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, 1998
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, 1999 was $3,249,110
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, 1999. 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 Act of 1934. The words expect, believe, goal, plan,
intend, estimate, and similar exressions 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 Subsidiaries (the
"Company"), a Delaware corporation, provides comprehensive
environmental services predominately in Upstate, 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. Through a
shareholder, 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 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.
Tank Installation Services
The Company provides aboveground and underground tank
installation services for gasoline stations, municipalities,
chemical companies, and manufacturing facilities. The Company's
affiliation with the Petroleum Equipment Institute (PEI) ensures
quality tank installations with the highest quality tanks and
appurtenances.
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 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 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, 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
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. 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.
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. 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
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 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,
Braintree, and Athens offices are substantial, the Rochester,
Plattsburgh, and Buffalo offices 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 1998, 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 1998, the
Company had sales of approximately $2,537,000 to a utility
company and sales of approximately $1,528,000 to a metal
manufacturing company, which combined totaled 37% 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, 1998, the Company had a backlog of orders
it believed to be firm of approximately $2,700,000.
Employees
As of March 15, 1999, the Company had a total of 76 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
The Company leases approximately 17,000 square feet leased
from O'Brien & Gere Property Development (an affiliated party) at
a current monthly rate of $6,840, including utilities. 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 $1,200 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
The Company leases approximately 300 square feet of office
space from O'Brien & Gere Engineers (an affiliated party) at a
current rate of $1,278 per month. The term of the lease is on a
month-to-month basis.
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,
2000, 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
18, 1998. 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 10,586,541 -0-
Election of Directors:
John R. Loveland CEO and Director 10,586,541 -0-
Richard L. Elander Director 10,586,541 -0-
Cornelius B. Murphy, Jr. Director 10,586,541 -0-
Steven A. Sanders Director 10,586,541 -0-
Robert J. Berger Director 10,586,541 -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 31, 1997 5/8 1/8
June 30, 1997 5/8 1/8
September 30, 1997 3/4 1/4
December 31, 1997 5/8 1/4
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
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, 1999, there were approximately 169 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
1998 1997 1996 1995 1994
Project
Billings $10,917,903 $6,993,221 $5,792,548 $7,145,587 $5,143,623
Net Income
(Loss) from
Continuing
Operations $812,753 ($1,747,543)($1,553,320) ($847,037)($1,131,139)
Extraordinary
Gain 0 $1,000,000 0 0 0
Net Income
(Loss) Per
Share from
Continuing
Operations
(Basic &
Dilutive) $.07 ($.32) ($.32) ($.17) ($.25)
Balance Sheet Data
As of December 31
1998 1997 1996 1995 1994
(5) (4) (1),(2),
& (3)
Total Assets $6,632,753 $4,776,471 $5,155,409 $5,527,547 $6,269,756
Long-Term
Obligations $1,526,560 $228,855 $875,000 $2,326,459 $1,681,686
(1) On March 2, 1994, a shareholder of the Company converted its
$1.0 million long-term obligation to common stock.
(2) On March 2, 1994, the Company paid off its subordinate debt
to a shareholder.
(3) On April 6, 1994, the Company sold 170,000 shares of common
stock for $255,000.
(4) On November 1, 1995, the Company converted a $500,000 short-
term note to a long-term obligation.
(5) 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, 1998, the Company had cash and cash
equivalents of $122,106 as compared to $81,517 at December 31,
1997.
At December 31, 1998, the Company had a working capital
surplus of $1,019,312 compared to a working capital deficit of
$217,156 at December 31, 1997, with a current ratio of
approximately 1.4 to 1 at the end of 1998 compared to .9 to 1 at
the end of 1997. The increase in working capital was primarily
attributable to the significant increase in accounts receivable
and the fact that due to the new terms of the Company's revolving
loan, the outstanding borrowings are classified as a long-term
liability at December 31, 1998.
Cash used in financing activities was $126,787, which was
primarily due to the timing of paydowns and advances on the
Company's line of credit.
Cash provided by operating activities during 1998 was
$374,993 compared to cash used in operating activities of
$747,813 during 1997. The increase in cash provided by operating
activities in 1998 was substantially attributable to the
Company's improved profitability during the year.
