SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19761
OP-TECH Environmental Services, Inc.
(Exact name or registrant as specified in its charter)
Delaware 91-1528142
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
6392 Deere Road, Syracuse, NY 13206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
315-463-1643
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 1943 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, 1997 was
$1,820,436 based upon the average bid and ask price of
such stock on such day.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
Company's classes of common stock, as of March 15, 1997.
Common Stock, $.01 par value. 4,854,497
PART I
ITEMS 1. BUSINESS
General
OP-TECH Environmental Services, Inc. and Subsidiaries
(the "Company"), a Delaware corporation 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 interior and exterior demolition as well as
asbestos removal services. 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
materials as required by the New York State Department of
Environmental Conservation (NYSDEC). The Company's services
include assessing the regulatory, technical, and construction
aspects of the environmental issue, developing a strategic plan
to solve 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. Through its affiliation with O'Brien & Gere
Limited Inc. and Subsidiaries ("Limited"), the Company has
an available resource of experienced engineers, scientists,
construction professionals and attorneys.
SERVICES
Asbestos Abatement
The Company provides asbestos abatement contracting
services to 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 with 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
provided 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, loaders and a large soil blender.
The Company primarily provides on-site soil blending
to public utilities and municipal customers.
Hydrogeological/Drilling Services
The Company subcontracts hydrogeological services to
petroleum companies, engineering firms and local and
state public entities. 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 PCB's,
and other unanticipated developments. The substances
involved may pose an immediate threat to public health
or the environment, such as possible groundwater contamination.
The Company has an agreement with the 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, collection and transportation
of the substance to an appropriate treatment or disposal
facility.
Aqueous Treatment Facility
The Company operates a year round 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.
Construction of the facility was completed in September, 1992
and has seen increased use as a result of receiving a Part
360 permit from the State of New York.
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 to complete
solutions, and to enhance the clients' 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 an investigation, the Company performs
numerous physical tests. A remedial investigation also involves
the study of the geologic, and hydrogeologic characteristics of
the affected area and the surrounding environment and a
determination of the risks posed by the hazardous materials
determined to be located in the affected area. In conducting
such investigations, the Company often reviews the construction
of a facility and past storage and handling practices regarding
hazardous materials. The Company has the capability of
removing and replacing underground storage tanks.
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.
Design, Construction, and Operation of Remedial Facilities:
Based on the results of remedial investigations and feasibility
studies, the Company uses its scientific and construction
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. The Company has submitted a number of
bids for projects with other members of Limited.
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
("RCRA") 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 substance 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 of 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 form 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 rage 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 intransit or a 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 having 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
the Central and Upstate New York Region 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 and Albany, New York and an additional office in
Canada. While operations in the Syracuse and Massena offices
are substantial, the Rochester and Albany offices operate on
a skeleton staff. Operations in Canada have been minimal
since inception.
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,
utilities, waste disposal firms, municipalities and engineering
firms. During 1996, the Company performed services for more
than 250 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 1996, sales to one customer,
other than an affiliated party,amounted to approximately
$428,000. Sales to two individual customers totalled
approximately $1,539,000 or 27% of the Company's revenues.
Insurance
The Company maintains commercial general liability insurance
which provides aggregate coverage limits of $5.0 million.
The Company also maintains asbestos liability and contractors
pollution legal liability which provide aggregate coverage
limits of $1.0 million respectively. In addition, the
Company also maintains workers compensation, comprehensive
automobile, and Directors and Officers liability insurance.
Backlog
As of December 31, 1996, the Company had a backlog of orders
it believed to be firm of approximately $1,400,000.
Employees
As of March 15, 1997, the Company had a total of 60 full-time
employees between its headquarters in Syracuse, NY and its
branch offices in Massena, Rochester and Albany, NY. All
employees of St. Lawrence Industrial Services, Inc.,
a wholly owned subsidiary, are covered by union contracts.
No other employees are currently covered by union contracts.
The Company's ability to retain and expand its staff will be
an important factor in determining the Company's future success.
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
The Company's executive and branch office located in Syracuse,
New York, occupy approximately 17,000 square feet leased from
O'Brien and Gere Property Development, a related party, at a
current monthly rate of $7,167 including utilities. The terms
of the lease extend through June 30, 1998 and does not contain
an escalation clause.
Additionally, the Company leases approximately 6,400 square feet
of office and garage space in Rochester, New York from Elam Sand
and Gravel at a current monthly rate of $1,500 plus electrical
and gas charges. The terms of the lease extend through August
31, 1997 and does not contain an escalation clause.
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, ship and boiler room building; and two storage sheds.
The Company is currently pursuing the sale of its Massena
property and is currently in negotiations with two independent
parties interested in purchasing it. (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. Currently, the Company is unable to determine the
extent of the contamination if any.
Management plans to begin digging test sites on the property
in the second quarter of 1997 at which time it will be in a
better position to determine the extent of any ground
contamination if any.
The Company's owned equipment consists primarily of construction
equipment such as vacuum trucks, tankers, forklifts, 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 form local equipment contractors.
The Company also, from time to time, leases equipment to outside
parties.
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 or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 price for the shares of the Company's
common stock of the following periods is as follows:
Quarter Ended High Bid Low Bid
March 31, 1995 1 1/4 1/2
June 30, 1995 3/4 5/8
September 30, 1995 1 3/4
December 31, 1995 1 3/4
March 31, 1996 1 1/8 5/8
June 30, 1996 7/8 3/8
September 30, 1996 5/8 1/8
December 31, 1996 5/8 1/8
March 15, 1997 5/8 1/8
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, 1997, there were approximately 140 holders
of record of the Company's common stock.
(c) The Company has never paid any dividends and does not
anticipate paying dividends for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
Statement of Operations Data
1996 1995 1994 1993 1992
Revenues $5,792,548 $7,145,587 $5,143,623 $4,648,574 $2,041,532
Net Loss (1,553,320) (847,037) (1,131,139) (587,804) (953,790)
Net Loss
Per Share ($.32) ($.17) ($.25) ($.20) ($.32)
Balance Sheet Data 1996 1995 1994 1993 1992
(5) (2),(3) & (4) (2)&(3)
Total Assets $5,155,409 $5,527,547 $6,269,756 $5,610,187 $5,202,398
Long-Term Obligations $875,000 2,326,459 $1,681,686 $3,249,620 $3,182,871
(2) On March 2, 1994, a shareholder of the Company converted its
$1.0 million long-term obligation
to common stock.
