UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 193
For the Quarter Ended December 31, 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 the close of the period covered by this report.
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>
December 31, 1998 March 31, 1998
ASSETS (unaudited) (audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 553,331 $ 206,750
Accounts receivable:
Trade (net of allowance of $50,000 in 1998 and 1997) 3,375,580 2,540,810
Other 211,264 78,936
Costs and estimated earnings in excess of billings
on uncompleted contracts 535,550 563,924
Notes receivable 0 200,000
Inventory 593,485 931,590
Prepaid expenses 46,667 143,174
Total current assets 5,315,877 4,665,184
Property, plant and equipment:
Furniture and fixtures 362,554 345,857
Machinery, tools and equipment 4,117,668 4,027,556
Vehicles 1,328,466 1,373,657
Leasehold improvements 301,370 340,282
6,110,058 6,087,352
Less accumulated depreciation 3,720,114 3,475,318
Total property, plant and equipment, net 2,389,944 2,612,034
Other assets:
Restricted cash 600,000 600,000
Franchise agreements 46,041 50,916
Notes receivable from officers 151,040 151,040
Note receivable from ETS, Inc. 99,503 100,000
Note receivable 40,000 0
Cash value of life insurance 6,693 6,693
Other assets 8,220 97,338
Total other assets 951,497 1,005,987
Assets of business transferred under
contractual agreements 198,438 267,666
Total assets $ 8,855,756 $ 8,550,871
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
December 31, 1998 March 31, 1998
(unaudited) (audited)
Current liabilities:
Bank overdraft $ 1,533,862 $ 173,493
Notes payable to bank 89,061 89,062
Notes payable to stockholders 1,291,700 3,410,000
Notes payable to affiliates 414,573 966,159
Notes payable 92,000 0
Current portion of long-term debt 487,477 480,543
Accounts payable 1,802,791 1,846,539
Accrued expenses and other current liabilities 154,914 768,638
Reserve for loss on closing subsidiary 9,608 0
Total current liabilities 5,875,986 7,734,434
Long-term liabilities:
Long-term debt 552,019 907,896
Deferred gain on sale/leaseback 253,590 481,821
Liabilities of business transferred under contractual
arrangements 140,339 140,339
Total liabilities 6,821,934 9,264,490
Stockholders' equity:
Preferred stock, no par value, authorized 5,000,000
shares; issued and outstanding 1,750,000 and 0 shares at
December 31, 1998 and March 31, 1998, respectively
net of valuation allowance of $2,550,000 712,684 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) (4,612,088) (6,646,845)
Less notes receivable from officers (193,112) (193,112)
Total stockholders' equity 2,033,822 (713,619)
Total liabilities and stockholders' equity $ 8,855,756 $ 8,550,871
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
<CAPTION>
December 31 December 31 December 31 December 31
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
Contract revenues - commercial $ 4,712,275 $ 3,317,398 $ 14,814,784 $ 14,396,905
Cost of goods and services 4,050,917 2,952,443 13,043,214 11,383,406
Gross profits (losses) 661,358 364,955 1,771,570 3,013,499
Selling, general and administrative expenses 474,552 1,054,698 2,032,793 2,159,654
Net operating income 186,806 (689,743) (261,223) 853,845
Interest income 11,914 8,948 32,280 22,052
Interest expense (51,162) (156,867) (299,280) (466,665)
Gain/(loss) on sale of equipment (12,114) 0 317,364 0
Income (loss) from continuing operations $ 135,444 $ (837,662) $ (210,859) $ 276,632
Loss from discontinued operations 0 (566,092) 0 (550,351)
Extraordinary gain on extinguishment of debt 600,000 0 2,550,000 0
Net income (loss) $ 735,444 $(1,403,754) $ 2,339,141 $ (141,119)
Earnings (loss) from continuing operations per
common share:
Basic $ .01 $ (.05) $ (.01) $ .03
Diluted $ .01 $ (.05) $ (.01) $ .03
Earnings (Loss) per common share:
Basic $ 0.04 $ (.09) $ 0.14 $ (.01)
Diluted $ 0.04 $ (.09) $ 0.13 $ (.01)
Average shares of common stock used for
above computation:
Basic 16,492,043 15,586,075 16,492,043 14,894,247