Cash used in investing activities of $207,617 during 1998,
was primarily attributable to capital expenditures for a dump
truck, several utility vehicles, computer equipment, a high
pressure water truck, and tank installation 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 December 31, 1998, the agreement was amended
to provide borrowings up to $1,500,000. The revolving loan is
subject to renewal at the Bank's option and is payable on April
30, 2000. 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 $739,531 at December 31,
1998.
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
The Company recognizes the need to ensure its operations
will not be adversely impacted by year 2000 software failures.
The Company is addressing the risk to the availability and
integrity of financial systems and the reliability of operational
systems. The Company is in the process of reviewing its major
suppliers for year 2000 compliance. In 1998, the Company
upgraded its financial systems to comply with year 2000
requirements and has also undertaken an upgrade of its
headquarters information and decision support systems, which is
expected to be complete by September 1999. The Company has spent
approximately $40,000 to date on these systems upgrades and
estimates spending approximately $15,000 over the next 3 to 9
months.
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. A wholly-owned
subsidiary of the same shareholder 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. The property at that time had a carrying
value of approximately $1.9 million. 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. As of
December 31, 1998, the carrying value, which management believes
is properly stated at the lower of cost or market, of the
property is $1,605,427.
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.
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 Profit
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.
1997 COMPARED TO 1996
Revenues
During the year ended December 31, 1997, the Company's
revenues increased 21% to $6,993,221 as compared to $5,792,548
reported for the previous year ended December 31, 1996. A
comparison of revenues by service line between the current and
prior year shows the following: The asbestos abatement and
demolition business saw an increase in revenues of approximately
$690,000 due to an award of a large asbestos abatement project in
the fourth quarter of 1996 that was completed in May of 1997.
The Company also saw an increase in revenues of approximately
$325,000 in underground storage tank removal revenues. The
increase is attributable to the Federal 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 is December 22, 1998. The Company expects to see
a continued rise in this service line during 1998. Industrial
cleaning services remained steady throughout 1997 as the Company
continued to focus its marketing efforts in this area. Emergency
Spill Response revenue increased approximately $150,000 during
1997. The increase was primarily attributable to a large oil
spill in January of 1997. Finally, the Company saw an increase
in the transportation and disposal business of approximately
$100,000 as a result of the increased volume of UST jobs.
Project Costs and Gross Profit
Project costs for the year ended December 31, 1997 increased
23% to $4,959,449 from $4,036,846 for the year ended December 31,
1996. The increase in project costs is attributable to increased
revenues. The gross profit margin for the year ended December
31, 1997 was 29% versus 30.3% for the year ended December 31,
1996. The decrease in the gross profit margin is attributable to
an increase in public projects which typically produces a lower
gross profit margin than private projects. The Company also
continues to see increasingly competitive market conditions which
have forced the Company to bid jobs at a lower gross profit
margin than in previous years.
Selling, General, and Administrative Expenses
During the year ended December 31, 1997, selling, general,
and administrative ("SG&A") expenses decreased 1% to $2,569,486
compared to $2,593,996 reported for the previous year.
Operating Loss
For the year ended December 31, 1997, the Company's
operating loss increased 13% to $1,333,400 compared to a loss of
$1,181,190 for the previous year. The increase in the operating
loss is primarily attributable to a non-cash charge of $797,686
related to the write down of its Massena property and certain
equipment held for use. In 1996, the Company incurred a non-cash
charge $342,896 related to the write down of certain equipment
and intangible assets.
Interest Expense
Interest expense increased 13% to $402,144 in 1997 compared
to $357,173 in 1996. The increase in interest expense is
attributable to increased borrowings from O'Brien & Gere Limited
(a shareholder).
Extraordinary Gain
In connection with the capital restructuring of the Company
in 1997, O'Brien & Gere Limited (a shareholder) forgave
$1,000,000 of debt.