(3) On March 2, 1994, the Company paid off its subordinate debt to
a shareholder. The long-term obligation as of December 31,
1993 was $681,516.
(4) April 6, 1994, the Company sold 170,000 shares of Common Stock
for $255,000.
(5) On November 1, 1995, the Company converted a $500,000 short-term
note to a long-term obligation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents
of $19,077 as compared to $32,044 at December 31, 1995.
At December 31, 1996, the Company had a working capital deficit
of $2,978,958 compared to a working capital deficit of $742,556
at December 31, 1995, with a current ratio of .4 to 1 at the end
of 1996 compared to .7 to 1 at the end of 1995. The increase
in the working capital deficit is primarily attributable to the
default provisions in the Company's debt which has been
classified as current as discussed below.
As a result of recurring operating losses during 1996, the
Company's cash provided by financing activities was due
primarily to proceeds from its line of credit with O'Brien &
Gere Limited, an affiliate of the Company.
For the year ended December 31, 1996, the Company's net cash
used in operating activities was $371,140 versus net cash
provided by operating activities of $308,694 in 1995.
During 1996, the Company had capital purchases of $153,953
which were financed through operations and long term debt.
Capital expenditures consisted of several utility vehicles
and a Vec Loader which increased the Company's ability to
provide dry vacuum services.
On May 31, 1996, the Company renewed its $1,000,000 working
capital line of credit with a bank. The line of credit
currently expires on May 31, 1997. The Company expects to
satisfy its liquidity requirements in 1997, which are
expected to consist of working capital requirements,
principal and interest payments on debt and some small
capital expenditures. In order for the Company to achieve
these cash requirements, it will be necessary for the bank to
renew the line of credit in May 1997.
Although there can be no guarantees of its renewal, management
believes that the bank will renew this credit facility.
Due to the significant amount of debt held by the Company,
a significant rise in interest rates could have an adverse
effect on the Company's profitability and its ability to meet
cash flow requirements.
On August 1, 1996, the Company entered into a modification
with the bank that deferred principal payments on the first
and second mortgages until February 1998. In addition,
interest payments on its unsecured line of credit with O'Brien
& Gere Limited have been deferred until February of 1998.
The Company's ability to resume principal and interest payments
on these obligations depends on its ability to meet its
budgetary goals in 1997.
During 1996, the Company increased its existing unsecured line
of credit with O'Brien & Gere Limited, an affiliate of the
Company and a shareholder, to $1,000,000 due on March 1, 1998.
As of December 31, 1996, there was an $875,000 advance against
the line of credit. Subsequent to year end, the Company borrowed
an additional $125,000 bringing the shareholder note up to
$1,000,000. In March of 1997, O'Brien & Gere Limited approved
an additional $400,000 advance, $200,000 which is immediately
available to the Company and an additional $200,000 which will
become available in May 1997 subject to meeting certain
budgetary goals.
Substantially all of the Company's debt is with one financial
institution, and such agreements have cross default provisions.
As a result of non compliance with covenants on certain of the
debt, all of the debt is deemed to be in default and callable
by the Bank. Though the Bank has not at this date called the
obligations, there can be no assurances that they will not
exercise this right in the future.
NEW PRESIDENT
During 1996, the Board of Directors conducted a national
search for a new President. After reviewing numerous candidates,
the Board decided to hire Anthony R. Pongonis as the Company's new
President. Since taking on this role in October of 1996, Mr.
Pongonis has been focused on achieving a higher sales volume
for the Company while assembling a new management team to lead
the Company into 1997.
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company's financial statements reflect the non-cash impact
of Statement of Financial Accounting Standards (SFAS) #121 which
was adopted in 1996. The non-cash charge as a result of the
adoption of SFAS #121 was $342,896. $240,594 was related to
equipment which was deemed non-usable in the third quarter and
$102,302 related to the write down of an intangible non-current
asset.
As a result of the reduced carrying amount of these long-lived
assets, depreciation and amortization expense is expected to
be reduced by approximately $90,000 in 1997.
ASSETS HELD FOR SALE
Assets held for sale of $1,908,677 at December 31, 1996
consist principally of the Massena Port Facility valued
at $1,828,677 and certain equipment valued at $80,000.
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.
Currently, the Company uses the property for its Massena
branch office headquarters, equipment storage and its Aqueous
Treatment/360 Facility. Due to the significance of the
carrying value of the property, the Company obtained an
independent third party appraisal to support its carrying value.
As a result of the appraisal, management has concluded based
on several factors that there is no impairment of the property's
value at this time.
Management recognizes the potential debt reduction and generation
of working capital if the property were to be sold. As a result,
management is actively pursuing the sale of the property and
realizes its value as both a petroleum storage facility as well
as a non-petroleum products storage facility. Currently,
management is pursuing options with two independent parties who
are interested in the property for each of the above purposes.
EQUIPMENT
Management is actively pursuing the sale of certain equipment
valued at $80,000. Due to the nature of the equipment and the
current demand for it, an impairment valuation is not deemed
appropriate at this time.
1997 BUSINESS PLAN
Management has formulated a business plan which it believes will
help the Company achieve both its revenue goal and overhead
reduction plan for 1997. There are no assurances that this
program will be successful. Some of the specifics of the plan
are outlined as follows:
Revenues
To increase sales volume, the Company has implmented a Master
Service Agreement Plan. This plan will allow the Company to
become listed on the preferred vendor lists of large industrial
customers. The successful marketing of these plans will allow
for recurring industrial services to these clients and provide
a base workload for the Company.
In addition to the above, the Company is pursuing public
projects in 1997. In the past, OP-TECH has never aggressively
pursued work in the public sector. As a result of changing
markets, management believes the Company can be very competitive
in the public sector and still yield a gross margin sufficent
enough to meet budgetary goals.
Gross Margin
In addition to achieving a higher sales volume for 1997,
management is focusing on attaining a gross margin sufficient
enough to cover overhead expenses. As the overall environmental
market has become very competitive, managing the type of work
pursued has become a difficult challenge.
Management believes it can achieve a proper mix of business
during 1997 to enable it to achieve a gross margin consistent
with its goals.
Overhead Reduction
Management has taken and will continue to take the necessary
steps it deems appropriate to reduce corporate overhead.
