1,289,166 and a decrease in accrued expenses
and other current liabilities of $485,140. Adjustments to net cash flows are
gain on the sale of the Service Division of $329,478, depreciation and
amortization of $276,628 and amortization of deferred gain on sale/leaseback of
$152,154.
Net cash provided by investing activities of $224,109 consisted mainly of
purchase of property, plant and equipment in the amount of $372,332, proceeds
from sale of Service Division of $350,000 and decrease in notes receivable of
$200,000. The net cash used in financing activities of $651,593 includes in part
proceeds from notes payable to stockholder of $850,000, payment of debt
principal of $259,764, decrease in notes payable of $3,817,211, increase in
preferred stock of $3,250,000 and an increase in bank overdraft of $598,568. The
cash and cash equivalents at September 30, 1998 were $100,023. New orders
received for the second quarter of fiscal 1999 were $6,020,032 compared to
$4,075,032 for the three months ended September 30, 1997. New orders were up in
the second quarter as a result of strong construction activity during this
period. Backlog at September 30, 1998 was $14,500,000 compared to $4,200,000 at
September 30, 1997.
<PAGE>
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
or 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 system 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 it Year 2000 readiness. This
assessment included a review of the Company's internal information technology
systems and non-information technology systems. Upon review of this assessment,
The Company believes that its technology systems are fully Year 2000 compliant.
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, 1998. Although the cost
of the Company's Year 2000 remediation program has not yet been finalized, the
Company estimates that these cost will not exceed $30,000 and, in any event,
believes that such costs will not have a material, adverse effect upon the
company's result of operation or financial condition.
FORWARD LOOKING STATEMENTS
Management has included herein certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used, statements
which are not historical in nature, including the words "anticipated",
"estimate", "should", "expect", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Among the factors that could
cause the actual results to differ materially from those projected are 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,. Other risks,
uncertainties, and factors that could cause actual results to differ materially
from those projected are detailed from time to time in reports filed by the
Company with the Securities and Exchange Commission, including Forms 8-K, 10-Q,
and 10-K.
<PAGE>
GOING CONCERN
The accompanying financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. For the six month
period ended September 30, 1998, the Company had cash used in operating
activities of $952,429, and at September 30, 1998, the Company had an
accumulated deficit of $5,064,815 from operations and a stockholders' equity of
$2,190,078.
These factors, plus significant losses and cash flow deficits from operations in
prior years, indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's working capital
requirements for the first quarter of fiscal 1999 were met principally through
the proceeds of $350,000 from the sale of the ETSW Service Division, $200,000
payment on notes receivable and $850,000 loan from a shareholder.
Management's plans to continue as a going concern include the following efforts
to generate necessary cash flow to meet the Company's working capital needs: (i)
raising additional capital, (ii) obtaining a line of credit, (iii) increasing
sales of its infrastructure products, systems and services and (iv)continuing to
evaluate and manage costs and expenses and utilizing resources effectively to
increase gross profit and reduce selling and general administrative expenses.
Management has negotiated with certain note holders to convert their debt to
preferred stock (see Note H of Notes to the Consolidated Financial Statements)
and is currently in negotiation with lenders to obtain a line of credit to
provide working capital. Management believes it can return the Company to
profitable operations in fiscal 1999. There can be no assurance that
management's negotiations with lenders will be successful or the Company will
have profitable operations in fiscal 1999.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
RECENT EVENTS
On March 12, 1998, substantially all of the assets of ETS, a wholly owned
subsidiary of the Company, were sold to ETS Acquisition, Inc., a newly formed
firm based in Roanoke, Virginia. In connection with this sale, the Company sold
a portion of its assets and business relating to the LEC technology, including
patents and licenses, to CCTI, a newly formed firm based in Roanoke, Virginia.
In connection with the foregoing transaction, the Company entered into a
Management Agreement with ATI, a newly formed firm based in Roanoke, Virginia,
to provide management services with respect to the Company's contract with China
Steel Corporation. ATI and CCTI agreed to accept responsibility for any
potential liabilities associated with the China Steel Contract and to provide
its best effort to have the contract transferred from the Company to ATI. ETS
Acquisition, Inc., CCTI and ATI are owned by six former executive officers of
the Company or ETS and former members of the Company's Board of Directors.