Diluted 19,742,043 15,586,075 18,658,710 14,894,247
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED DECEMBER 31, 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
Extraordinary gain on
extinguishment of debt (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
Redemption of preferred shares (2,500,000) $(1,041,700) (250,000) $(1,291,700)
Conversion of debt to
preferred shares 1,000,000 1,000,000 1,000,000
Extraordinary gain on
extinguishment of debt (600,000) (600,000)
Accrued dividends
preferred shares 32,717 (32,717) 0
Net Income 735,444 735,444
Balances at
December 31, 1998 16,492,043 $ 6,126,338 1,750,000 $712,684 $(4,612,088) $ (193,112) $ 2,033,822
<PAGE>
INFRACORPS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine months ended
December 31, 1998 December 31, 1997
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,339,141 $ (141,119)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 390,403 816,606
Amortization of convertible debentures discount 0 334,113
Professional services received in exchange for common stock 0 133,444
Amortization of deferred gain on sale/leaseback (228,231) (228,231)
Gain on disposal of equipment (317,364) 0
Reserve for closing subsidiary 9,608 0
Extraordinary gain on extinguishment of debt (2,550,000) 0
Increase/decrease in operating assets and liabilities:
Accounts receivable (967,098) 673,106
Costs and estimated earnings in excess of billings on uncompleted contracts 28,374 (528,741)
Inventories338,105 (155,322)
Prepaid expenses 96,507 40,596
Cash surrender value of life insurance, net 0 (24,222)
Accounts payable 93,993 (293,221)
Accrued expenses and other liabilities (43,748) (1,078,962)
Restricted cash 0 (600,000)
Other Assets (613,724) 267,874
Net cash used in operating activities (1,424,034) (782,079)
Cash flow from investing activities:
Purchase of property, plant and equipment (529,400) (1,403,002)
Proceeds from sale of Service Division 390,000 0
Notes Receivable decrease 200,497 0
Decrease in assets of business transferred under contractual agreement 69,228 0
Net cash used in investing activities 130,325 (1,403,002)
Cash flows from financing activities:
Bank overdraft 1,360,369 80,319
Notes payable increase (decrease) (4,655,902) (1,036,146)
Issuance of preferred stock 4,250,000 0
Preferred stock redemption (1,250,000) 0
Principal payments on long-term debt (355,877) (432,086)
Proceeds from exercise of stock options 0 777,680
Proceeds from notes payable to stockholder 2,291,700 2,876,533
Net cash provided by financing activities 1,640,290 1,878,800
Increase (decrease) in cash and cash equivalents 346,581 (306,281)
Cash and cash equivalents at beginning of year 206,750 377,313
Cash and cash equivalents at end of period $ 553,331 $ 71,032
</TABLE>
Supplemental disclosures of cash flow information and noncash investing
activities: Interest paid on notes payable and long-term debt was $299,280 and
$466,665 for the nine months ended December 31, 1998 and December 31, 1997
respectively. There were no capital lease obligations for the periods
represented. Dividends on preferred shares of $32,717 and $0 were accrued for
the nine months ended December 31, 1998 and December 31, 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
nine months ended December 31, 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 nine month
period ended December 31, 1998, the Company had cash used in operating
activities of $1,424,034, and at December 31, 1998, the Company had an
accumulated deficit of $4,612,088 from operations and a stockholders' equity of
$2,033,822.
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 nine 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 $2,291,700 loan from shareholders.
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.
<PAGE>
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 December 31, 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 December 31, 1998, "assets of business transferred under
contractual arrangements" was stated net of a valuation allowance of $858,000.
