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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ending December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission file No. 0-19761
OP-TECH Environmental Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1528142
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
6392 Deere Road, Syracuse, NY 13206
(Address of principal executive office) (Zip Code)
(315) 463-1643
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name or each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X or No
Indicate by check mark if disclosure of delinquent filers
pursuant to item 405 of regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-
affiliates of the Company as of March 15, 2000 was $3,626,238
based upon the average bid and ask price of such stock on such
day.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Company's classes of common stock, as of March 15, 2000. Common
stock, $.01 par value. 11,603,963
PART I
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement
in this Form 10-K to make applicable and take advantage of the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or
on behalf of, the Company. This 10-K, press releases issued by
the Company, and certain information provided periodically in
writing and orally by the Company's designated officers and
agents contain statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The words expect, believe, goal, plan, intend, estimate,
and similar expressions and variations thereof used are intended
to specifically identify forward-looking statements. Where any
such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement,
the Company cautions that, while it believes such assumptions or
basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the
differences between assumed facts or basis and actual results can
be material, depending on the circumstances. Where, in any
forward-looking statement, the Company, or its management,
expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished.
ITEM 1. BUSINESS
General
OP-TECH Environmental Services, Inc. and Subsidiary (the
"Company"), a Delaware corporation, provides comprehensive
environmental services predominately in Upstate, Western,
Central, and Eastern New York, Massachusetts, Pennsylvania, and
New Jersey. The Company performs industrial cleaning of non-
hazardous materials and provides varying services relating to
plant facility closure, including interior and exterior
demolition and asbestos removal. In addition, the Company
provides remediation services for sites contaminated by hazardous
materials and provides 24-hour emergency spill response services.
The majority of the Company's revenues are derived from
industrial companies and municipalities facing complex
environmental clean-up problems associated with hazardous and non-
hazardous materials as required by various governmental agencies.
The Company's services include assessing the regulatory,
technical, and construction aspects of the environmental issue,
and performing the necessary remediation activities. The Company
seeks to provide its clients with remedial solutions which
integrate the various aspects of a project and are well-
documented, practical, cost effective, and acceptable to
regulatory agencies and the public.
SERVICES
Asbestos Abatement
The Company provides asbestos abatement contracting services
to both the public and private sectors. The Company has
expertise in all types of asbestos abatement including removal,
disposal and enclosure, and encapsulation. Asbestos removal is
performed in commercial buildings, industrial facilities, and
governmental buildings.
Interior Demolition/Structural Dismantling
The Company provides interior demolition services such as
removing walls, ceilings, and flooring. In addition, the Company
offers structural dismantling services and has experience in
razing concrete, wood and steel structures, concrete and brick
chimneys, and concrete piers and foundations.
On-Site Industrial and Waste Management Services
The Company provides on-site industrial cleaning and waste
management services. Specialized services for the handling,
processing and disposal of hazardous wastes are performed by
vacuuming, soda blasting, hydroblasting, dredging, dewatering and
sludge processing, sludge pumping, chemical cleaning, and tank
cleaning.
Transportation and Disposal Services
The Company provides transportation of hazardous and non-
hazardous wastes from customer sites to customer-designated
landfills, disposal facilities, and the Company's own aqueous
treatment facility. The Company also provides liquid tank truck
transports equipped with vacuum pumps.
Excavation and Site Remediation Services
The Company provides excavation and soil blending services
for treatment of contaminated soil using heavy equipment such as
excavators and loaders. The Company primarily provides on-site
soil blending to public utilities and municipal customers.
Hydrogeological/Drilling Services
The Company provides hydrogeological services to petroleum
companies, engineering firms and local and state public entities
through the use of qualified subcontractors. Through performing
hydrogeological assessments, the Company evaluates and
determines the need for ground water remediation systems, pump
and treatment systems and sub-surface petroleum product recovery.
In addition, the Company provides air sparging systems, long-term
remediation system operations and maintenance as well as
monitoring well and recovery well installations.
24-Hour Emergency Spill Response
The Company undertakes environmental remediation projects on
both a planned and emergency basis. Emergency response actions
may develop into planned remedial action projects when soil,
groundwater, buildings, or facilities are extensively
contaminated. The Company has established specially trained
emergency response teams. Many of the Company's decontamination
and mitigation activities result from a response to an emergency
situation by one of its response teams. These incidents can
result from transportation accidents involving chemical or
petroleum substances, fires at chemical facilities or hazardous
waste sites, transformer fires or explosions involving PCBs, and
other unanticipated events. The substances involved may pose an
immediate threat to public health or the environment, such as
possible groundwater contamination. The Company also has an
agreement with the New York State Department of Environmental
Conservation (NYSDEC) to provide emergency response services in
Upstate, Central, and Western New York, payment of which is
guaranteed by the NYSDEC.
Emergency response projects require trained personnel who
are equipped with protective gear and specialized equipment and
are prepared to respond promptly whenever these situations occur.
The Company's health and safety specialists and other skilled
personnel closely supervise these projects during and subsequent
to the clean-up process. The steps performed by the Company
include rapid response, containment and control procedures,
sampling for analytical testing and assessment, neutralization
and treatment, and collection and transportation of the substance
to an appropriate treatment or disposal facility.
Aqueous Treatment Facility
The Company operates an aqueous treatment facility at the
Company's Massena, New York location. The facility provides for
the clean-up of contaminated water and its eventual discharge
into the St. Lawrence River. The facility services both the
Company, its clients, and outside vendors.
Overall Site Assessment and Implementation of Remediation
Services
Hazardous Waste: The Company's hazardous waste projects
include the design and construction of on-site facilities to
monitor, isolate, or contain hazardous wastes existing in surface
and subsurface water, the transport of contaminated soils, the
decontamination of equipment and facilities related to the
production and use of hazardous materials, industrial cleaning,
building demolition and asbestos removal. Although the Company's
projects vary widely in objective, scope, and duration, each
project involves the Company providing one or more of the
following services through the use of its own resources or the
resources of selected subcontractors: strategic planning, site
reconnaissance and security, remedial evaluation, clean-up
evaluation, design, construction, and operation of facilities to
treat, stabilize, or isolate the hazardous materials, and
closure planning and monitoring.
Strategic Planning: On each of its projects, the Company
attempts as early as possible, to formulate a complete strategy
for directing all efforts toward solving the hazardous waste
problem. The Company's strategic plans are designed to satisfy
the demands of regulatory agencies and the public, sometimes
under emergency conditions. Additionally, the Company attempts
to balance the cost of the alternatives against risks to the
client associated with potential litigation or unfavorable
publicity. Through strategic planning, the Company attempts to
minimize expenditures that will not lead appropriate solutions,
and to enhance the client's credibility with regulatory agencies
and the public.
Site Reconnaissance and Security: In conducting a site
reconnaissance, the Company makes a general assessment to
determine the basic characteristics of a site and the limitations
imposed thereby, climatological considerations and the proximity
and degree of residential development. In providing site
security, the Company's services include assessing the hazardous
condition, restricting access to the affected area, assisting in
the preparation of any necessary evacuation plans, eliminating or
reducing potential risks of fire or explosion, containing or
removing hazardous materials which might pose additional risk,
and implementing measures to reduce or halt the spread of
hazardous substances into adjacent areas.
Remedial Evaluation: A remedial investigation involves the
detailed assessment of an affected area to determine the nature
and extent of hazardous materials present. This is often done at
the request of one or more regulatory agencies. In conducting
such investigations, the Company often reviews the construction
of a facility and past storage and handling practices regarding
hazardous materials.
Clean-up Evaluation: A feasibility study addresses measures
which may be implemented to remove hazardous wastes from a site,
to treat, stabilize, or contain such wastes on-site or to
otherwise mitigate their effects. Such studies take into
account, among other things, available technology, regulatory
considerations, and the cost-benefit relationship of alternative
measures. Additionally, the Company reviews the project and
alternative remedial measures in light of legitimate public
concerns.
Construction and Operation of Remedial Facilities: Based on
the results of remedial investigations and feasibility studies,
the Company uses its expertise directly, or through
subcontractors, to design an appropriate structure or system for
use at a particular site, and performs the necessary remediation
activities. These remediation activities might include such
diverse measures as construction of a slurry wall to contain the
hazardous materials, construction and operation of a pumping and
filtration system to decontaminate surface or subsurface waters
or construction and operation of an integrated system to excavate
contaminated soil and remove it to a licensed disposal facility.
Closure Planning and Site Monitoring: The Resource
Conservation and Recovery Act of 1976 ("RCRA") requires the
planning of closure and postclosure monitoring for all licensed
secure hazardous landfills, treatment facilities, and on-site
hazardous waste storage areas. The Company plans and performs
facility closures and postclosure monitoring programs. While
certain monitoring requirements are mandated by RCRA, many sites
have, at some time, contained hazardous wastes which also
frequently require monitoring. The Company provides monitoring
for sites and the corresponding data management services.
The Company usually contracts for and manages all aspects of
the work related to the completion of a particular project. In
addition, the Company performs all aspects of the work and
certain other specialized operations, some of which are
subcontracted to other parties. The Company does, however,
occasionally, contract to perform only certain aspects of a
particular project.
Technologies Employed
The Company utilizes a wide variety of physical and chemical
treatment technologies in performing its remediation activities.