Some actions taken by the Company during 1996 and early 1997
are outlined as follows;
All staffing needs were reviewed and under utilized staff
were released thus reducing overhead wages.
The Company eliminated its in house drilling division as it
found the demand for these services to be at an all time low
in its service area.
Several pieces of unused equipment were sold during 1997
which helped generate approximately $40,000 in additional
operating cash. In addition, the Company has since paid down
$82,000 of debt related to this equipment.
Overhead items such as shop supplies, shop labor and non-project
expenses have been held to a minimum in 1997.
Although there can be no assurances of the Company's ability
to meet its cash requirementsduring 1997, management believes
achieving certain revenue, gross margin and overhead reduction
goals set forth in its 1997 operating budget will allow the
Company to meet the necessary cash requirements to enable it
to continue as a going concern.
Results of Operations
This financial review should be read in conjunction with the
accompanying Consolidated Financial Statements and related
notes thereto.
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 form cost reduction programs; sell the
Massena Property and utilize its facilities and work force
profitability in the face of intense price competition.
The Company's operations may be affected by the commencement
and completion of major site remediation projects; seasonal
fluctuations due to weather and budgetary cycles influencing
the timing of customers' spending for remedial activities;
the timing of regulatory decisions relating to hazardous
waste management projects'; changes in regulations governing
the management of hazardous waste and secular changes in the
waste processing industry towards waste minimization
and the propensity of delays in the remedial market.
As a result of these factors, the Company's revenue and
income could vary significantly form quarter to quarter,
and past financial performance should not be considered a
reliable indicator of future performance.
The Company's business has not been significantly affected
by inflation during the periods discussed below.
1996 COMPARED TO 1995
Revenues
During the year ended December 31, 1996, the Company's revenues
decreased 19% to $5,792,548 compared to $7,145,587 reported for
the previous year ended December 31, 1995. A comparison of
revenues by business type between the current and prior year
shows the following. The asbestos abatement and demolition
business remained stable due to an award of a large asbestos
abatement contract in the fourth quarter. The hydrogeological
and drilling business decreased significantly due to the lack
of enforcement of governmental regulations during the year. The
Company has since eliminated its in-house hydrogeological
division and is currently subcontracting these services to
another company. Industrial cleaning services rose slightly
during the year as the Company began to refocus its marketing
effort in this area. The Company's Emergency Spill Response
revenue decreased significantly during 1996 as there were
fewer emergency response calls than in 1995. Finally, the
Company saw a slight decrease in the transportation and
disposal business during the year.
Project Costs and Gross Profit
Project costs for the year ended December 31, 1996 decreased
15% to $4,036,846 from $4,756,576 for the year ended December
31, 1995. The decrease in project costs is attributable
primarily to decreased revenues. The gross profit margin for
the year ended December 31, 1996 was 30.3% versus 36.8% for
the year ended December 31, 1995. The decrease in the gross
profit margin is attributable to increasingly competitive
market conditions which have forced the Company to bid
jobs at a lower gross profit margin than in past years.
In addition, several large projects during 1995 contributed
to an overall higher gross profit margin.
Selling, General and Administrative Expenses
During the year ended December 31, 1996 selling, general and
administrative expenses decreased 9.6% to $2,593,996 compared
to $2,871,719 reported for the previous year ended December
31, 1995. The decrease is mainly attributable to a reduction
in personnel.
Operating Loss
For the year ended December 31, 1996, the Company's operating
loss increased to $1,181,190 compared to a loss of $482,708
for year ended December 31, 1995. The increase in the operating
loss is attributable to an overall lower sales volume in 1996
and a lower gross margin on sales due to an increasingly
competitive market. In addition, the Company incurred a non-
cash charge of $342,896 related to the write-down of certain
equipment and intangible assets during 1996.
Interest Expense
Interest expense decreased slightly in 1996 to $357,173 from
$357,460 in 1995. Interest expense on short term borrowings
increased during 1996 as a result of an increase in the
Company's line of credit borrowings with an affiliate.
Net Loss
The net loss for the year ended December 31, 1996 was $1,553,320
($.32 per share) compared to $847,347 ($.17 per share) in 1995.
As a result of the Company's net operating loss, there was no
provision for federal income taxes recorded in 1996.
1995 COMPARED TO 1994
Revenues
During the year ended December 31, 1995, the Company's
revenues increased by 38.9% to $7,145,587 compared to
$5,143,623 reported for the previous year ended December 31,
1994. A comparison of revenues by business type between the
current and prior year shows the following. The asbestos
abatement and demolition business increased due to a large
contract with an affiliated party. The hydrogeological and
drilling business increased due to a high volume of governmental
contracts during 1995. Finally, the Company's emergency spill
response revenue rose significantly due to several large fuel
truck spills which occurred throughout the year. The Company
also saw a moderate increase in the transportation and disposal
business while the industrial cleaning business only experienced
a slight increase.
Project Costs and Gross Profit
Project Costs for the year ended December 31, 1995 increased
32.5% to $4,509,328 from $3,402,744 for the year ended December
31, 1994. The increase in project costs is attributable
primarily to increased revenues. The gross profit margin for
the year ended December 31, 1995 was 36.8% versus 33.8% for the
year ended December 31, 1994. The increase in the gross margin
is attributable to a greater number of projects which were
labor and equipment intensive during 1995.
Selling, General and Administrative Expenses
During the year ended December 31, 1995, selling, general and
administrative (S,G & A) expenses increased by 20.5% to
$3,118,967 compared to $2,589,287 reported for the previous
year ended December 31, 1994. The increase in SG & A is mainly
attributable to an increase in bad debt write offs, depreciation
expense and added personnel. In addition, the Company wrote
off the remaining value of its customer list and organization
costs in the amount of $107,000. SG & A as a percent of revenue
decreased to 43.6% in 1995 versus 50.4% for 1994.
Operating Loss
For the year ended December 31, 1995, the Company's operating
loss improved by 43.1% to $482,708 compared to a loss of
$848,408 for the year ended December 31, 1994. The improvement
in the operating loss is attributable to increased revenues and
a higher gross profit margin in 1995.
Interest Expense
Interest expense increased 23.1% in 1995 to $357,460 from
$290,453 in 1994 as a result of increased borrowings by the
Company principally to finance capital purchases.