<PAGE>
The Board of Directors of the Company is continuing to review the financial and
other aspects of the 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.
The Company has continued to undertake cost cutting measures and is continuing
to seek additional capital. On April 29, 1998, the Company sold the Service
Division of ETSW (e.g., septic system installation and repair, plumbing, jacuzzi
service contracts and incidental concrete manufacturing/concrete products) to a
new corporation formed by Coleman S. Lyttle, a director of the Company and
President of ETSW, for a total purchase price of $550,000, payable as follows:
$350,000 cash at closing, assumption of certain indebtedness of the Company and
notes payable to the Company in the aggregate amount of $200,000. Mr. Lyttle
continues to serve as a director of the Company and as President of ETSW. A gain
of $329,478 was recognized on this sale.
On July 30, 1998, the Company issued 3,250,000 shares of Series A Convertible
Preferred Stock to convert and retire an aggregate of $3,250,000 of Company debt
evidenced by promissory notes of the Company held by certain shareholders. The
Company sold shares of Series A Convertible Preferred Stock to each shareholder,
at a price of $1.00 per share, which was paid by the shareholder's delivery and
surrender to the Company of his promissory note and any security agreements,
guarantees or liens executed by the Company or any of its affiliates in relation
to the promissory note.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
Not Applicable.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
A lawsuit was served on ETS Analytical Services, Inc. ("ETSAS") on or about
March 18, 1998 and filed in the Circuit Court for Chesterfield County under the
caption, Steven R. Pond v. ETS Analytical Services, Inc., Case No.
041CL98000254-00 (Circuit Court for Chesterfield County). In this lawsuit,
Steven R. Pond ("Pond"), a former employee of ETSAS and the owner of premises
leased to ETSAS, has asserted that ETSAS has breached its obligations under the
lease by failing to make certain monthly payments, including late fees and
interest, as well as by causing or permitting "physical damages and waste upon
the premises." Pond is seeking judgment against ETSAS "in the sum of $129,189.85
for accelerated rent, together with accrued late fees in the amount of
$4,579.79; compensatory damages in the amount of $1,000.00, plus the costs of
remediation and all damages, costs, liability or expense arising from or related
to environmental contamination or environmental degradation of the [p]remises;
prejudgment interest at the rate of 1.00%; together with the costs of this
action and award of attorney's fees and costs." On April 8, 1996, ETSAS filed a
Special Plea, Grounds of Defense, and Counterclaim, in which ETSAS asserted that
it is entitled to a set-off of any monies allegedly due and owing under the
lease by virtue of Pond's indebtedness to ETSAS, in the amount of approximately
$60,000, under a promissory note. ETSAS intends to defend the lawsuit
vigorously. It is not possible at this stage, however, to determine the
likelihood of an unfavorable outcome in the case or an estimate of the range of
potential loss.
Item 2. CHANGED IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On August 17, 1998, the annual shareholders meeting was held. The
following items were put forth to the security holders for a vote.