Physical treatment technologies generally involve filtration and
aeration techniques and are used to separate contaminants from
soils, slurries, or water. Chemical treatment technologies
generally involve flocculation, clarification,
precipitation, polymer addition, chemical oxidation, chemical
absorption, and stabilization. Depending on the contaminants
present and the site characteristics, these technologies are
combined into integrated treatment systems which reduce
contaminant concentrations to levels consistent with prescribed
regulatory standards.
Regulation
The business of the Company and its clients is subject to
extensive, stringent, and evolving regulation by the EPA and
various other federal, state, and local environmental
authorities. These regulations directly impact the demand for
the services offered by the Company. In addition, the Company is
subject to the Federal Occupational Safety and Health Act, which
imposes requirements for employee safety and health. The Company
believes it is in substantial compliance with all federal, state,
and local regulations governing its business.
RCRA. The Resources Conservation and Recovery Act of 1976
is the principal federal statute governing hazardous waste
generation, treatment, storage, and disposal. RCRA, or EPA-
approved state programs may govern any waste handling activities
of substances classified as "hazardous." The 1984 amendments to
RCRA substantially expanded its scope by, among other things,
providing for the listing of additional wastes as "hazardous" and
providing of the regulation of hazardous wastes generated in
lower quantities than previously had been regulated.
Additionally, the amendments impose restrictions on land disposal
of certain hazardous wastes, prescribe more stringent standards
for hazardous waste land disposal sites, set standards for
underground storage tanks and provide for "corrective" action at
or near sites of waste management units. Under RCRA, liability
and stringent operating requirements may be imposed on a person
who is either a "generator" or a "transporter" of hazardous
waste, or an "owner" or "operator" of a waste treatment, storage,
or disposal facility. The Company does not believe its hazardous
waste remediation services cause it to fall within any of these
categories, although it might be considered an "operator" of a
waste management facility or a "generator" of hazardous waste if
it were to control the collection, source, separation, storage,
transportation, processing, treatment, recovery, or disposal of
hazardous wastes, including operation of a treatment unit for
remedial purposes.
Regulation of underground storage tanks (UST) legislation,
in particular Subtitle I of RCRA, focuses on the regulation of
underground tanks in which liquid petroleum or hazardous
substances are stored and provides for the regulatory setting for
the principal portion of the Company's work. Subtitle I of RCRA
requires owners of all existing underground tanks to list the
age, size, type, location, and use of each tank with a designated
state agency. The EPA has published performance standards and
financial responsibility requirements for storage tanks over a
five year period. These regulations also require all new tanks
which are installed to have protection against spills, overflows,
and corrosion. Subtitle I of RCRA provides civil penalties of up
to $15,000 per violation for each day of non-compliance with tank
requirements and $10,000 for each tank for which notification was
not given or was falsified. RCRA also imposes substantial
monitoring obligations on parties which generate, transport,
treat, store, or dispose of hazardous waste.
Superfund Act. The Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund Act")
generally addresses clean-up of inactive sites at which hazardous
waste treatment, storage, or disposal took place. The Superfund
Act assigns joint and several liability for cost of clean-up and
damages to natural resources to any person who, currently, or at
the time of disposal of a hazardous substance who by contract,
agreement, or otherwise arranged for disposal or treatment, or
arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment; and
to any person who accepts hazardous substances for transport to
disposal or treatment facilities or sites from which there is a
release or threatened release. Among other things, the Superfund
Act authorized the federal government either to clean up these
sites itself or to order persons responsible for the situation to
do so. The Superfund Act created a fund, financed primarily from
taxes on oil and certain chemicals, to be used by the federal
government to pay for the clean-up efforts. Where the federal
government expends money for remedial activities, it may seek
reimbursement from the Potentially Responsible Parties ("PRPs").
In October 1986, the Superfund Amendment and Reauthorization
Act ("SARA") was enacted and has increased environmental
remediation activities significantly. SARA authorizes federal
expenditures of $8.5 billion over five years, while imposing more
stringent clean-up standards and accelerated timetables. The
requirements of SARA are expected to add 1,600 to 2,000 sites to
the national priority list. Within 36 months of the enactment of
SARA, remedial investigation and feasibility studies were to be
conducted for at least 275 national priority list sites, and were
this not achieved for at least 650 sites within five years.
Physical on-site remedial work was to be commenced for at least
175 new sites in the 36 months after enactment and for an
additional 200 sites in the following 24 months. SARA also
contains provisions which expand the EPA's enforcement powers and
which are expected to encourage and facilitate settlements with
PRPs. The Company believes that, even apart from funding
authorized by SARA, industry and governmental entities will
continue to try to resolve hazardous waste problems due to their
need to comply with other statutory and regulatory requirements
and to avoid liabilities to private parties.
The liabilities provided by the Superfund Act could, under
certain factual circumstances, apply to a broad range of possible
activities by the Company, including generation of transportation
of hazardous substances, releases of hazardous substances,
failure to properly design a clean-up, removal or remedial plan
and failure to achieve required clean-up standards, leakage of
removed wastes in transit or at the final storage site, and
remedial operations on ground water. Such liabilities can be
joint and several where other parties are involved.
Other. The Company's operations are subject to other
federal laws protecting the environment, including the Clean
Water Act and the Toxic Substances Control Act.
Many states have also enacted statutes regulating the
handling of hazardous substances, some of which are broader and
more stringent than the federal laws and regulations.
Competitive Conditions
The markets for environmental remediation, as well as
demolition and asbestos removal, have become increasingly
competitive. The Company competes with many different firms
ranging from small local firms to large national firms, some of
which have greater financial and marketing resources than the
Company. Competition in environmental services is based largely
on competitive pricing and quality of service provided. Other
competitive factors include geographic location as well as
reputation. Management believes the Company is one of the few
firms based in its market areas throughout the Northeastern
United States that offers a high quality combination of
environmental services at the most competitive prices. In
addition, through its wide range of environmental services, good
reputation, and competitive pricing, the Company hopes to
maintain a competitive edge in the environmental services
business.
The Company operates field offices in Syracuse, Massena,
Rochester, Albany, Plattsburgh, and Buffalo, New York, as well as
Braintree, Massachusetts, Edison, New Jersey, and Athens,
Pennsylvania. While operations in the Syracuse, Massena, Albany,
Buffalo, Braintree, and Athens offices are substantial, the
Rochester and Plattsburgh operate on a smaller level.
Seasonality
Typically during the first quarter of each calendar year
there is less demand for environmental remediation due to the
cold weather, particularly in the Northeast and Midwest regions.
In addition, factory closings for the year-end holidays reduce
the volume of industrial waste generated, which results in lower
volumes of waste handled by the Company during the first quarter
of the following year.
Customers
The Company's client base includes industrial companies,
real estate developers, auto parts manufacturers, aluminum
producers, utility companies, waste disposal firms,
municipalities, and engineering firms. During 1999, the Company
performed services for more than 300 clients. These projects
ranged from short-term (three months or less) to projects which
were on-going for 12 months or more. The majority of the
projects were short-term in nature and continue to provide a
substantial amount of revenue for the Company. During 1999, the
Company had sales of approximately $1,026,000 to a public entity
and sales of approximately $583,000 to a state agency, which
together totaled approximately 13% of the Company's revenues.
Insurance
The Company maintains commercial general liability insurance
which provides aggregate coverage limits of $5 million. The
Company also maintains asbestos liability and contractors
pollution legal liability which provide aggregate coverage limits
of $5 million. In addition, the Company also maintains workers
compensation, comprehensive automobile, and Directors and
Officers liability insurance. The Company's insurance coverage
is consistent with the insurance requirements found in the
environmental remediation industry.
Backlog
As of December 31, 1999, the Company had a backlog of orders
it believed to be firm of approximately $2,700,000.
Employees
As of March 15, 2000, the Company had a total of 85 full-
time employees. The Company's ability to retain and expand its
staff will be an important factor in determining the Company's
future success. The Company maintains employment contracts with
its key managers in its branch offices. Manager contracts are
negotiated on an annual basis and encompass items such as salary,
bonuses, and non-compete clauses. The Company does not maintain
key-person insurance for such personnel. The Company considers
its relations with its employees to be good, and the Company has
never had a work stoppage or threat of a work stoppage.
ITEM 2. PROPERTIES
Syracuse, New York Branch and Corporate Headquarters
During 1999, the Company leased approximately 17,000 square
feet leased from O'Brien & Gere Property Development (an
affiliated party) at a monthly rate of $6,840, including
utilities. Subsequent to 1999, O'Brien & Gere Property
Development sold the building to a third party; however, the
original lease terms remain in effect. The term of the lease
extends through June 30, 2001, and the lease does not contain an
escalation clause.
Massena, New York Branch
The Company owns a 13.93 acre parcel of land located in the
Town of Massena, St. Lawrence County, New York. This parcel,
which has approximately 1,300 feet of frontage on the St.
Lawrence River, is located in a protected area where the water is
forty-five feet deep. This provides excellent dockage for local
ships and also ocean-going ships utilizing the St. Lawrence
Seaway.
The land is improved with a well-maintained concrete and
creosote timbered dock that extends about 90 feet into the river
and about 260 feet along the river bed. It is equipped with the
necessary piping, valves, and fittings to serve the former
Metropolitan Oil Petroleum Tank Farm. The land is improved with
seven petroleum tanks that have a capacity of 472,000 barrels.