Net Loss
The net loss for the year ended December 31, 1995 improved to
$847,037 ($.17 per share) from $1,131,139 ($.25 per share)
in 1994. As a result of the Company's net operating loss,
there was no provision for federal income taxes recorded in
1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and
the report of Coopers & Lybrand L.L.P. 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 May 30, 1996 for a term of one year.
Name, Age Year First
Principal Occupation Elected Certain Other Information
Terry L. Brown (45)
Vice President 1991 Mr. Brown has served his
present position as Vice President
since November 1991. He has
served as President of O'Brien
& Gere Technical Services since
September 1991. He has served as a
director of O'Brien & Gere Limited
since August of 1991. From 1988
to September 1991, he served as
Vice President and General Manager
of O'Brien & Gere Technical
Services.
Richard L. Elander (55)
Vice President 1991 Mr. Elander has served his
present position as Vice
President and General Manager
since June 1994. He also
served as Chief Executive Officer
from November 1991 to June 1994.
Mr. Elander serves as a Director
of O'Brien & Gere Limited since
August 1991. From prior to 1988,
Mr. Elander served as President
of O'Brien & Gere Operations.
John R. Loveland (59)
Chairman of the Board and
Chief Executive Officer 1994 Mr. Loveland has served his
present position since June 1994.
He has been a director of O'Brien
& Gere Engineers Inc. since 1973,
he served as President of O'Brien
& Gere Engineers Inc. from 1980
to December 1992. He has been
Chairman of the Board of O'Brien
& Gere Limited since 1989.
Cornellus B. Murphy, Jr. (51)
President 1991 Mr. Murphy has served his current
position since June 1994. He
previously served as the Company's
Chairman of the Board from November
of 1991 to June 1994. Mr. Murphy
is a Director of O'Brien & Gere
Limited since 1985 and President
of O'Brien & Gere Engineers, Inc.
since 1992. Prior to that, Mr.
Murphy served as Senior Vice
President of O'Brien & Gere
Engineers Inc. and Chairman of
the Board of O'Brien & Gere
Technical Services Inc. since 1992.
From 1982 to 1992, Mr. Murphy
served as President of O'Brien & Gere
Technical Services Inc.
Steven A. Sanders (51)
Director 1991 Mr. Sanders is President of
the Law Office of Steven A.
Sanders P.C. 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
Srerchio.
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position Held
John R. Loveland 59 Chairman of the Board and C.E.O
Cornelius B. Burphy, Jr. 51 President
Anthony R. Pongonis 44 President
Terry L. Brown 45 Vice President
Richard L. Elander 55 Vice President and General Manager
Dennis S. Lerner 50 Secretary
Joseph M. McNulty 42 Treasurer
Mr. Pongonis was hired during the fourth quarter of 1996.
He has over twenty-five years of experience in the
environmental services market.
Richard L. Elander, Cornelius B. Murphy, Jr. and Terry L. Brown
resigned as officers of the Company on December 31, 1996.
Each of them continues to remain directors of the Company.
Mr. Lerner has served his present position since February of
1994. Mr. Lerner is Assistant Secretary of O'Brien & Gere
Engineers Inc. a wholly owned subsidiary of O'Brien & Gere
Limited and serves as O'Brien & Gere Engineer's in-house
legal counsel. He has held this position since 1990.
Mr. McNulty has served his current position since February 1993.
Mr. McNulty is the Vice President of Finance of O'Brien & Gere
Limited since April of 1995 and serves as a Director of O'Brien
& Gere, Inc. of North America.
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
Long Term Compensation
Annual Compensation Awards Payments
Name and Other Annual # LTIP All Other
Principal Year Salary Compensation Options Payouts Compensation(1)
Position
John R. 1996 $ 16,800 -0- 50,000 -0- -0-
Loveland 1995 $ 24,960 -0- 50,000 -0- -0-
Chairman & 1994 $ 12,480 -0- -0- -0- -0-
C.E.O
Richard L.
Elander 1996 $100,564 -0- 100,000 -0- $6,946
Vice 1995 $105,957 -0- 100,000 -0- $5,575
President 1994 $123,325 -0- -0- -0- $4,508
(1) Amounts shown consist of the Company's contribution under
the Company's 401(k) Profit Sharing Plan.
Year End Option Table
The following table sets forth certain information regarding stock options
held as of December 31, 1996 by the named executive officers.
Number of Securities
Shares Underlying Unexercised
Acquired on Value Options at Fiscal Year End
Name Exercise # Realized Exercisable Unexercisable
John R. Loveland 50,000 -0-
Richard L. Elander 100,000 -0-
Value of Unexercised
In - the Money Options
Options at Fisacl Year End (1)
Exercisable Unexercisable
John R. Loveland -0- -0-
Richard L. Elander -0- -0-
(2) The options for all Executive Officers were out-of-the
-money on December 31, 1996 as the exercise price of
the options exceeded the closing price of the Company's
Common Stock as reported by the National Quotation Bureau Inc.
Compensation of Directors
Directors of the Company are paid $500 for each quarter
plus reimbursement for their actual expenses incurred in
attending meetings. During 1996, the Company paid its 1995
Directors fees in the following manner, two directors were
issued 757 shares of stock and $864 in cash, one director was
paid in 757 shares of stock and two directors were paid nothing.
The fair value of the stock on the issue date was $.62 per
share. At December 31, 1996 the Company has accrued the
remaining portion of its 1996 Directors Fees which remain
unpaid.
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, 1997 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, 1997,
4,854,497 shares of Common Stock, par value $.01 per share
were outstanding. Each share of Common Stock is entitled
to one vote.
Name and Address Number of Shares of Common Percentage
of Beneficial Owner Stock Beneficially Owned (1) of Class
O'Brien & Gere Limited
5000 Brittonfield Parkway 2,068,200 (2) 42.6%
Syracuse, NY 13220
Richard L. Elander
3613 Melvin Drive South 428,608 (3)(7) 8.9%
Baldwinsville, NY 13027
Terry L. Brown 50,000 (4)(7) < 1%
Cornelius B. Murphy Jr. 667 (7) < 1%
Steven A. Sanders 25,552 (5)(7) < 1%
John R. Loveland 96,000 (6)(7) 1.0%
All Officers & Directors
as a Group (7 persons) (4)(5)(6)(8)
(1) Except as set forth in (2) below, the beneficial owners
have sole voting and investment power over the shares owned.