Net Loss
The net loss after an extraordinary gain of $1,000,000 for
the year ended December 31, 1997 was $747,543 ($.14 per share
basic & dilutive) compared to a net loss of $1,553,320 ($.32 per
share basic and dilutive) in 1996. As a result of the Company's
net operating loss, there was no provision for federal income
taxes recorded in 1997.
ITEM 7A. - SEE AUDITED FINANCIAL STATEMENTS
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
18, 1998 for a term of one year.
Name, Age Year
Principal First
Occupation Elected Certain Other Information
Robert J. Berger 1998 Mr. Berger has served in his present
(55) 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 Chief Financial
Officer. From April through August
1998, he served as consultant to
First Empire State Corp. pursuant to
its merger with OnBank. Since
August 1998, he has been an Adjunct
Professor and a Director of the
Madden Institute of Business
Education at LeMoyne College in
Syracuse, New York.
Richard L. Elander 1991 Mr. Elander has served in his
(57) 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 December 1995.
From 1983 to 1996, 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
(61) present position since June 1994.
Chairman of the He has been a director of O'Brien &
Board and Chief Gere Engineers, Inc. since 1973. He
Executive Officer also served as President of 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.
Cornelius B. Murphy,Jr. 1991 Mr. Murphy has served in his current
(53) position since December 1996. He
Director previously served as the Company's
President from June 1994 to December
1996 and Chariman of the Board from
November of 1991 to June 1994. Mr.
Murphy has been a director of
O'Brien & Gere Limited since 1985
and O'Brien & Gere Engineers, Inc.
from 1992 to 1997. Prior to that,
Mr. Murphy served as Senior Vice
President of O'Brien & Gere
Technical Service, Inc. since 1992.
From 1982 to 1992, Mr. Murphy served
as President of O'Brien & Gere
Technical Services, Inc. Mr. Murphy
currently serves as Chief Scientist
of O'Brien & Gere Engineers.
Steven A. Sanders 1991 Mr. Sanders is a partner in the law
(53) firm of Beckman, Millman, and
Director Sanders. 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 61 Chairman of the Board and Chief
Executive Officer
Anthony R. Pongonis 45 President
Christopher J. Polimino 33 Vice President and General Manager
Dennis S. Lerner 52 Secretary
Joseph M. McNulty 44 Treasurer
Mr. Pongonis was hired during the fourth quarter of 1996.
He has over twenty-five years of experience in the environmental
services industry.
Mr. Polimino was promoted to the position of Vice President
and General Manager during the second quarter of 1998. He has
been with the Company since December of 1994 and has previously
served as Controller.
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 currently serves as O'Brien
& Gere Engineers' in-house legal counsel and has held this
position since 1990.
Mr. McNulty has served his current position since February
1993. Mr. McNulty has served as Vice President of Finance of
O'Brien & Gere Limited from April 1995 to December 1998, and he
is currently the Chief Financial Officer and a director of
O'Brien & Gere Limited, Inc.
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
Other All
Name and Annual Other
Principal Compen- # of LTIP Compen-
Position Year Salary sation Options Payouts sation
John R. Loveland 1998 $13,920 -0- -0- -0- -0-
Chairman and 1997 $19,200 -0- 50,000 -0- -0-
CEO 1996 $16,800 -0- -0- -0- -0-
Anthony R. Pongonis 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
The following table sets forth certain information regarding
stock options held as of December 31, 1998 by the named executive
officers.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End
# Shares
Acquired Exercis- Unexer- Exercis- Unexer-
on Value able cisable able cisable
Name Exercise Realized # # # #
John R. Loveland 50,000 -0- -0- -0- -0- -0-
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, 1999 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, 1999,
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
Of Beneficial Beneficially Percentage
Owner Owned (1) of Class
M&T Bank 5,622,140 48.5%
101 S. Salina Street
Syracuse, NY 13202
O'Brien & Gere Limited 3,148,200 27.1%
5000 Brittonfield Parkway
Syracuse, NY 13220
Richard L. Elander 329,565 (4) 2.8%
3486 Melvin Drive North
Baldwinsville, NY 13027
Cornelius B. Murphy, Jr. 1,424 (4) <1%
Steven A. Sanders 4,799 (2)(4) <1%
John R. Loveland 127,093 (3)(4) <1%
All Officers & (2)(3)(4) 4.2%
Directors 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) Includes 50,000 shares issuable upon exercise of currently
exercisable options. 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. Total rent
expense incurred in 1998 amounted to approximately 77,000. The
Company also has several month-to-month office rental agreements
in place with another O'Brien & Gere Limited subsidiary.