There are four support buildings on the premises, consisting of
an office building, a combination office, shop and boiler room
building, and two storage sheds.
The Company is currently pursuing the sale of all or part of
its Massena property and is currently discussing its sale with
several parties. On November 5, 1997, the Company entered into
an option with O'Brien & Gere Property Development (an affiliated
party) for the sale of the eastern portion of the property, the
tanks and the dock for $2 million. (See additional discussion
under ITEM 7 of this report).
In March of 1997, the Company signed a consent order issued
by the New York State Department of Environmental Conservation
which requires the Company to remediate its Massena, NY property.
As a result, in the second quarter of 1997, the Company began
digging test pits on the property to determine the extent of
ground contamination. A total of ten test pits were dug. Eight
of the pits were found to have no contamination and were closed-
out by New York State. The remaining two pits had low level
indications of contamination. These areas were excavated late in
the third quarter of 1997. The Company removed approximately 40
cubic yards of contaminated material from the two pits and is
currently awaiting final closure of the site by New York State.
The Company also tested its groundwater monitoring wells which
were also found to be free of contamination, therefore, posing no
threat to the groundwater supply in the area. The Company has
spent approximately $60,000 to clean this site, which was
expensed in 1997. As of the date of this report, the Company is
awaiting final closure of the consent order by the New York State
Department of Environmental Conservation. The Company believes
the extent of the contamination is minimal and will not impair
its ability to sell the property.
Braintree, Massachusetts Branch
The Company leases approximately 300 square feet of office
space from O'Brien & Gere Engineers (an affiliated party) at a
current rate of $2,000 per month. The term of the lease is on a
month-to-month basis.
Buffalo, New York
The Company leases approximately 2,500 square feet of office
and garage space at a current rate of $2,100 per month plus
utilities. The term of the lease extends through March 31, 2002.
The lease payment is scheduled to increase $100 in August of 2000
and an additional $100 in June of 2001.
Rochester, New York
The Company leases approximately 300 square feet of office
space from O'Brien & Gere Property Development (an affiliated
party) at a current rate of $800 per month. The term of the
lease is on a month-to-month basis.
Athens, Pennsylvania Branch
The Company leases approximately 4,000 square feet of office
and garage space at a current rate of $1,100 per month plus
utilities. The term of the lease extends through March 1, 2001,
and does not contain an escalation clause.
Albany, New York Branch
During 1999, the Company leased approximately 300 square
feet of office space from O'Brien & Gere Engineers (an affiliated
party) at a rate of $1,278 per month. The term of the lease was
on a month-to-month basis. Subsequent to 1999, the Company
relocated its Albany branch to a space that is approximately
5,000 square feet, which includes office and garage space. The
current lease rate is $2,292 per month plus utilities, and the
new lease term, which does not contain an escalation clause,
extends through January 31, 2003.
Edison, New York Branch
The Company leases approximately 300 square feet of office
space from O'Brien & Gere Engineers (an affiliated party) at a
current rate of $406 per month. The term of the lease is on a
month-to-month basis.
Plattsburgh, New York Branch
The Company leases approximately 400 square feet of office
and garage space at a current rate of $280 per month including
utilities. The term of the lease extends through January 31,
2001, and the lease does not contain an escalation clause.
Equipment
The Company's owned equipment consists primarily of
construction equipment such as vacuum trucks, tankers, excavation
equipment, pumps, generators, and compressors, some of which have
been specially modified for the Company's use. Chemical trailers
and other specialized equipment for short-term projects are
typically leased from local equipment contractors.
ITEM 3. LEGAL PROCEEDINGS
With the exception of the New York State Department of
Environmental Conservation consent order discussed in ITEM 2
above, the Company is not a party to any litigation or
governmental proceedings that management believes could result in
any judgements or fines against it or that would have a material
adverse effect on the Company's cash flows, results of
operations, or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholders meeting on November
17, 1999. The shareholders voted on the ratification of
PricewaterhouseCoopers LLP as the Company's auditors and the
election of five directors. The following votes were cast for
each:
For Against
Ratification of PricewaterhouseCoopers LLP as
the Company's auditors 9,284,427 -0-
Election of Directors:
Robert J. Berger Director 9,284,427 -0-
Richard L. Elander Director 9,284,427 -0-
John R. Loveland Director 9,284,427 -0-
Cornelius B. Murphy, Jr. Director 9,284,427 -0-
Steven A. Sanders Director 9,284,427 -0-
There were no other matters submitted to a vote of the Company's
shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The shares of the Company's common stock are listed in the
"Pink Sheets" and on the NASDAQ Bulletin Board under the symbol
OTES.
The high and low bid prices for the shares of the Company's
common stock were as follows:
Quarter Ended High Bid Low Bid
March 15, 1998 5/8 1/4
June 30, 1998 3/4 7/16
September 30, 1998 3/4 1/4
December 31, 1998 1/4 1/4
March 15, 1999 3/4 1/4
June 30, 1999 3/4 1/4
September 30, 1999 5/8 3/8
December 31, 1999 7/16 5/16
March 15, 2000 13/32 5/16
The aforementioned prices reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.
(b) At March 15, 2000, there were approximately 170 holders of
record of the Company's common stock.
(c) The Company has never paid any dividends and does not
anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data
Year Ended December 31
1999 1998 1997 1996 1995
Project Billings $12,517,772 $10,917,903 $6,993,221 $5,792,548 $7,145,587
Net (Loss)
Income from
Continuing
Operations ($2,613,883) $ 812,753 ($1,747,543)($1,553,320) ($847,037)
Extraordinary
Gain 0 0 $1,000,000 0 0
Net (Loss)
Income Per
Share from
Continuing
Operations
(Basic &
Dilutive) ($.23) $.07 ($.32) ($.32) ($.17)
Balance Sheet Data
As of December 31
1999 1998 1997 1996 1995
(2) (1)
Total Assets $5,942,940 $6,632,753 $4,776,471 $5,155,409 $5,527,547
Long-Term
Obligations $865,364 $1,526,560 $228,855 $875,000 $2,326,459
(1) On November 1, 1995, the Company converted a $500,000 short-
term note to a long-term obligation.
(2) On October 14, 1997, the Company entered into an agreement
with its two largest creditors to convert all or part of its
indebtedness into common stock of the Company. The agreement
included forgiveness of $1,000,000 of debt by O'Brien & Gere
Limited (a shareholder) and the conversion of $540,000 of
convertible debentures, plus accrued interest, into 1,080,000
shares of the Company's common stock. In addition, the Company's
then financial institution converted $2,811,070 of principal and
interest into 5,622,140 shares of the Company's common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash
equivalents of $15,034 as compared to $122,106 at December 31,
1998.
At December 31, 1999, the Company had a working capital
deficit of $1,313,585 compared to a working capital surplus of
$1,019,312 at December 31, 1998. The Company had a current ratio
of approximately .76 to 1 at the end of 1999 compared to 1.38 to
1 at the end of 1998. The decrease in working capital was
primarily attributable to the fact that the terms of the
Company's revolving loan required the outstanding borrowings of
$1,778,989 to be classified as a current liability at December
31, 1999, but as a long-term liability at December 31, 1998.
Several other factors also contributed to the decrease in working
capital and in the current ratio at December 31, 1999. First,
trade accounts payable and billings in excess of costs and
estimated profit on uncompleted projects increased due to
additional costs incurred on several poorly managed asbestos and
tank installation projects. Second, the current portion of long-
term debt at year-end increased due to the Company financing the
purchase of several utility vehicles and other equipment.
Finally, accrued payroll at the end of 1999 increased when
compared to 1998 due to the Company's growth during the year.
Cash provided by financing activities was $882,260 in 1999,
compared to cash used in financing activities of $126,787 in
1998. This change was due to an increase in the Company's
available line of credit from $1,500,000 to $2,000,000 and an
increase in the Company's average outstanding balance on the line
of credit during the year. The change was also due to the timing
of paydowns and advances on the Company's line of credit.
Cash used in operating activities during 1999 was $905,886
compared to cash provided by operating activities of $374,993
during 1998. The increase in cash used in operating activities
in 1999 was attributable to several factors. First, the Company
was completing the implementation of its expansion and growth
plan during the first quarter of 1999, and outlayed cash of
approximately $95,000 related to the opening of its new office in
Buffalo, NY. Second, the Company had cash outlays of
approximately $80,000 preparing for an emergency spill contract
which covers 75% of the land area in New York State. The
contract, which the Company had anticipated would begin in July
of 1999, did not begin until October 17, 1999 as a result of
delays in the approval of the New York State budget. Third, the
Company incurred losses of approximately $330,000 on several tank
installation projects. As a result of these losses, the Company
is no longer pursuing tank installation work. Finally, the
Company had approximately $400,000 in losses on several asbestos
projects and an industrial cleaning project during the third and
fourth quarters of 1999. These losses were the result of
incomplete bidding practices and poor project management. The
Company has since refined its approach to asbestos projects, is
revising its estimating practices, and has started an education
program for branch managers in better project execution. The
Company has also replaced several project managers with more
experienced personnel from other firms.