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 nine-month period
ended December 31, 1997. Revenues of $964,571 for the three-months ended
December 31, 1997 and $4,281,421 for the nine-months ended December 31, 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 extraordinary gain on
extinguishment of debt 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
extraordinary gain on extinguishment of debt 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.
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.
In a subsequent transaction, Dr. Allen Kahn has agreed to purchase 1,000,000
shares of Series A Convertible Preferred Stock at $1.00 per share, payable in
$150,000 cash and forgiveness 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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months and nine months ended December 31, 1998 compared to three months
and nine months ended December 31, 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 nine-month period ended December 31, 1997. Revenues for the
three-month period ended December 31, 1998 (the "third quarter of fiscal 1999")
were $4,712,275 compared to $3,317,398 for the three-month period ended December
31, 1997, resulting in a 42% increase in revenues. This increase largely was the
result of increase in new orders in previous quarters. Revenues for the
nine-month period ended December 31, 1998 (the "year to date of fiscal 1999")
were $14,814,784 compared to $14,396,905 for the nine-month period ended
December 31,1997 resulting in a 3% increase. This increase largely was the
result of inclement weather in 1997.
Cost of goods and services for the third quarter of fiscal 1999 was $4,050,917
or 86% of sales compared to $2,952,443 or 89% of sales for the three-month
period ended December 31, 1997. Cost of goods and services for the year to date
of fiscal 1999 was $13,043,214 or 88% of sales as compared to $11,383,406 or 79%
for the nine-month period ended December 31, 1997. Gross profits for the third
quarter of fiscal 1999 were $661,358 or 14% of sales compared to $364,955 or 11%
of sales for the three-month period ended December 31, 1997. Gross profits for
the year to date of fiscal 1999 was $1,771,570 as compared to $3,013,499 for the
nine-month period ended December 31, 1997. These decreases in gross profits were
due to the decreases in margins during prior periods. Selling, general and
administrative expenses were $474,552 for the third quarter of fiscal 1999 or
10% of net sales compared to $1,054,698 or 32% of net sales for the three-month
period ended December 31, 1997. Selling, general and administrative expenses
were $2,032,793 for the year to date of fiscal 1999 or 14% of net sales compared
to $2,159,654 or 15% of net sales for the nine-month period ended December 31,
1997. The general and administrative expense decrease was due to reduced costs
associated with the management reorganization.
Gain on sale of $317,364 for the year to date of fiscal 1999 reflected the sale
of the Service Division of ETSW. Interest expense for the third quarter of
fiscal 1999 was $51,162 compared to $156,867 for the three-month period ended
December 31, 1997. Interest expense for the year to date of fiscal 1999 was
$299,280 as compared to $466,605 for the nine-month period ended December 31,
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.
Income from continuing operations for the third quarter of fiscal 1999 was
$135,444 compared to a loss of $837,662 for the three-month period ended
December 31,1997. Loss from continuing operations for the year to date of fiscal
1999 was $210,859 compared to income of $409,232 for the nine-month period ended
December 31,1997. Discontinued operations include environmental operations which
were sold in October 1997 and March 1998. Loss from discontinued operations was
$566,092 for the three-month period ended December 31, 1997 and loss from
discontinued operations was $550,351 for the nine-month period ended December
31, 1997. Revenues of $964,571 for the three-months ended December 31, 1997 and
$4,281,421 for the nine-months ended December 31, 1997 related to the
discontinued environmental operations.
On July 30, 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 $1,950,000 was recognized. On December 31, 1998, a shareholder
converted debt to preferred shares in the amount of $1,000,000 and a
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.
In a subsequent transaction, Dr. Allen Kahn has agreed to purchase 1,000,000
shares of Series A Convertible Preferred Stock at $1.00 per share, payable in
$150,000 cash and forgiveness 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.
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. 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 no
buyer stepped forward so the assets were 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 third quarter of fiscal 1999 was $735,444 compared to net
loss of $1,403,754 for the three-month period ended December 31, 1997. Net
income for the year to date of fiscal 1999 was $2,339,141 compared to net loss
of $141,119 for the nine-month period ended December 31, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 1998
The Company continues to be cash deficient. For the nine-month period ended
December 31, 1998, the Company had cash used in operating activities of
$1,424,034 and at December 31, 1998, the Company had an accumulated deficit of
$4,612,088 from operations and a stockholders' equity of $2,033,822. 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 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 $1,950,000 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.