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 1998, the Company provided $283,435 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 $325,096
in 1998.
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, 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.
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, 1998 and 1997 F-2
Consolidated Statement of Operations
for the years ended December 31, 1998,
1997, and 1996 F-3
Consolidated Statements of Shareholders'
Equity (Deficit) for the years ended
December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1998,
1997, and 1996 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.
(3) 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, 1998.
(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.
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 31, 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 31st day of March 1999.
/s/ John R. Loveland Director and Chairman of the Board
John R. Loveland (Chief Executive Officer)
/s/ Cornelius B. Murphy, Jr. Director
Cornelius B. Murphy, Jr.
/s/ Robert J. Berger Director
Robert J. Berger
/s/ Richard L. Elander Director
Richard L. Elander
/s/ Steven A. Sanders Director
Steven A. Sanders
/s/ Anthony R. Pongonis President
Anthony R. Pongonis
/s/ Christopher J. Polimino Vice President and Chief
Christopher J. Polimino Accounting Officer
/s/ Joseph M. McNulty Treasurer
Joseph M. McNulty
/s/ Dennis S. Lerner Secretary
Dennis S. Lerner
Report of Independent Accountants
Shareholders and Board of Directors
OP-TECH Environmental Services, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations and
shareholders' equity (deficit) and cash flows present fairly,
in all material respects, the financial position of OP-TECH
Environmental Services,Inc. and Subsidiaries at December 31,
1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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.
Syracuse, New York
March 12, 1999
F-1
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 122,106 $ 81,517
Accounts receivable (net of
allowance for doubtful accounts
of approximately $126,000 in 1998
and $119,000 in 1997):
Unaffiliated parties 2,847,001 1,948,102
Affiliated parties 109,190 126,247
2,956,191 2,074,349
Costs on uncompleted projects
applicable to future billings 289,768 132,590
Prepaid insurance 157,537 105,792
Other assets 159,345 78,653
Total current assets 3,684,947 2,472,901
Property and equipment, net 1,199,635 622,979
Assets held for sale 1,605,427 1,675,000
Other assets 142,744 5,591
$ 6,632,753 $ 4,776,471
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 45,085 $ 224,458
Notes payable to bank 500,000
Accounts payable:
Unaffiliated parties 1,350,204 1,008,236
Affiliated parties 51,184 118,159
1,401,388 1,126,395
Billings in excess of costs and
estimated profit on uncompleted
contracts 569,393 309,927
Accrued payroll and related liabilities 226,130 272,772
Accrued expenses and other liabilities 71,888 148,594
Current portion of long-term debt 351,751 107,911
Total current liabilities 2,665,635 2,690,057
Long-term debt 1,174,809 120,944
Shareholders' equity:
Common stock, par value $.01 per share;
authorized 20,000,000 shares;
11,603,963 and 11,555,100 shares
outstanding as of December 31, 1998
and 1997, respectively 116,040 115,551
Additional paid-in capital 7,787,152 7,773,555
Accumulated deficit (5,110,883) (5,923,636)
2,792,309 1,965,470
$ 6,632,753 $ 4,776,471
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
Project billings and services $ 10,917,903 $ 6,993,221 $ 5,792,548
Project costs 7,596,788 4,959,449 4,036,846
Gross margin 3,321,115 2,033,772 1,755,702
Selling, general and
administrative expenses 2,399,988 2,569,486 2,593,996
Provision for impairment of
long-lived assets - 797,686 342,896
Operating income (loss) 921,127 (1,333,400) (1,181,190)
Other income and expense:
Interest expense (111,099) (402,144) (357,173)
Other income (expense), net 20,925 (11,999) (14,957)
(90,174) (414,143) (372,130)
Gain (loss) before
income taxes and
extraordinary item 830,953 (1,747,543) (1,553,320)
Income taxes 18,200 - -
Income (loss) before
extraordinary item 812,753 (1,747,543) (1,553,320)
Extraordinary gain on
forgiveness of debt - 1,000,000 -
NET INCOME (LOSS) 812,753 (747,543) (1,553,320)