(2) 1,397,059 of these shares are pledged as collateral to
OnBank & Trust Company, Syracuse, New York to secure the
Corporation's Commercial Mortgage Loan in the principal
amount of $1,150,000. For so long as these shares are
pledged to OnBank & Trust Company and the Corporation is
not in default int the payment of principal and interest on
the Commercial Mortgage Loan. O'Brien & Gere Limited
("Limited") shall have the right to continue to vote the
pledged shares on all matters. The pledge will terminate
on December 31, 1996 or on any subsequent fiscal year,
provided certain revenue, income, and balance sheet ratios
are achieved, and there are no material adverse factors in
the financial condition of the Corporation as reasonably
determined by OnBank & Trust Company.
(3) Includes currently exercisable options to purchase 100,000
shares. Does not include 2,068,200 shares owned by Limited
of which Mr. Elander is a director.
(4) Includes 50,000 shares issuable upon exercise of currently
exercisable stock options. Does not include 2,068,200
shares owned by Limited of which Mr. Brown is a director.
(5) Does not include 200 shares which are owned by Mr. Sanders'
wife as custodian for the son as to which Mr. Sanders
disclaims beneficial ownership.
(6) Includes 50,000 shares issuable upon exercise of currently
exercisable options. Does not include 2,068,200 shares
currently owned by Limited of which Mr. Loveland is a
director. Includes 46,000 shares owned by Mr. Loveland's
wife as to which Mr. Loveland disclaims beneficial ownership.
(7) Director
(8) Includes 50,000 shares issuable upon exercise of
currently exercisable options in the name of
the following executive officers: Joseph McNulty, Treasurer
and Dennis Lerner, Secretary.
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, 1998. Total rent expense incurred in 1996 amounted to
$88,992.
During 1996, the Company provided approximately $1,110,000
of remediation, sub-contract support and project services
to affiliated parties.
The Company purchases technical, accounting and consulting
services from affiliated parties. The costs for these
services amounted to $150,743 in 1996.
The Company had a $1,000,000 unsecured line of credit with
Limited due on March 1, 1998.
Interest is payable at prime plus 2%. Interest expense
amounted to $59,453 for 1996.
Steven A. Sanders, a director of the Company, is President
of The Law Offices of Steven A. Sanders, P.C. which has
provided professional services to the Company since August
of 1991, and it is anticipated that it will continue to do so.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits Page
1) Report of Independent Auditors. F-1
Consolidated Balance Sheets at December 31, 1996 and 1995. F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994. F-3
Consolidated Statements of Shareholders' Deficit for the years
ended December 31, 1996, 1995 and 1994. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994. F-5
Notes to Consolidated Financial Statements. F-6
(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.
(21) Subsidiaries of the Company:
St. Lawrence Industrial Services Inc.
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, 1996.
(c) Exhibits - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OP-TECH Environmental Services, Inc.
(Registrant)
By:/s/ John R. Loveland
John R. Loveland, Chief Executive Officer
April 4, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on the 4th day of April, 1997.
/s/ John R. Loveland
John R. Loveland Director and Chairman of the Board
(Principal Executive Officer)
/s/ Cornelius B. Murphy, Jr.
Cornelius B. Murphy, Jr. President and Director
/s/ Terry L. Brown
Terry L. Brown Vice President and Director
/s/ Richard L. Elander
Richard L. Elander Vice President and Director
/s/ Steven A. Sanders
Steven A. Sanders Assistant Secretary and Director
/s/ Joseph M. McNulty
Joseph M. McNulty Treasurer
Independent Auditors' Report
Shareholders and Board of Directors
OP-TECH Environmental Services, Inc. and Subsidiaries
We have audited the accompayning consolidated balance sheets of OP-TECH
Environmental Services, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations,
shareholders' deficit, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain resonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statementst referred to
above present fairly, in all material respects, the consolidated
financial position of OP-TECH Environmental Services, Inc. and
Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statemetns do not include any
adjustments that might result from the outcome of this uncertainity.
As discussed in Note 5 to the consolidated financial statements, in
1996 the Company changed its method of accounting for the impairment
of long-lived assets.
Syracuse, New York
April 2, 1997
Coopers & Lybrand
Independent Auditors Report
Shareholders and Board of Directors
OP-TECH Environmental Services Inc.
and Subsidiaries
We have audited the consolidated statements of operations, shareholders'
equity and cash flows of OP-TECH Environmental Services, Inc. and
subsidiaries for the year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by managment as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of OP-TECH
Environmental Services, Inc. and subsidiaries referred to above
present fairly, in all material respects, the consolidated results of
their operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS 1996 1995
Current Assets:
Cash and cash equivalents $ 19,077 $ 32,044
Accounts receivable (net of allowance for
doubtful accounts of approximately $33,000
in 1996 and $31,000 in 1995):
Unaffiliated parties 890,028 1,064,689
Affiliated parties 658,690 196,270
1,548,718 1,260,959
Costs on uncompleted projects applicable to
future billings 100,941 102,199
Prepaid expenses 117,082 114,535
Other assets 151,418 57,308
Total current assets $5,155,409 $5,546,944
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable to bank $ 971,000 $ 780,000
Accounts payable:
Unaffiliated parties 954,066 681,161
Affiliated parties 112,997 10,242
$1,067,063 691,403
Billings in excess of costs and estimated profit
on uncompleted contracts 238,063 149,202
Accrued payroll and related liabilities 208,385 125,281
Accrued expenses and other liabilities 233,562 147,632
Current portion of lon-term debt 2,198,121 416,083
Total current liabilities 4,916,194 2,309,601
Long-term debt 0 2,081,459
Long-term notes payable - affiliate 875,000 245,000
Total liabilities 875,000 4,636,060
Shareholders' deficit:
Common stock, par value $.01 per share; authorized
7,500,000 shares; 4,854,497 and 4,850,058 and shares
outstanding as of December 31, 1996 and 1995,
respectively 48,535 48,500
Additional paid-in capital 4,491,773 4,485,157
Accumulated deficit (5,176,093) (3,622,773)
(635,785) 910,884
$5,155,409 $5,546,944
The accompanying notes are an integral part of the consolidated financial
statements.