Cash used in investing activities of $83,446 during 1999,
was primarily attributable to capital expenditures for the
purchase of a wet/dry vacuum, six gas meters, several negative
air machines, a pressure washer, various equipment needed to
service the Company's contract with the NYSDEC, and computer and
office equipment.
On October 14, 1997, the Company entered into a borrowing
agreement with a new bank that provided for borrowings on a
revolving basis. On July 1, 1999, the agreement was amended to
provide borrowings up to $2,000,000. The revolving loan is
subject to renewal at the Bank's option and is payable on April
30, 2000. The Company is in current ongoing discussions with the
Bank, and based on these discussions, the Company believes that
the line of credit will be renewed until April of 2001; however,
there can be no assurances that this will occur. The revolving
loan is guaranteed by a shareholder for an amount not to exceed
$500,000. Under the terms of the guarantee, should the Bank be
unable to recover the full amount of outstanding balances from
the Company's collateralized assets, the shareholder agrees to
purchase the Massena Port Facility for the unrecovered balance up
to a maximum of $500,000. Borrowings against the revolving loan
aggregated $1,778,989 at December 31, 1999.
Effective January 1, 1999, the Company sold its wholly-owned
subsidiary, St. Lawrence Industrial Services, Inc. The sale did
not have a significant impact on the Company's financial
statements.
YEAR 2000
During 1998 and 1999, the Company upgraded its financial
systems and decision support systems in anticipation of possible
hardware and software failures related to the year 2000. The
Company did not experience any problems from the date change from
1999 to 2000, and all aspects of the Company's operations
continued without interruption.
THE MASSENA PORT FACILITY
The Massena Port Facility is a former oil tank farm which is
located on the St. Lawrence River in Massena, NY. The property
is improved with several buildings and a deep water docking
facility for large ocean going ships. The property is still a
viable location for a petroleum distribution facility and could
still function as one pending upgrades of tanks and diking
systems to current state and federal guidelines. Any
improvements such as these would be treated as a capital expense
in the year they were incurred. Currently, the Company uses the
property for its Massena branch office headquarters, equipment
storage and its Aqueous Treatment/360 Facility. O'Brien & Gere
Property Development, a subsidiary of a shareholder of the
Company, currently has an option to purchase the Massena Port
Facility for $2,000,000.
In 1996, the Company reclassified the Massena Property to
Assets Held for Sale, at which time the property had a carrying
value of approximately $1.9 million. Due to the uniqueness of
the Facility, it has been difficult to find an alternative use
for it or to sell the property. Due to the significance of the
carrying value of the property, in March of 1997, management
obtained an independent third party appraisal to support its
carrying value. Such appraisal included an evaluation of similar
sales plus a pending transaction at the time. The appraisal also
included an evaluation of the time frame during which a sale
would be expected. Based upon the appraisal report and an
estimate of the costs to sell, management recognized an
impairment of $308,377 on the property during 1997. The Company
obtained a current independent real estate appraisal of the
property in January of 2000. Based upon the results of the
appraisal, the Company recognized an impairment of $825,427
during the fourth quarter of 1999. As of December 31, 1999, the
carrying value, which management believes is properly stated at
the lower of cost or market, of the property is $780,000.
CAPITAL RESTRUCTURING & BUSINESS OPERATIONS
The Company entered into letters of agreement with its then
two largest creditors, its then financial institution, OnBank &
Trust Co. ("OnBank"), and O'Brien & Gere Limited ("OBG Limited"),
a shareholder, on October 14, 1997, which were executed as of
December 31, 1997, whereas OnBank and OBG Limited agreed to
convert all or part of their indebtedness, including accrued
interest, into Common Stock of the Company, and to forgive the
remaining balance. OBG Limited, to which the Company was
indebted for $1,540,000, including accrued interest of $140,000,
forgave $1,000,000 of the debt and converted the balances into
1,080,000 shares of the Company's Common Stock. OnBank, to which
the Company was indebted for $2,811,070, including accrued
interest of $75,332, converted their debt and accrued interest
for 5,622,000 shares of the Company's Common Stock. The price
per share of $.50 was negotiated with the two creditors and the
Company based on the price of recent sales and their estimates of
future risk.
RESULTS OF OPERATIONS
This financial review should be read in conjunction with the
accompanying Consolidated Financial Statements and accompanying
notes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may be affected by a
number of factors, including the Company's ability to
successfully increase market share in its existing service
territory while expanding its services into other markets,
realize benefits from cost reduction programs, sell all or part
of the Massena Property, and utilize its facilities and work
force profitably in the face of intense price competition.
1999 COMPARED TO 1998
Revenues
During the year ended December 31, 1999, the Company's
revenues increased 15% to $12,517,772 as compared to $10,917,903
reported for the previous year ended December 31, 1998. Revenues
from underground storage tank removals and installations
increased approximately $360,000, which was primarily
attributable to the Federal Government deadline to remove all
underground storage tanks ("USTs") that are not in compliance
with the EPA guidelines for USTs. Due to losses incurred on
several tank installation projects in 1999, the Company is no
longer pursuing tank installation work. Billings from asbestos
projects increased approximately $1,000,000, while billings from
remediation projects increased approximately $900,000. Revenues
from spill response increased approximately $530,000.
Approximately $200,000 of the increase in spill response work was
due to the emergency spill response contract the Company has with
the NYSDEC, which went into effect during October of 1999. The
increase in these service lines was offset by a decrease of
approximately $2,400,000 in the transportation and disposal and
industrial cleaning service lines combined. This decrease was
due to a major emergency spill contract and a large industrial
cleaning contract the Company had during 1998.
In addition, during 1999, the Company's branches that were
opened during the last half of 1998 generated revenue of
approximately $2,800,000, all of which was core service revenue
resulting from competitive bidding in both the public and private
markets. The Company's Braintree, MA, and Albany, NY, branches
also showed an increase of approximately $1,900,000 in revenue
when compared to 1998.
Project Costs and Gross Margin
Project costs for the year ended December 31, 1999 increased
36% to $10,355,805 from $7,596,788 for the year ended December
31, 1998. The increase in project costs is attributable to the
significant increase in revenues. Project costs as a percentage
of revenues increased to 83% for the year ended December 31, 1999
compared to 70% for the same period in 1998.
The gross profit margin for the year ended December 31, 1999 was
17% versus 30% for the year ended December 31, 1998.
As a result of increased billings, project costs also
increased. The decrease in gross margin was due to the
significant losses taken on several tank installation, several
asbestos projects, and an industrial cleaning project during
1999. As a result of these projects, the Company had
approximately $640,000 in cash outlays and lost gross margin
dollars. Most of this loss was absorbed by the Company during
the third and fourth quarters of 1999. Also, in 1998, the
Company had a major emergency cleanup contract and a large
industrial cleaning project that were performed on a time and
materials basis, which produced a higher gross margin than bid
work.
Selling, General, and Administrative Expenses
During the year ended December 31, 1999, selling, general,
and administrative ("SG&A") expenses increased 43% to $3,439,654
compared to $2,399,988 reported for the previous year. SG&A
expenses were approximately 27% of sales for the year ended
December 31, 1999 compared to approximately 22% for the previous
year. The increase in SG&A was due to the Company's branch
expansion. During the last half of 1998 and during 1999, the
Company opened branches in Edison, NJ, Buffalo, NY, and
Rochester, NY, and significantly increased the operations of the
Athens, PA branch. The following items increased during 1999 due
to this expansion: Payroll expense increased approximately
$475,000 from 1998 to 1999 because of the additional
administrative personnel required in order to accommodate the
higher volume of billing, payroll, and other administrative
functions created by the Company's growth. The Company also hired
several sales people in early 1999, and added several project
managers. Workers' compensation expense increased approximately
$180,000 due to the overall increase in payroll and due to the
higher number of asbestos projects performed during the year.
Asbestos projects have the highest workers' compensation rate of
all of the workers' compensation classifications used by the
Company. Office rent expense, telephone expense, and rental
expense for copiers and other office equipment increased a total
of approximately $166,000 during 1999 due to the opening of
branch offices and the growth within the existing branches. The
Company's operating lease expense showed an increase of
approximately $165,000 due to the addition of four vacuum trucks,
two tractors, and three box vans during the year. In addition,
depreciation expense in 1999 was approximately $148,000 higher
than in 1998. Approximately $40,000 of this increase was related
to the purchase of eight utility vehicles, seven spill trailers,
and other equipment, valued at approximately $300,000, in 1999.
Provision for Impairment of Long-Lived and Other Assets
During the fourth quarter of 1999, the Company recognized a
provision for impairment of long-lived and other assets of
$1,109,877. Included in this provision was a loss of $825,427
recognized in order to reflect the carrying value of the Massena
Port Facility at the lower of cost or market. The remainder of
the impairment was due to a loss recognized on equipment and
other assets the Company was no longer utilizing.
Operating Loss
For the year ended December 31, 1999, the Company reported
an operating loss of $2,387,564 compared to operating income of
$921,127 for the previous year. This change was due to the
nonrecurring impairment charges discussed above, a significant
increase in selling, general and administrative expenses, and due
to the losses incurred on several tank installation and asbestos
projects. The Company has made several changes in response to
the problems encountered during 1999. Several managers who were
responsible for losses on certain projects have been replaced
with more experienced personnel, the Company is no longer
pursuing tank installation projects, and the Company has
refocused its efforts in the asbestos service line to obtain
projects of a size that the Company has completed successfully in
the past.