Earnings per common share -
basic and dilutive:
Income (loss) before
extraordinary item $.07 $(.32) $(.32)
Extraordinary item - .18 -
Net income (loss) $.07 $(.14) $(.32)
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 1998, 1997, and 1996
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
Balances at
December 31, 1995 $ 48,500 $ 4,485,157 $(3,622,773) $ 910,884
Issuance of 3,962 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)
Conversion of debt to
6,702,140 shares 67,021 3,284,049 - 3,351,070
Retirement of 1,537 shares (5) (2,267) - (2,272)
Net loss - - (747,543) (747,543)
Balances at
December 31, 1997 115,551 7,773,555 (5,923,636) 1,965,470
Issuance of 48,863 shares 489 13,597 14,086
Net income - - 812,753 812,753
Balances at
December 31, 1998 $ 116,040 $ 7,787,152 $(5,110,883) $2,792,309
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
Operating activities:
Net income (loss) $ 812,753 $ (747,543) $ (1,553,320)
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 105,350 190,594 131,290
Depreciation and
amortization 161,201 351,812 486,021
Provision for impairment
of long-lived assets - 716,710 342,896
Interest expense converted
to common stock - 166,836 -
(Increase) decrease in
operating assets and
increase (decrease)in
operating liabilities:
Accounts receivable (987,192) (716,225) (419,049)
Costs on uncompleted
projects applicable
to future billings (157,178) (31,649) 1,258
Prepaid expenses and
other assets 14,862 84,055 6,209
Billings and estimated
profit in excess of
costs on uncompleted
contracts 259,466 71,864 88,861
Accounts payable and
other accrued
expenses 165,731 165,733 469,712
Net cash provided by
(used in) operating
activities 374,993 (747,813) (446,122)
Investing activities:
Purchases of property
and equipment (207,617) (120,488) (153,953)
Proceeds from sale of
property and equipment - 7,793 -
Net cash used in
investing activities (207,617) (112,695) (153,953)
Financing activities:
Cash overdrafts (179,373) 149,476 74,982
Proceeds from notes
payable to banks and
long-term borrowings,
net of financing costs 4,792,163 511,904 1,732,000
Proceeds from notes
payable to shareholders - 525,000 630,000
Principal payments on
current and long-term
borrowings (4,739,577) (263,432) (1,856,525)
Proceeds from issuance
of common stock - - 6,651
Net cash (used in)
provided by financing
activities (126,787) 922,948 587,108
Increase (decrease)
in cash and cash
equivalents 40,589 62,440 (12,967)
Cash and cash equivalents
at beginning of year 81,517 19,077 32,044
CASH AND CASH EQUIVALENTS
AT END OF YEAR 122,106 81,517 19,077
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 -
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
OP-TECH Environmental Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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.
Priniciples 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, or other assumptions utilized by management to
evaluate the asset carrying value, 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.
F-6
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 fixed price contracts, greater
than three months, are 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 approximately $2,537,000, $463,000 and $429,000 in 1998, 1997
and 1996, respectively. Accounts receivable at December 31,
1998, 1997, and 1996 include $157,200, $102,510 and $164,439,
respectively, from this customer.
For the year ended December 31, 1998 two individual customers
generated approximately $4,065,000, or 37% 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 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 agreements.
F-7
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 1997 and 1996, 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. 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.
F-8
3. RELATED PARTY TRANSACTIONS
The Company purchased 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 $325,000, $97,000 and $151,000 in 1998,
1997 and 1996, respectively.
Additionally, the Company provided approximately $283,000,
$1,507,000 and $1,110,000 of remediation, sub-contract support
and project services to a shareholder and its affiliates for the
years ending December 31, 1998, 1997 and 1996, respectively.