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1995 and 1994
1996 1995 1994
Project billings and services $5,792,548 $7,145,587 $5,143,623
Project Costs 4,036,846 4,756,576 3,554,744
Gross margin 1,755,702 2,389,011 1,588,879
Selling, general and
administrative expenses 2,593,996 2,871,719 2,437,287
Prvision for impairment of
long-lived asset 342,896
Operating loss (1,181,190) (482,708) (848,408)
Other income and expense:
Interest income 8,699
Interest expense (357,173) (357,460) (290,453)
Other income (expense), net (14,957) (3,503) 2,923
(372,130) (360,963) (278,831)
Loss before income taxes (1,553,320) (843,671) (1,127,239)
State income taxes 3,366 3,900
NET LOSS $(1,553,320) $ (847,037) $(1,131,139
Net loss per share $(.32) $(.17) $(.25)
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Deficit
Years Ended December 31, 1994, 1995 and 1996
Additional
Common Paid-In Accumulated Total
Stock Capital Deficit
Balances at December 31, 1993 $30,050 $1,979,721 $(1,644,597) $ 365,174
Conversion of debenture note of
affiliate to 671,141 shares 6,711 993,289 - 1,000,000
Issuance of 1,170,000 shares 11,700 1,507,674 - 1,519,374
Net loss - - (1,131,139) (1,131,139)
Balances at December 31, 1994 48,461 4,480,684 (2,775,736) 1,753,409
Issuance of 3,962 shares 39 4,473 - 4,512
Net loss - - (847,037) (847,037)
Balances at December 31, 1995 48,500 4,485,157 (3,622,773) 910,884
Issuance of 3,500 shares 35 6,616 - 6,651
Net loss - - (1,553,320) (1,553,320)
Balances at December 31, 1996 $48,535 $4,491,773 $(5,176,093) $ (635,785)
<PAGE>
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Operating activities:
Net loss $(1,553,320) $ (847,037) $(1,131,139)
Adjustments to reconcile net
cash (used in) provided by
operating activities:
Provision for loss on
accounts receivable 131,290 126,334 61,906
Depreciation and
amortization 486,021 728,438 526,182
Provision for impariment
of long-lived assets 342,896
Loss on disposal of equipment 3,770 4,600
(Increase) decrease in operating
assets and increase (decrease)
in operating liabilities:
Accounts receivable (419,049) 338,765 (829,025)
Costs on uncompleted projects
applicable to future
billings 1,258 (1,141) 57,740
Prepaid expenses and other
assets 6,209 (2,743) (97,812)
Billings and estimated profit
in excess of costs of
uncompleted contracts 88,861 (18,221) 167,423
Accounts payable and other
accrued expenses 544,694 (19,471) 96,540
Net cash (used in) provided by
operating activities (371,140) 308,694 (1,143,585)
Investing activities:
Purchases of property and
equipment (153,953) (503,640) (492,521)
Proceeds from sale of
property and equipment 5,707
Increase inorganization
costs/other (3,583)
Maturity of certificates
of deposit 255,000
Net cash used in investing
activities (153,953) (497,933) (241,104)
Financing activities:
Proceeds from notes payable
to banks and long-term
borrowings, net of
financing costs 1,732,000 231,621 1,387,288
Proceeds from notes payable
to affiliates 630,000 140,000 250,000
Principal payments on
long-term borrowings to
affiliates (145,000)
Principal payments on
subordinated debt due
to related party (875,0000)
Principal payments on
current and long-term
borrowings (1,856,525) (310,998) (609,917)
Prceeds form issuance of
common stock 6,651 4,512 1,519,374
Net cash provided by
financing activities 512,126 65,135 1,526,745
(Decrease) increase in
cash and cash equivalents (12,967) (124,104) 142,056
Cash and cash equivalents at
beginning of year 32,044 156,148 14,092
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 19,077 $ 32,044 $ 156,148
The accompanying notes are an integral part of the consolidated fiancial
statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
OP-TECH Environmental Services, Inc., a Delaware corporation and
Subsidiaries (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 two subsidiaries, St. Lawrence Industrial Services,
Inc., a New York corporation and OP-TECH Environmental Services,
Ltd., a Canadian subsidiary.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and 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 5, 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 may have a material effect on the conclusions reached
and the 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
Predominately, contracts are short-term in nature, less than
three months, and revenue is recognized as the costs are
incurred and billed. Income on long-term contracts is
recognized on project billings based 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 the 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 $428,989, $1,777,468 and $570,720 in 1996, 1995 and 1994,
respectively. Accounts receivable at December 31, 1996, 1995
and 1994 include $164,439, $157,027 and $232,716, respectively,
from this customer.
For the year ended December 31, 1996 two individual customers,
including one shareholder, generated approximately $1,538,952,
or 27% 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 cost or
estimated net realizable value. The net realizable value of
assets held for sale, which comprise principally the Massena
property, is substantially determined by an independent
appraisal.
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 values of the
Company's non-traded fixed-rate long-term debt are estimated
using discounted cash flow analysis, based upon the Company's
current incremental borrowing rates for similar types of
borrowing arrangements.
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.
Net Loss Per Share
Net loss per share is based on the average number of common and
common equivalent shares outstanding during the period. The
weighted average number of shares outstanding is 4,851,614 in
1996, 4,848,834 in 1995 and 4,455,364 in 1994, therefore, both
primary and fully diluted earnings per share were calculated
using the same number of weighted average common shares
outstanding.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of ("FAS
121"), for fiscal years beginning after December 15, 1995. This
statement requires long-lived assets and certain identifiable
intangibles, to be held and used by the Company and assets to be
disposed of by the Company, to be reviewed for impairment
whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. As a result
the Company's assets classified as assets held for sale and
assets to be held and used have been evaluated in accordance
with the provisions of SFAS 121.
Reclassification
Certain amounts in the 1995 financial statements have been
reclassified to conform to 1996 presentation.
2. BUSINESS OPERATIONS
As reflected in the accompanying financial statements, the
Company has suffered recurring losses from operations since
inception, has a working capital deficiency at December 31,
1996, and a negative capital deficiency that raise substantial
doubt about its ability to continue as a going concern.
Substantially all of the Company's debt is with one financial
institution, and such agreements have cross default provisions.
As a result of non compliance with covenants on certain of the
debt, all of the debt is deemed to be in default and callable by
the Bank. Though the Bank has not at this date called the
obligations, there can be no assurances they will not exercise
their right in the future. In addition, the Company's
$1,000,000 revolving loan is subject to annual renewal in May
1997. Accordingly, all debt related to this Bank has been
classified as current.