Interest Expense
Interest expense increased 72% to $191,180 in 1999 compared
to $111,099 in 1998. The increase in interest expense was
primarily due to the increase in the Company's average
outstanding balance on its revolving line of credit. The
increase was also attributable to the financing of new equipment.
Net Loss
The net loss for the year ended December 31, 1999 was
($2,613,883) (($.23) per share basic & dilutive) compared to net
income of $812,753 ($.07 per share basic and dilutive).
1998 COMPARED TO 1997
Revenues
During the year ended December 31, 1998, the Company's
revenues increased 56% to $10,917,903 as compared to $6,993,221
reported for the previous year ended December 31, 1997. The
increase in revenue was due to several factors, including a
$2,500,000 emergency spill contract for a utility customer and
several large industrial cleaning contracts, which resulted in
approximately $1,500,000. The Company also saw an increase in
revenues of approximately $735,000 in underground storage tank
removal revenues, which is attributable to the Federal Government
deadline to remove all underground storage tanks ("USTs") which
are not in compliance with the EPA guidelines for USTs. The
deadline to remove out of compliance USTs was December 22, 1998.
The Company expects to see a continued rise in this service line
during 1999, due to the number of organizations that are not yet
in compliance with the Federal Government deadline. The Company
saw a significant increase in the transportation and disposal
business as a result of the increased volume of UST jobs. During
1998, the Company's newly expanded geographic areas generated
revenue of approximately $2,500,000, all of which was core
service revenue resulting from competitive bidding in both the
public and private markets.
Project Costs and Gross Margin
Project costs for the year ended December 31, 1998 increased
53% to $7,596,788 from $4,959,449 for the year ended December 31,
1997. The increase in project costs is attributable to the
significant increase in revenues. Project costs as a percentage
of revenues remained consistent at 70% for the year ended
December 31, 1998 and 71% for the same period in 1997.
The gross profit margin for the year ended December 31,
1998 was 30% versus 29% for the year ended December 31, 1997.
Management was able to control the mix of work pursued by the
Company, which enabled the Company to focus its efforts in
service areas that produced a higher gross margin percentage.
Selling, General, and Administrative Expenses
During the year ended December 31, 1998, selling, general,
and administrative ("SG&A") expenses decreased 6.6% to $2,399,988
compared to $2,569,486 reported for the previous year. SG&A
expenses were approximately 22% of sales for the year ended
December 31, 1998 compared to approximately 37% for the previous
year. The decrease in SG&A is due to the Company's ability to
increase the utilization of its existing staff while
simultaneously increasing revenues. The Company added several
project managers and supervisors during the year and kept them
focused on bidding and managing projects. Additionally, SG&A
decreased due to the corporate restructuring of the Company in
1997, which significantly reduced depreciation and amortization
expenses. The Company was also able to secure lower general
business insurance rates as well as cut various other SG&A
expenses during 1998.
Operating Income
For the year ended December 31, 1998, the Company reported
operating income of $921,127 compared to a loss of $1,333,400 for
the previous year. The change is primarily attributable to the
Company's mix of work during 1998, which produced a 30% gross
margin and the overall reduction of SG&A expenses compared to the
prior year. In 1997, the Company incurred a non-cash charge
$797,686 related to the write down of its Massena property and
certain equipment held for use.
Interest Expense
Interest expense decreased 72% to $111,099 in 1998 compared
to $402,144 in 1997. The decrease in interest expense is
primarily attributable to the Company's financial restructuring
in 1997, which significantly reduced the Company's debt.
Net Income
The net income for the year ended December 31, 1998 was
$812,753 ($.07 per share basic & dilutive) compared to a net loss
of $747,543 ($.14 per share basic and dilutive) after an
extraordinary gain of $1,000,000 in 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the fact that the interest rate associated with the
Company's revolving line of credit is based on the prime interest
rate, the Company is exposed to interest rate risk. If the prime
rate increases, the Company's monthly interest payments on its
line of credit also increase, which could impact cash flow;
however, past fluctuations in the prime rate, whether an increase
or decrease, have not had a material effect on the Company's cash
flow. Although the Company does not anticipate any material
effects from interest rate risk, the Company attempts to keep its
outstanding balance on its line of credit as low as possible at
all times.
The Company is aware that if the economy were to slow down,
the Company's business could be affected by other companies
closing operations or reducing production, which could reduce the
amount of waste generated or industrial cleaning projects
available. In order to try to mitigate this market risk, the
Company continues to make every effort to secure more emergency
spill response contracts and long-term environmental remediation
and industrial cleaning projects.
For more information regarding market risk, see the audited
financial statements submitted under Item 14 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the
report of PricewaterhouseCoopers LLP are submitted under Item 14
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
The following table sets forth certain information about the
directors of the Company, all of whom were unanimously elected at
the Annual Meeting of Stockholders of the registrant on November
17, 1999 for a term of one year.
Year
Name, Age First
Principal Occupation Elected Certain Other Information
Robert J. Berger 1998 Mr. Berger has served in his present
(53) position as Director since November
Director 1998. Mr. Berger was employed in
various positions for OnBank from
1978 through March 31, 1998, his
last position being Senior Vice
President, Treasurer, and Chief
Financial Officer. From April
through August 1998, he served as
consultant to First Empire State
Corp. pursuant to its merger
agreement with OnBank. Since August
1998, he has been an Adjunct
Professor and Director of the Madden
Institute of Business Education at
LeMoyne College in Syracuse, New
York. Mr. Berger is also Chairman,
President, and Chief Executive
Officer of St. Lawrence Industrial
Services, Inc., and he is a Director
of YAPA, Young Adult Professional
Associates, Inc. On February 24,
2000, Mr. Berger was elected
Chairman of the Board of Directors.
Richard L. Elander 1991 Mr. Elander has served in his
(60) present position as a Director since
Director November of 1991. He has served as
Vice President and General Manager
from June 1994 to December 1996. He
also served as Chief Executive
Officer from November 1991 to June
1994. Mr. Elander served as a
Director of O'Brien & Gere Limited
from August 1991 to September 1995.
From 1983 to 1995, Mr. Elander
served as President of O'Brien &
Gere Operations. Currently, Mr.
Elander operates his own
construction management consulting
business.
John R. Loveland 1994 Mr. Loveland has served in his
(62) present position since June 1994.
Director, Chief He has been a director of O'Brien &
Executive Officer, Gere Engineers, Inc. since 1973, and
and Chairman of the he also served as President of
Board O'Brien & Gere Engineers, Inc. from
1980 to December 1992. He served as
Chairman of the Board of O'Brien &
Gere Limited from 1989 to March
1999. Mr. Loveland is currently
President of O'Brien and Gere
Property Development. On February
24, 2000, Mr. Loveland resigned his
position as Chairman of the Board
and was succeeded by Mr. Berger.
Cornelius B. Murphy, Jr. 1991 Dr. Murphy has served in his current
(55) position since December 1996. He
Director previously served as the Company's
President from June 1994 to December
1996 and as Chariman of the Board
from November of 1991 to June 1994.
Dr. Murphy has been a director of
O'Brien & Gere Limited since 1985
and O'Brien & Gere Engineers, Inc.
from 1982 to date. Dr. Murphy
served as President of O'Brien &
Gere Engineers from 1992 to 1997.
From 1982 to 1992, he served as
President of O'Brien & Gere
Technical Services, Inc. Dr. Murphy
currently serves as Chairman of the
Board of O'Brien & Gere Limited and
as Chief Scientist of O'Brien & Gere
Engineers. In February 2000, Dr,
Murphy was elected President of the
State University of New York
Environmental Science and Forestry
School.
Robert F. Neuhaus 1999 Mr. Neuhaus has served in his
(38) current position since December of
Director 1999. He is an Administrative Vice
President of M&T Bank where he
oversees M&T's commercial banking
and commercial real estate business
in the Central New York region.
Prior to joining M&T, Mr. Neuhaus
was Vice President of the Corporate
Finance Division for J.P. Morgan,
Inc. in New York City.
Steven A. Sanders 1991 Mr. Sanders is a partner in the law
(54) firm of Beckman, Millman, & Sanders
Director LLP. Mr. Sanders has also been
President of the Law Office of
Steven A. Sanders, PC since 1992.
Prior to that, he served as Counsel
to Jacobs, Persinger & Parker from
1987 to 1992. Prior thereto, Mr.
Sanders served as Senior Partner of
the law firm Sanders and Siercho.
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position Held
John R. Loveland 62 Chief Executive Officer
Christopher J. Polimino 34 President
Anthony R. Pongonis 47 Executive Vice President
Dennis S. Lerner 57 Secretary
Kelly B. Ardoin 25 Assistant Treasurer
Mr. Polimino was promoted to the position of President
during the first quarter of 2000. He has been with the Company
since December of 1994 and has previously served as Executive
Vice President, General Manager, and Controller.
Mr. Pongonis was hired during the fourth quarter of 1996.
He previously served as the Company's President and is currently
the Company's Eastern Region Manager. He has over twenty-five
years of experience in the environmental services industry.
Mr. Lerner has served in his present position since February
of 1994. Mr. Lerner was Assistant Secretary of O'Brien & Gere
Engineers, Inc., a wholly-owned subsidiary of O'Brien & Gere
Limited, from 1992 to March 1999. He also served as O'Brien &
Gere Engineers' in-house legal counsel from 1990 to 1999.