In a subsequent transaction, Dr. Allen Kahn has agreed to purchase 1,000,000
shares of Series A Convertible Preferred Stock at $1.00 per share, payable in
$150,000 cash and forgiveness 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 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 inventories of $338,105, a decrease in accounts receivable of $967,098 and a
decrease in accrued expenses and other current liabilities of $613,724.
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 $317,364,
depreciation and amortization of $390,403 and amortization of deferred gain on
sale/leaseback of $228,231.
Net cash provided by investing activities of $130,325 consisted mainly of
purchase of property, plant and equipment in the amount of $529,400, proceeds
from sale of fixed assets of $390,000 and decrease in notes receivable of
$200,497. The net cash from financing activities of $1,433,540 includes in part
proceeds from notes payable to stockholder of $2,291,700, payment of debt
principal of $355,877, decrease in notes payable of $4,655,902, increase in
preferred stock of $4,250,000 and an increase in bank overdraft of $1,360,369.
The cash and cash equivalents at December 31, 1998 were $346,581. New orders
received for the third quarter of fiscal 1999 were $1,985,730 compared to
$4,235,602 for the three months ended December 31, 1997. New orders received for
the year to date of fiscal 1999 was $21,116,034 compared to new orders of
$14,520,487 for the nine-month period ended December 31, 1997. New orders were
down in the third quarter as a result of slowdown of construction for the
winter. Backlog at December 31, 1998 was $11,800,000 compared to $5,100,000 at
December 31, 1997.
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.
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 nine month
period ended December 31, 1998, the Company had cash used in operating
activities of $1,424,034, and at December 31, 1998, the Company had an
accumulated deficit of $4,612,088 from operations and a stockholders' equity of
$2,033,822.
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 year to date of fiscal 1999 were met principally through
the proceeds of $390,000 from the sale of the ETSW Service Division and other
fixed assets, $200,000 payment on notes receivable and $2,291,700 loan from
shareholders.
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.
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.
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.
In a subsequent transaction, Dr. Allen Kahn has agreed to purchase 1,000,000
shares of Series A Convertible Preferred Stock at $1.00 per share, payable in
$150,000 cash and forgiveness 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.
<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. On December 17, 1998 this suit was settled without prejudice for
$85,000, payable with $25,000 cash and a promissory note for $60,000 bearing 8%
interest payable monthly and due February 1, 2001.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
Item 5. OTHER INFORMATION.
None
<PAGE>
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
(1) The Company filed one Current Report on Form 8-K during the
quarter ended December 31, 1998. This report, dated January 13,
1999, referenced the redemption of preferred stock, resignation
of director and issuance of additional preferred stock.
<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 12, 1999 BY: s/James B. Quarles
----------------- ------------------------------
James B. Quarles
Chairman and President
DATE February 12, 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 NINE MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 553,331
<SECURITIES> 0
<RECEIVABLES> 3,375,580
<ALLOWANCES> 0
<INVENTORY> 593,485
<CURRENT-ASSETS> 5,315,877
<PP&E> 6,110,058
<DEPRECIATION> (3,702,114)
<TOTAL-ASSETS> 8,855,756
<CURRENT-LIABILITIES> 5,875,986
<BONDS> 552,019
0
712,684
<COMMON> 6,126,338
<OTHER-SE> (4,612,088)
<TOTAL-LIABILITY-AND-EQUITY> 8,855,756
<SALES> 0
<TOTAL-REVENUES> 14,814,784
<CGS> 0
<TOTAL-COSTS> 13,043,214
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (299,280)
<INCOME-PRETAX> (210,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> (210,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,550,000
<CHANGES> 0
<NET-INCOME> 2,339,141
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