Management's plans with respect to its ability to continue as a
going concern cover the following significant areas. First of
all, there has been a change in the leadership at the Company
intended to refocus the Company on growth and profitability.
Secondly, the new leadership has put together a budget for 1997
that, if achieved, will provide sufficient cash flow to meet its
obligations when they come due, when considered in connection
with the financing plans discussed below. This budget includes
three main points of focus: increasing revenues, maintaining its
gross profit margin, and continued reduction in operating
expenses.
In order to achieve its budgeted revenue goals, the Company is
focusing on developing relationships with large industrial
customers to ensure the Company is on their preferred vendor
lists. The Company believes this will allow for more recurring
core service revenue from this base of companies. In addition,
the Company is aggressively pursuing public projects, a market
segment not pursued in the past.
With respect to gross margin, the Company has eliminated certain
product lines not able to generate sufficient margins to warrant
continued management focus. All efforts are now being focused
on those projects whereby the Company is able to be both
competitive and be able to realize historical margin levels.
The Company has been engaged in continuous efforts to reduce its
fixed operating expenses. The 1997 budget includes goals to
reduce fixed costs by a further ten percent. The Company is
also looking at under utilized assets that could be sold to
raise additional funds.
With respect to its financing agreement, the Company has entered
into a modification agreement with the Bank deferring principal
payments on the first and second mortgages until February 1998.
This amendment has reduced the Company's cash flow requirements
for 1997. If the Bank, and other creditors, do not call their
debt, as a result of the covenant defaults, then the principal
payments due for 1997 on all debt obligations will be $217,583.
Subsequent to year end, the Company borrowed an additional
$125,000 from its largest Shareholder, bringing the Shareholder
note up to $1,000,000. In addition, the Shareholder has
committed to advance an additional $200,000 in convertible
debentures today, and another $200,000 in convertible debentures
after May 1, 1997, contingent upon the occurrence of certain
events.<PAGE>
Notes to Consolidated Financial Statements
Based on achieving the Company's 1997 budget, availability of
additional financing from a Shareholder, renewal, under similar
terms, of the Company's revolving loan and anticipating the Bank
will not call its debt obligations, management believes that
there will be sufficient cash flow to meet its obligations when
they come due. However, there can be no assurances the Company
will be able to increase its revenues, maintain its gross margin
and achieve its cost reductions to achieve its 1997 budget, nor
that the Bank will renew its revolving loan and not call its
debt obligations during 1997. In the event any one or
combination of the above events do not occur, the Company may
not be able to meet its obligations as they come due.
3. 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 $150,743, $122,924 and $162,012 in 1996, 1995 and
1994, respectively.
Additionally, the Company provided $1,109,963, $1,637,499 and
$1,059,362 of remediation, sub-contract support and project
services to a shareholder and its affiliates for the years
ending December 31, 1996, 1995 and 1994, respectively.
Interest expense on an unsecured line of credit with a
stockholder was approximately $59,500, $16,000 and $26,500 in
1996, 1995, and 1994, respectively.
In connection with the bank financing arrangement, a certain
shareholder has pledged to the bank, an aggregate of 1,397,059
shares of common stock of the Company owned by them, as security
for the Company's commercial mortgage and term loan.
See also Note 6 for additional related party transactions.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at
December 31:
1996 1995
Land and improvements $ - $ 1,117,761
Building - 833,833
Furniture and fixtures 35,033 34,334
Office machines 133,920 120,567
Utility vehicles 184,941 164,600
Field equipment 1,909,347 2,586,632
Aqueous treatment 332,909 329,176
System
2,596,150 5,186,903
Less: Accumulated 1,361,201 1,421,886
Depreciation
$ 1,234,949 $ 3,765,017
Depreciation expense amounted to $447,988, $471,811, and
$381,972 for 1996, 1995, and 1994, respectively.
5. IMPAIRMENT OF LONG-LIVED ASSETS
Assets Held for Sale
As a result of the Company's operating losses, and the need to
increase cash flows, the Company decided, in the third quarter,
to actively pursue the disposal of under utilized assets. The
largest assets to be disposed of is the Massena Port Facility.
The Company acquired this asset in 1991 for the purpose of
developing a large aqueous treatment facility. Based on an
independent appraisal, the Company has determined there is not
an impairment of the recorded value of this asset. In addition,
the Company has identified certain non-critical equipment
expected to be sold in 1997. This equipment was deemed to have
an impairment of approximately $240,000 and, accordingly in the
third quarter, the Company provided for such through a charge to
the income statement.
The components of Assets Held for Sale consist of the following:
Massena Port Facility $ 1,828,677
Equipment 80,000
$ 1,908,677
Assets to be Held and Used
Due to the operating losses over the past years, the Company has
evaluated whether there is any impairment of its long-lived
assets in accordance with SFAS #121. As a result of this
review, the Company wrote off approximately $100,000 of
intangible assets during the fourth quarter related to the
original purchase of Fourth Coast Pollution, Inc. No further
write downs were deemed to be necessary by management at this
time. Management will continue to monitor whether, as a result
of future events, any impairment of its assets has occurred.
6. DEBT AND LEASE OBLIGATIONS
At December 31, 1996, the Company had a borrowing agreement that
provides for available borrowings up to $1,000,000 on a
revolving loan basis due in May of 1997, subject to certain
acceleration clauses. The revolving loan is subject to renewal,
at the bank's option, in May of 1997. Advances are based upon
85% of certain accounts receivable, as defined in the loan
document, plus 50% of the open project costs. Borrowings
against the revolving loan aggregated $971,000 at December 31,
1996. Interest is charged at prime plus 2% (10.25%). The
Company also has an outstanding $29,000 letter of credit with a
bank at December 31, 1996. The weighted average borrowing rates
under short-term credit facilities were 10.25% at December 31,
1996 and 10.5% at December 31, 1995.
Long-term debt is summarized as follows at December 31, 1996 and
1995:
1996 1995
Commercial mortgage note payable to a bank,
due in monthly installments of $13,232
commencing February 1998 and continuing
through July 2007, including interest
at 9.5% through June 1997 and an interest
rate equal to the prime plus 350 basis points
determined 45 days prior to the beginning of
the next two five year periods, collateralized
by land and building held for sale
having a net carrying value of $1,828,677. (a)
$ 985,782 $ 1,013,386
$1,000,000 unsecured line of credit payable to
a Shareholder with interest and principal
due March 1, 1998. Interest is
accrued at prime plus 2% (10.25% at 1996). (c) 875,000 245,000
Term notes payable to a bank, due in
monthly principal installments of $14,546
plus interest through January 2000. As
of February 2000 monthly interest payments
of $7,208 plus interest through May 2000.