Ms. Ardoin was hired during the third quarter of 1998, and
currently serves as the Company's Controller. Ms. Ardoin
previously worked for a public accounting firm as a staff
accountant.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by the Company for services rendered
during the last three fiscal years.
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payments
Name and Other
Principal Annual # of LTIP All Other
Position Year Salary Compensation Options Payouts Compensation
John R. Loveland 1999 $35,880 -0- -0- -0- -0-
Chief Executive 1998 $13,920 -0- -0- -0- -0-
Officer 1997 $19,200 -0- 50,000 -0- -0-
Anthony R. Pongonis 1999 $107,220 -0- -0- -0- -0-
Executive Vice 1998 $ 92,220 $17,500 (1) -0- -0- -0-
President
(1) Includes stock bonus with a market value of $2,500 at the
time of award.
Year End Option Table
There were no outstanding stock options held as of December 31,
1999 by the named executive officers.
Compensation of Directors
Directors of the Company are paid $500 for each quarter plus
reimbursement for their actual expenses incurred in attending
meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
the beneficial ownership of the company's common stock at March
15, 2000 by persons who, to the knowledge of the Board of
Directors, beneficially own more than five percent of the
outstanding shares of common stock of the Corporation.
All voting power of the Corporation is vested in its common
stock. As of the close of business on March 15, 2000, 11,603,963
shares of common stock par value $.01 per share were outstanding.
Each share of common stock is entitled to one vote.
Number of Shares
Name and Address of Common Stock Percentage
of Beneficial Owner Beneficially Owned (1) of Class
M&T Bank 5,622,140 48%
101 S. Salina Street
Syracuse, NY 13202
O'Brien & Gere Limited 3,148,200 27%
5000 Brittonfield Parkway
Syracuse, NY 13220
Richard L. Elander 329,565 (4) 3%
Cornelius B. Murphy, Jr. 1,424 (4) <1%
Steven A. Sanders 25,752 (2) (4) <1%
Robert J. Berger 20,000 (4) <1%
John R. Loveland 77,093 (3)(4) <1%
All Officers & Directors (2)(3)(4) 4%
as a Group (9 persons)
(1) The beneficial owners have sole voting and investment power
over the shares owned.
(2) Includes 200 shares, which are owned by Mr. Sanders' wife as
custodian for his son, as to which Mr. Sanders disclaims
beneficial ownership.
(3) Does not include 3,148,200 shares currently owned by Limited
of which Mr. Loveland is a director. Includes 76,659 shares
owned by Mr. Loveland's wife as to which Mr. Loveland disclaims
beneficial ownership.
(4) Director
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 1, 1995, the Company entered into a lease agreement
with O'Brien & Gere Property Development (an affiliate) to occupy
approximately 17,000 square feet of office and garage space. The
terms of the lease extend through June 30, 2001. The Company
also has several month-to-month office rental agreements in place
with another O'Brien & Gere Limited subsidiary. Total rent
expense incurred due to these leases in 1999 amounted to
approximately $120,000.
On November 5, 1997, the Company entered into an option with
O'Brien & Gere Property Development (an affiliate) to sell the
eastern portion of the Massena Property, the tanks, and the dock
for $2 million.
During 1999, the Company provided $970,000 of remediation,
sub-contract support, and project services to subsidiaries
O'Brien & Gere Limited, a shareholder. Services provided to
O'Brien & Gere Limited subsidiaries were at competitive rates
which were bid on a project by project basis.
The Company purchases technical, accounting, and consulting
services from subsidiaries of O'Brien & Gere Limited, a
shareholder. The costs for these services amounted to $299,000
in 1999.
The Company's revolving loan agreement is guaranteed by
O'Brien & Gere Limited, a shareholder, for an amount not to
exceed $500,000.
Steven A. Sanders, a director of the Company, a partner of
Beckman, Millman, & Sanders LLP, which provides professional
services to the Company, and it is anticipated that it will
continue to do so.
On January 1, 1999, the Company sold its wholly-owned
subsidiary, St. Lawrence Industrial Services, Inc., to a director
of the Company.
The Company purchases subcontract labor services from St.
Lawrence Industrial Services, Inc., which is owned by Robert J.
Berger, a director of the Company. The costs for these services
amounted to approximately $1,094,000 in 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Page
(a) Financial Statements and Exhibits
(1) Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1999 and
1998 F-2
Consolidated Statement of Operations for the years
ended December 31, 1999, 1998, and 1997 F-3
Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended December 31, 1999,
1998, and 1997 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997 F-5
Notes to Consolidated Financial Statements F-7
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Subsidiary of the Company:
OP-TECH Environmental Services Limited - Ontario,
Canada
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the three months ended December 31, 1999.
(c) Exhibits
10.1 Union and Employment Contracts (1) Incorporated herein by
reference to the Company's Form 10-K F/Y/E December 31, 1997.
10.2 Voting Agreement (1) Incorporated herein by reference to the
Company's Form 10-K F/Y/E December 31, 1997.
10.3 Memorandum of Agreement and Exchange (1) Incorporated herein
by reference to the Company's Form 10-K F/Y/E December 31, 1997.
10.4 Revolving Loan Promissory Note (1) Incorporated herein by
reference to the Company's Form 10-Q for the period ended June
30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OP-TECH Environmental Services, Inc.
(Registrant)
By:/s/ John R. Loveland
John R. Loveland, Chief Executive Officer
March 30, 1999
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on the 30th day of March 2000.
/s/ Robert J. Berger Director and Chairman of the Board
Robert J. Berger
/s/ Richard L. Elander Director
Richard L. Elander
/s/ John R. Loveland Director and Chief Executive Officer
John R. Loveland
/s/ Cornelius B. Murphy, Jr. Director
Cornelius B. Murphy, Jr.
/s/ Robert F. Neuhaus Director
Robert F. Neuhaus
/s/ Steven A. Sanders Director
Steven A. Sanders
/s/ Christopher J. Polimino President and Chief Accounting Officer
Christopher J. Polimino
/s/ Anthony R. Pongonis Executive Vice President
Anthony R. Pongonis
/s/ Kelly B. Ardoin Assistant Treasurer
Kelly B. Ardoin
/s/ Dennis S. Lerner Secretary
Dennis S. Lerner
PRICEWATERHOUSECOOPERS LLP
OP-TECH Environmental
Services, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1999 and 1998
Report of Independent Accountants
Shareholders and Board of Directors
OP-TECH Environmental Services, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations and shareholders'
equity and cash flows present fairly, in all material respects, the
financial position of OP-TECH Environmental Services, Inc. and
Subsidiary at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the
Company's operating results and financial position raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/S/PricewaterhouseCoopers LLP
March 15, 2000
OP-TECH Environmental Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
Current assets:
Cash and cash equivalents $ 15,034 $ 122,106
Accounts receivable (net of
allowance for doubtful accounts
of approximately $132,000 in 1999
and $126,000 in 1998):
Unaffiliated parties 3,049,770 2,847,001
Affiliated parties 259,181 109,190
3,308,951 2,956,191
Costs on uncompleted projects
applicable to future billings 479,970 289,768
Prepaid insurance 107,043 157,537
Other assets 226,662 159,345
Total current assets 4,137,660 3,684,947
Property and equipment, net 990,157 1,199,635
Assets held for sale 780,000 1,605,427
Other assets 35,123 142,744
Total Assets $ 5,942,940 $ 6,632,753
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft $ 110,954 $ 45,085
Notes payable to bank 1,778,989 -
1,889,943 45,085
Accounts payable:
Unaffiliated parties 1,788,759 1,350,204
Affiliated parties 21,270 51,184
1,810,029 1,401,388
Billings in excess of costs and estimated
profit on uncompleted contracts 818,712 569,393
Accrued payroll and related liabilities 366,040 226,130
Accrued expenses and other liabilities 14,426 71,888
Current portion of long-term debt 552,095 351,751
Total current liabilities 5,451,245 2,665,635
Long-term debt 313,269 1,174,809
Shareholders' equity:
Common stock, par value $.01 per share;
authorized 20,000,000 shares; 11,603,963
shares outstanding as of December 31,
1999 and 1998, respectively 116,040 116,040
Additional paid-in capital 7,787,152 7,787,152
Accumulated deficit (7,724,766) (5,110,883)
Shareholders' equity, net 178,426 2,792,309
Total Liabilities and Shareholders' Equity $5,942,940 $6,632,753
The accompanying notes are an integral part of the consolidated
financial statements.
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Project billings and services $ 12,517,772 $ 10,917,903 $ 6,993,221
Project costs 10,355,805 7,596,788 4,959,449
Gross margin 2,161,967 3,321,115 2,033,772
Selling, general and
administrative expenses 3,439,654 2,399,988 2,569,486
Provision for impairment of
long-lived assets 1,109,877 - 797,686
Operating (loss) income (2,387,564) 921,127 (1,333,400)
Other income and expense:
Interest expense (191,180) (111,099) (402,144)
Other (expense) income, net 8,841 20,925 (11,999)
(182,339) (90,174) (414,143)
(Loss) gain before income
taxes and extraordinary item (2,569,903) 830,953 (1,747,543)
Income taxes 43,980 18,200 -
(Loss) income before
extraordinary item (2,613,883) 812,753 (1,747,543)
Extraordinary gain on
forgiveness of debt - - 1,000,000
Net (Loss) Income $(2,613,883) $ 812,753 $ (747,543)
Earnings per common share -
basic and dilutive:
(Loss) income before
extraordinary item $ (0.23) $ 0.07 $ (0.32)
Extraordinary item - - 0.18
Net (loss) income $ (0.23) $ 0.07 $ (0.14)
The accompanying notes are an integral part of the consolidated
financial statements.