1.) Five individuals were nominated by management and elected by the
shareholders by the following votes:
For Withheld
--- --------
Terence Dellecker 12,208,353 66,375
Coleman S. Lyttle 12,139,853 134,875
John R. Potter 12,209,353 65,375
James B. Quarles 12,219,203 55,525
Navin D. Sheth 12,226,253 48,475
2.) Approval of the Amendment and Restatement of the Company's Articles of
Incorporation to change the name of the Company from ETS International,
Inc. to InfraCorps Inc.:
For Withheld Abstain
--- -------- -------
12,168,686 85,345 20,700
3.) Approval of the Board's appointment of KPMG Peat Marwick as auditors for
fiscal 1999:
For Withheld Abstain
--- -------- -------
12,244,928 15,400 14,400
4.) Approval of the proposed amendments of Sections 2 and 10 of Article III of
the Company's Bylaws to increase the number of directors from 5 to 10 and
set the number of directors to 7:
For Withheld Abstain
--- -------- -------
12,274,728 0 0
<PAGE>
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
Exhibits to this Form 10-Q are as follows:
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended,
of the Registrant*
3.1 Bylaws, as amended, of the Registrant*
4.1 Specimen copy of certificate for the
Registrant's common stock, no par value*
4.2 Article II of the Registrant's Bylaws
(included in Exhibit 3.2)*
10.1 Employment Agreement dated January 20,
1998, between J. B. Quarles and the
Registrant*
10.2 Stock Option Agreements between the
Registrant and James B. Quarles*
10.3 Management Agreement dated march 12,
1998, between Air Technologies, Inc. and
the Registrant*
10.4 Contract dated September 12, 1997,
between China Steel Corporation and the
Registrant**
10.5 Lease dated June 1, 1996, between Estate
of Stamie E. Lyttle and ETS Water and
Waste Management, Inc.***
10.6 Agreement for the Purchase of Series A
Convertible Preferred Stock and for the
Conversion of Certain Promissory Notes
dated July 30, 1998****
10.7 Contract License Agreement dated
September 14, 1995, between Ultraliner,
Inc. and ETS Water and Waste Management,
Inc.*
27 Financial Data Schedule*****
<PAGE>
* Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the transition period from June 1, 1997 to March
31, 1998.
** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1997.
*** Incorporated by reference to the Registrants Annual Report of
Form 10-K for the fiscal year ended May 31, 1997.
**** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
***** Filed herewith.
(B) Reports on Form 8-K
The Company did not file any Current Reports
on Form 8-K during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registrations statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFRACORPS INC.
DATE February 8, 1999 BY: s/ James B. Quarles
---------------- --------------------------------
James B. Quarles
Chairman and President
DATE February 8, 1999 BY: s/Warren E. Beam, Jr.
---------------- ------------------------------
Warren E. Beam, Jr.
Secretary and Controller
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended, of the Registrant*
3.1 Bylaws, as amended, of the Registrant*
4.1 Specimen copy of certificate for the Registrant's common
stock, no par value*
4.2 Article II of the Registrant's Bylaws (included in Exhibit
3.2)*
10.1 Employment Agreement dated January 20, 1998, between J. B.
Quarles and the Registrant*
10.2 Stock Option Agreements between the Registrant and James B.
Quarles*
10.3 Management Agreement dated march 12, 1998, between Air
Technologies, Inc. and the Registrant*
10.4 Contract dated September 12, 1997, between China Steel
Corporation and the Registrant**
10.5 Lease dated June 1, 1996, between Estate of Stamie E. Lyttle
and ETS Water and Waste Management, Inc.***
10.6 Agreement for the Purchase of Series A Convertible Preferred
Stock and for the Conversion of Certain Promissory Notes
dated July 30, 1998****
10.7 Contract License Agreement dated September 14, 1995, between
Ultraliner, Inc. and ETS Water and Waste Management, Inc.*
27.1 Financial Data Schedule*****
<PAGE>
* Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the transition period from June 1, 1997 to March
31, 1998.
** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1997.
*** Incorporated by reference to the Registrants Annual Report of
Form 10-K for the fiscal year ended May 31, 1997.
**** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
***** Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 100,023
<SECURITIES> 0
<RECEIVABLES> 3,687,891
<ALLOWANCES> 0
<INVENTORY> 683,619
<CURRENT-ASSETS> 5,322,456
<PP&E> 6,135,394
<DEPRECIATION> (3,604,928)
<TOTAL-ASSETS> 8,994,692
<CURRENT-LIABILITIES> 5,693,410
<BONDS> 641,198
0
1,321,667
<COMMON> 6,126,338
<OTHER-SE> (5,064,815)
<TOTAL-LIABILITY-AND-EQUITY> 8,994,692
<SALES> 0
<TOTAL-REVENUES> 10,102,509
<CGS> 0
<TOTAL-COSTS> 8,992,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (248,118)
<INCOME-PRETAX> (346,303)
<INCOME-TAX> 0
<INCOME-CONTINUING> 153,697
<DISCONTINUED> 0
<EXTRAORDINARY> 1,950,000
<CHANGES> 0
<NET-INCOME> 1,603,697
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