Interest is at prime plus 2% (10.25% at 1996)
and loan is collateralized by equipment with
a net carrying value of $428,435. (a)(b) 385,275 506,455
Term note payable to a bank, due in monthly
principal installments of $2,438 plus
interest through December 1999, with interest
at prime plus 2%, collateralized by equipment with
a net carrying value of $102,866. (a) 89,417 115,999
Term note payable to a bank, due in
monthly principal installments of $5,952
plus interest commencing February 1998
and continu- ing through November 2002
with a balloon payment of $107,144
due December 2002. Interest is at
prime plus 2% (10.25% at 1996) and
loan is collateralized by a second
mortgage on land and building held
for sale having a net carrying value of
$1,828,677. (a)( b) 452,381 500,000
Various equipment installment obligations,
due in aggregate monthly installment
payments of $11,100, including interest
rates between 8.37% and 15%, collateralized
by equipment with a carrying value
of $321,607. (a) 285,266 361,702
3,073,121 2,742,542
Less: Current portion 2,198,121 416,083
$ 875,000 $ 2,326,459
(a) As a result of various subjective acceleration clause and
cross defaults in the debt agreements, all of the debt
obligations, other than the Shareholder line of credit, are
callable by the lenders. As of the date of these financial
statements, none of the lenders have called such debt.
(b) As of August 1, 1996, the Company entered into a
modification agreement with the Bank to defer principal payments
until February 1, 1998. The Company is making interest payments
as prescribed by the original loan agreements.
(c) Subsequent to December 31, 1996, the Company authorized the
issuance of $200,000 of unsecured convertible debt to be sold to
the Shareholder. The conversion will be at the price of $1 of
debt per share of Company common stock. Other terms of the debt
are currently being negotiated. The Shareholder has
conditionally indicated its willingness to acquire an additional
$200,000 (for a maximum total of $400,000) of this convertible
debt, to be issued no earlier than May 1, 1997.
The carrying amounts and fair values of the Company's debt
obligations at December 31, 1996 are as follows:
Short-term debt obligations $ 1,846,000 $ 1,846,000
Long-term debt obligations:
Variable-rate obligations 927,073 927,073
Fixed-rate obligations 1,271,048 1,255,593
Interest paid amounted to approximately $326,000, $357,000 and
$325,000 in 1996, 1995 and 1994, respectively.
Scheduled principal payments on long-term debt, assuming the
creditors do not call the debt, for the next five years are as
follows:
1997 $ 217,583
1998 1,285,423
1999 333,805
2000 223,191
2001 161,108
Thereafter 852,011
3,073,121
Subsequent to December 31, 1996 the Company sold approximately
$80,000 of equipment, the proceeds were utilized to reduce its
outstanding debt obligations.
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 1999. Rent
expense incurred amounted to $120,314, $98,720 and $71,352 in
1996, 1995 and 1994, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
1997 - $137,228, 1998 - $70,036, 1999 - $22,416.
The Company incurred non-cash debt and capital lease obligations
of $16,104 and $84,782 in 1996 and 1995, respectively, for the
acquisition of equipment.
7. STOCK OPTIONS AND WARRANTS
The Company approved a 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, provides
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, at prices ranging from
$1.50 to $2.75 per share, 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
1996, 1995 and 1994:
Weighted No. of
Average Shares
Exercise Under
Price Options
Balance at January 1, 1994 $2.75 175,000
Options granted 2.43 275,000
Options expired (2.75) (175,000)
Balance at December 31, 1994 2.43 275,000
Options granted - -
Balance at December 31, 1995 2.43 275,000
Options granted 1.50 25,000
Options forfeited (2.75) (68,750)
Balance at December 31, 1996 2.59 231,250
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 Company's stock 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 are not material, further
disclosures are not required.
On March 2, 1994, the Company issued to Summit Capital
Associates, Inc. two separate warrant certificates to purchase
146,250 and 125,000 shares, respectively, of common stock.
These warrants were issued in connection with a certain advisory
service agreement in 1993. These warrants are exercisable on or
after March 2, 1995 and on or before March 1, 1998 for a price
of $1.65 per share.
As of December 31, 1996, the Company has reserved a total of
502,500 shares of common stock for issuance under the agreements
discussed above. No options or warrants have been exercised.
8. INCOME TAXES
The Company has net operating loss carryforwards of
approximately $5,346,000 for income tax purposes that expire
through the year ending December 31, 2011. State income taxes
and franchise taxes paid were $366 in 1996 and 1995.
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 their valuation allowance by $541,505 and
$321,667 in 1996 and 1995, respectively, due to the uncertainty
of realizing the deferred tax assets in future years. The
Company has recorded a valuation allowance, amounting to the
entire net deferred tax asset, due to the historical losses
incurred by the Company.
Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1996 and 1995 are as
follows:
1996 1995
Deferred tax liabilities:
Tax over book depreciation $ 154,626 $ 212,075
Deferred tax assets:
Net operating loss carryforward $1,817,757 $1,349,368
Accounts receivable reserve 11,259 10,586
Other 22,643 7,649
Total deferred tax assets 1,851,659 1,367,603
Valuation allowance for
deferred assets (1,697,033) (1,155,528)
Deferred tax assets $ 154,626 $ 212,075
Net deferred taxes $ 0 $ 0
9. EMPLOYEE BENEFIT PLAN
During 1992 the Board of Directors approved 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 $12,083, $10,108 and $7,310 in 1996, 1995 and 1994,
respectively, by the Company. In addition, discretionary
compensation expense recognized by the Company at December 31,
1996 was approximately $18,000.
10. 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.
In connection with the ownership of the Massena Port Facility,
the Company has been negotiating over an extended period of
time, the details of a proposed consent order issued by the
State of New York Department of Environmental Conservation. In
March of 1997, the Company signed the consent order which
requires the payment of a $5,000 penalty and to provide
remediation of any contamination at the site. Due to the time
of year, the Company is unable to determine the extent of any
contamination. The Company is planning to perform tests of the
site in the spring, at which time it will be in a better
position to determine the extent of any contamination.