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998, and 1997
Additional
Common Common Paid-In Accumulated
Shares Stock Capital Deficit Total
Balances at
December 31, 1996 4,854,497 $ 48,535 $4,491,773 $(5,176,093) $ (635,785)
Conversion of debt
to 6,702,140 shares 6,702,140 67,021 3,284,049 - 3,351,070
Retirement of
1,537 shares (1,537) (5) (2,267) - (2,272)
Net loss - - - (747,543) (747,543)
Balances at
December 31, 1997 11,555,100 115,551 7,773,555 (5,923,636) 1,965,470
Issuance of
48,863 shares 48,863 489 13,597 - 14,086
Net income - - - 812,753 812,753
Balances at
December 31, 1998 11,603,963 116,040 7,787,152 (5,110,883) 2,792,309
Net loss - - - (2,613,883) (2,613,883)
Balances at
December 31, 1999 11,603,963 $116,040 $7,787,152 $(7,724,766) $ 178,426
The accompanying notes are an integral part of the consolidated
financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Operating activities:
Net income (loss) $(2,613,883) $ 812,753 $ (747,543)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Extraordinary gain on
forgiveness of debt - - (1,000,000)
Provision for loss on
accounts receivable 108,700 105,350 190,594
Depreciation and amortization 303,287 161,201 351,812
Provision for impairment of
long-lived assets 1,109,877 - 716,710
Interest expense converted
to common stock - - 166,836
Loss on sale of equipment 216 - -
(Increase) decrease in
operating assets and
increase (decrease) in
operating liabilities:
Accounts receivable (461,460) (987,192) (716,225)
Costs on uncompleted
projects applicable to
future billings (190,202) (157,178) (31,649)
Prepaid expenses and
other assets 97,171 14,862 84,055
Billings and estimated
profit in excess of costs
on uncompleted contracts 249,319 259,466 71,864
Accounts payable and
other accrued expenses 491,089 165,731 165,733
Net cash provided by (used
in) operating activities (905,886) 374,993 (747,813)
Investing activities:
Purchases of property
and equipment (113,976) (207,617) (120,488)
Proceeds from sale of
property and equipment 30,530 - 7,793
Net cash (used in)
provided by investing
activities (83,446) (207,617) (112,695)
Financing activities:
Cash overdrafts 65,869 (179,373) 149,476
Proceeds from notes payable
to banks and long-term
borrowings, net of financing
costs 4,998,188 4,792,163 511,904
Proceeds from notes payable
to shareholders - - 525,000
Principal payments on current
and long-term borrowings (4,181,797) (4,739,577) (263,432)
Net cash (used in)
provided by financing
activities 882,260 (126,787) 922,948
(Decrease) increase in cash
and cash equivalents (107,072) 40,589 62,440
Cash and cash equivalents at
beginning of year 122,106 81,517 19,077
Cash and Cash Equivalents
at End of Year $ 15,034 $ 122,106 $ 81,517
Non-cash items:
Conversion of debt and related
accrued interest to equity
(including $166,836 of 1997
interest expense) $ - $ - $3,351,070
Shareholders retirement
of common stock - - 2,272
Equipment purchased through
bank and other financing
sources 285,702 - -
Debt transfer upon sale
of asset 31,341 - -
The accompanying notes are an integral part of the consolidated
financial statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
OP-TECH Environmental Services, Inc. and Subsidiary (the
"Company"), provides comprehensive environmental services
predominately in Upstate and Central New York. The Company
performs industrial cleaning of non-hazardous materials, provides
varying services relating to plant facility closure including
demolition and asbestos services, provides remediation services
for sites contaminated by hazardous materials and provides
emergency spill response services. The Company has a Canadian
subsidiary, OP-TECH Environmental Services, Ltd.
Priniciples of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
One of the more significant estimates includes the evaluation of
impairment of the Company's long-lived assets. As more fully
described in Note 6, the Company has had certain property held
for sale appraised by an independent third party. Such
appraisals are dependent upon various assumptions and estimates,
which are subject to change over time. Future changes in these
estimates, or other assumptions utilized by management to
evaluate the asset carrying value, may have a material effect on
the conclusions reached and the ultimate determination of
impairment.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Project Income Recognition and Unbilled Project Costs
Contracts are predominately short-term in nature (less than three
months) and revenue is recognized as costs are incurred and
billed. Income on long-term fixed-priced contracts greater than
three months is recognized on the percentage-of-completion
method utilizing the cost-to-cost basis. Project costs are
generally billed in the month they are incurred and are shown as
current assets.
In the event interim billings exceed costs and estimated profit,
the net amount of deferred revenue is shown as a current
liability. Estimated losses are recorded in full when
identified.
Concentration of Business Risk - Significant Customers
Sales to one customer, other than an affiliated party, amounted
to approximately $1,025,700, $2,537,000 and $463,000 in 1999,
1998 and 1997, respectively. Accounts receivable at December 31,
1999 and 1998 include $234,100 and $157,200, respectively, from
this customer.
For the year ended December 31, 1999 two individual customers
generated approximately $1,609,000, or 13% of the Company's
revenues.
Property and Equipment
Property and equipment are stated at cost. Expenditures for
repairs and maintenance are charged to expense as incurred.
Depreciation and amortization of assets including those recorded
under capital leases is provided for using the straight-line
method.
Assets Held for Sale
Assets held for sale are stated at the lower of carrying amount
or fair value, determined by an independent appraisal, less cost
to sell.
Long and Short-Term Debt
The carrying amounts of the Company's short-term secured and
unsecured borrowing and non-traded variable-rate long-term debt
agreements approximate fair value. The fair value of the
Company's non-traded fixed-rate long-term debt is estimated
using discounted cash flow analysis based upon the Company's
current incremental borrowing rates for similar types of
borrowing arrangements and approximates carrying value.
Income Taxes
The Company provides for income taxes in accordance with the
liability method as set forth in Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes."
Under the liability method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that may be in
effect in the years in which the differences are expected to
reverse.
Earnings Per Share
Basic earnings per share is computed by dividing income by the
weighted average shares actually outstanding for the period.
Diluted earnings per share includes the potentially dilutive
effect of shares issuable under the employee stock purchase and
incentive stock option plans. Due to the losses incurred by the
Company in 1999 and 1997, the impact of the outstanding options
and warrants are anti-dilutive and, therefore, their impact has
not been included in the dilutive earnings per share disclosure.
2. Business Operations
In 1999 the Company has incurred a $2.6 million loss, (of which
approximately $1,510,000 was a non-cash charge), has a working
capital deficit of $1,313,585 and a total shareholders'
equity of $178,000. These losses have created a need for
additional financing which may not be available.
The Company is focusing on strategically continuing the growth of
its operations throughout the Northeastern United States and
Pennsylvania. The Company is also continuing its focus on its
core service lines with industrial and governmental customers which
is expected to lead to an increase in recurring work.
In order to achieve its 2000 budgeted revenue and profit goals,
the Company believes it can continue to develop core service
revenues throughout the Northeastern United States and
Pennsylvania. The Company has relocated two of its senior
employees to the Eastern New York and Massachusetts regions to
build a client base that will provide recurring core service
revenue. In addition, management believes that the cost
reductions executed in the fourth quarter of 1999, which included
certain professionals, will assist in achieving fiscal 2000 profit
goals.
Management expects, based on its efforts to improve operating
results, and the continued availability of the line of credit from
the Bank, the Company will be able to meet its obligations as they
come due. In addition, management believes that the Bank will
renew its line of credit in 2000, based upon on-going discussions
with the Bank. However, there can be no assurance the
Company will be able to continue to meet its budgets and maintain
adequate cash flows.
3. Capital Restructuring
In December 1997, the Company executed agreements with its then
two largest creditors. The Company's then financial institution
and a shareholder creditor, agreed to convert all or part of
their indebtedness, including accrued interest, into common stock
of the Company, and to forgive the remaining balance. The
shareholder, to which the Company was indebted for $1,540,000,
including accrued interest of $140,000, forgave $1,000,000 of the
debt and converted the balance into 1,080,000 shares of the
Company's common stock. The financial institution to which the
Company was indebted for $2,811,070, including accrued interest
of $75,332, converted their debt and accrued interest into
5,622,000 shares of the Company's common stock. The price per
share of $.50 was negotiated with the two creditors and the
Company based on the price of recent sales and their estimates of
future risk.
4. Related Party Transactions
The Company purchases technical, accounting, and consulting
services and rented certain office and warehouse space from a
shareholder and its affiliates. The cost for these services
amounted to approximately $299,000, $325,000, and $97,000 in
1999, 1998 and 1997, respectively.
Additionally, the Company provided approximately $970,000,
$283,000, and $1,507,000 of remediation, sub-contract support and
project services to a shareholder and its affiliates for the
years ending December 31, 1999, 1998 and 1997, respectively.
During 1999, the Company purchased approximately $1,094,000 of
subcontract labor services from St. Lawrence Industrial Services,
Inc. which is owned by a director of the Company.
Interest expense on an unsecured line of credit with a
stockholder was approximately $94,000 in 1997.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following at
December 31:
1999 1998
Furniture and fixtures $ 40,143 $ 35,033
Office machines 94,901 75,052
Utility vehicles 98,140 101,140
Field equipment 1,853,130 1,947,551
Aqueous treatment system 100,002 100,002
2,186,316 2,258,778
Less: Accumulated depreciation (1,196,159) (1,059,143)
$ 990,157 $ 1,199,635
Depreciation expense approximated $294,000, $157,000, and
$282,000 for 1999, 1998, and 1997, respectively.
6. Impairment of Long-Lived Assets
Assets Held for Sale
The Company continues to pursue the disposal of its Massena Port
Facility ("Facility"), which was acquired in 1991 for the purpose
of developing a large aqueous treatment facility. Management's
estimation of fair value is based upon an evaluation of existing
facts and circumstances, including current real estate market
conditions, a January 2000 independent appraisal and certain
other factors. During the fourth quarter of 1999, the Company,
based upon an independent appraisal of the Facility, recognized
an impairment loss on the carrying value of the Facility of
approximately $825,000.
A wholly-owned subsidiary of a shareholder of the Company
currently has an option to purchase the Massena Port Facility for
$2,000,000. Management has continued its efforts to market the
Facility or to find alternative uses.
During 1998 the Company reclassified equipment with a carrying
value of $69,573 from assets held for sale to equipment, as the
equipment is being utilized in the operations of the Company.
In 1999, the Company wrote down the carrying value of equipment
and other long-lived assets of approximately $284,500 as they are
no longer used in the Company's operations.
7. Debt and Lease Obligations
Long-term debt is summarized as follows at December 31, 1999:
Revolving loan, see (a) $ 1,778,989
Promissory Note, due in full with accrued interest
on April 1, 2000. Interest is at prime plus 1.5%
(10% as of December 31, 1999), collateralized by
all accounts receivable, inventory and equipment
now owned or acquired later. 150,000
Various equipment and other installment obligations,
due in aggregate monthly installment payments of
approximately $46,500, including interest rates
between 6.95% and 12%, collateralized by equipment
with a carrying value of $715,444. 715,364
2,644,353
Less: Current portion (2,331,084)
$ 313,269
(a) The Company has an annually renewable borrowing agreement that
provides borrowings up to $2,000,000 on a revolving loan basis,
collateralized by all accounts receivable, inventory and equipment
now owned or acquired later. Availability on the line is subject
to a specified borrowing base calculation based upon eligible
accounts receivable and costs in excess of billings.
The agreement includes a material adverse change clause which
permits the financial institution to call its debt in the
event of a material adverse change in the business.
Considering the significant losses in 1999, the Company asked
for and received a waiver of the material adverse change
clause as of and for the year ended December 31, 1999.
Management does not anticipate any adverse changes in the next
twelve months, however, there can be no assurances. The
revolving loan, which is due on April 30, 2000, is guaranteed
by a shareholder for an amount not-to-exceed $500,000.
Borrowings against the revolving loan aggregated $1,778,989 at
December 31, 1999. Interest is charged at prime plus 1.25%,
or 9.75% at December 31, 1999. The weighted average borrowing
rates under short-term credit facilities were 9.23% and 9.72%
at December 31, 1999 and 1998, respectively.
Interest paid amounted to approximately $191,000, $115,000, and
$235,000 in 1999, 1998 and 1997, respectively.
Scheduled principal payments on long-term debt for the next five
years are as follows:
2000 $2,331,084
2001 169,012
2002 61,695
2003 54,905
2004 27,657
$2,644,353
Office facilities, a portion of which is with an affiliate of the
Company's shareholder, are leased under noncancelable operating
leases expiring at various dates through 2001. Rent expense
incurred amounted to approximately $155,000, $77,000, and $89,000
in 1999, 1998 and 1997, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
2000 - $404,500, 2001 - $323,600, 2002 - $116,300, 2003 -
$21,900, 2004 - 1,300.
The Company incurred non-cash debt and capital lease obligations
of $285,702 and $456,413 in 1999 and 1998, respectively, for the
acquisition of equipment. In addition, during 1998, the Company
financed its three-year insurance premium obligation of
approximately $288,000.
8. Shareholders' Equity
The Company maintains a non-qualified stock option plan
permitting the issuance of up to 500,000 shares of common stock.
The purpose of the Plan, which is more fully defined by the Plan
document, is to provide various directors, officers, and employees
("Eligible Employees") of the Company the opportunity to acquire
a stake in the growth of the Company, as well as a means of
promoting the Eligible Employee's maximum effort and continued
association with the Company.
Stock options granted under the Plan allow the Eligible Employee
to purchase the Company's common stock, for a period not to
exceed three years, at the price established at the grant date.
Options granted under the Plan must specify option periods ending
not more than ten years from the date of grant. The following
table summarizes option activity of the Plan during 1999, 1998
and 1997:
Weighted No. of
Average Shares
Exercise Under
Price Options
Balance at December 31, 1996 $ 2.50 250,000
Options granted 1.50 50,000
Options expired (2.50) (250,000)
Balance at December 31, 1997 1.50 50,000
Options granted 0.00 -
Options expired 0.00 -
Balance at December 31, 1998 1.50 50,000
Options granted 0.00 -
Options expired (1.50) (50,000)
Balance at December 31, 1999 0.00 -
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for the options granted under the
Plan. Under APB Opinion No. 25, because the exercise price of
the stock option is above the market price of the underlying
stock on the date of the grant, no compensation expense is
recognized. Under SFAS No. 123, rights to acquire company stock
are to be valued under the fair value method and the proforma
effect of such value on reported earnings and earnings per share
are to be disclosed in the notes to the financial statements. As
the fair value of these options is not material, proforma and
related disclosures are not presented.
In 1994 and 1995, the Company issued warrants to a financial
advisor to purchase 302,500 shares of common stock. These
warrants expired and were immediately reissued in 1998, at a price
of $1.65 and expire in 2001.
As of December 31, 1999, the Company has reserved a total of
197,500 shares of common stock for issuance under the agreements
discussed above. No options or warrants have been exercised.
During 1999, the Company did not grant any stock awards of its
common stock.
9. Income Taxes
The following summarizes the income tax expense at December 31,
1999:
1999 1998
Current:
Federal $ - $ 15,000
State 43,980 3,200
$ 43,980 $ 18,200
The difference between the expected tax provision resulting from
the application of the federal statutory income tax rate to pre-
tax income, for 1999 and 1998, is due to the Company's continued
recognition of a deferred tax valuation allowance and the impact
of current tax obligations based on AMT tax rates subject to
certain limitation provisions. The Company has provided a state
tax expense for certain required franchise taxes for which net
operating loss carryforwards do not exist.
At December 31, 1999, the Company has federal net operating loss
("NOL") and alternative minimum tax ("AMT") credit carryforwards
of approximately $7,379,000 and $15,000, for income tax purposes.
The federal net operating loss carryforward expires at various
times through the year ending December 31, 2019. Alternative
minimum tax credit carryforwards do not expire. Income taxes and
franchise taxes paid were approximately $18,200 and $366 in 1998
and 1997, respectively.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. For financial reporting purposes the
Company increased its valuation allowance in 1999 due to the
generation of additional net operating loss carryforwards for
which a valuation allowance has been provided. The Company has
recorded a valuation allowance amounting to the entire net deferred
tax asset due to the uncertainty as to the ultimate recovery of the
assets.
Significant components of the Company's deferred tax liabilities
and assets as of December 31, 1999 and 1998 are as follows:
1999 1998
Deferred tax liabilities:
Tax over book depreciation $ 21,999 $ 76,021
Deferred tax assets:
Net operating loss carryforward $ 2,508,848 1,660,144
Accounts receivable reserve 44,932 42,826
Other 387,431 84,559
AMT tax credits 15,000 15,000
Total deferred tax assets 2,956,211 1,802,529
Valuation allowance for
deferred assets (2,934,212) (1,726,508)
Deferred tax assets $ 21,999 $ 76,021
Net deferred taxes $ - $ -
10. Employee Benefit Plan
The Company maintains an employee retirement plan which covers
substantially all employees. The Plan is funded by voluntary
employee contributions which are matched by the Company at a
designated percentage, and additional contributions by the
Company at the discretion of the Board of Directors. There were
matching contributions to the plan of approximately $9,900,
$11,500, and $9,100 in 1999, 1998 and 1997, respectively, by the
Company. The Company did not make any discretionary
contributions to the Plan in 1999, 1998 and 1997.
11. Commitment and Contingencies
The Company is subject to various federal, state and local
regulations relating to environmental matters, including laws
which require the investigation and, in some cases, remediation
of environmental contamination. The Company's policy is to
accrue and charge to operations environmental investigation and
remediation expenses when it is probable that a liability has
been incurred and an amount is reasonably estimable.
The Company is a party to various proceedings arising from the
normal course of business. Based on information currently
available, management believes adverse decisions relating to
litigation and contingencies in the aggregate would not
materially affect the Company's results of operations, cash flows
or financial condition.