Interest expense on an unsecured line of credit with a
stockholder was approximately $94,000 and $59,500 in 1997 and
1996, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at
December 31:
1998 1997
Furniture and fixtures $ 35,033 $ 35,033
Office machines 75,052 44,399
Utility vehicles 101,140 101,140
Field equipment 1,947,551 1,244,601
Aqueous treatment system 100,002 100,002
2,258,778 1,525,175
Less: Accumulated depreciation 1,059,143 902,196
$ 1,199,635 $ 622,979
Depreciation expense approximated $157,000, $282,000 and $448,000
for 1998, 1997, and 1996, respectively.
F-9
5. IMPAIRMENT OF LONG-LIVED ASSETS
Assets Held for Sale
The Company is actively pursuing 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; the 1997 independent appraisal;
a discount related to an estimated period of time to consummate
the sale of the Facility; and certain other factors, less costs
of disposal. In addition, 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. Based upon management's evaluation, as of
December 31, 1998, the carrying value of the Facility is
approximately stated at the lower of cost or market.
The components of Assets Held for Sale consist of the following:
Massena Port Facility, net of write down $ 1,605,427
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.
6. DEBT AND LEASE OBLIGATIONS
Long-term debt is summarized as follows at December 31, 1998:
Revolving loan, see (a) $ 739,531
Various equipment and other installment
obligations, due in aggregate monthly
installment payments of approximately
$34,400, including interest with rates
between 6.95% and 15%, collateralized
by equipment with a carrying value of
$714,481. 787,029
1,526,560
Less: Current portion (351,751)
$ 1,174,809
F-10
(a) The Company has a renewable borrowing agreement that provides
borrowings up to $1,500,000 on a revolving basis, collateralized by
all accounts receivable, inventory and equipment now owned or
acquired later. In addition, 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. 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 $739,531 at
December 31, 1998. Interest is charged at prime plus 1.5%, or
9.25% at December 31, 1998. The weighted average borrowing
rates under short-term credit facilities were 9.72% and 10% at
December 31, 1998 and 1997, respectively.
Interest paid amounted to approximately $115,000, $235,000 and
$326,000 in 1998, 1997 and 1996, respectively.
Scheduled principal payments on long-term debt for the next five
years are as follows:
1999 $ 351,751
2000 1,048,251
2001 119,041
2002 7,517
$ 1,526,560
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 $77,000, $89,000 and $120,000
in 1998, 1997 and 1996, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
1999 - $169,400, 2000 - $167,200, 2001 - $93,700, 2002 - $33,200,
2003 - $15,600.
The Company incurred non-cash debt and capital lease obligations
of $456,413 and $47,500 in 1998 and 1997, respectively, for the
acquisition of equipment. In addition, during 1998, the Company
financed its three-year insurance premium obligation of
approximately $288,000.
F-11
7. SHAREHOLDERS' EQUITY
The Company maintains 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 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 1998, 1997
and 1996:
Weighted No. of
Average Shares
Exercise Under
Price Options
Balance at December 31, 1995 $2.50 250,000
Options granted - -
Options forfeited - -
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 - -
Options expired - -
Balance at December 31, 1998 $1.50 50,000
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, pro forma
and related disclosures are not presented.
In 1994, the Company issued warrants to a financial advisor
to purchase 271,250 shares of common stock at a price of $1.65
per share. These warrants were expired and reissued in 1998 at a
price of $1.65 and expire in 2000.
F-12
As of December 31, 1998, the Company has reserved a total of
321,250 shares of common stock for issuance under the agreements
discussed above. No options or warrants have been exercised.
During 1998, the Company granted stock awards of 48,863 shares of
its common stock to certain of its employees. As a result, a non-
cash compensation expense of $14,086, the fair value of the stock
on the grant date, was recognized. During 1997 certain directors
returned 500 shares of common stock to the Company for no
consideration.
8. INCOME TAXES
The following summarizes the income tax expense at December 31,
1998:
Federal $ 15,000
State 3,200
Deferred -
$ 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 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 federal net operating loss ("NOL") and
alternative minimum tax ("AMT") credit carryforwards of
approximately $4,883,000 and $15,000, for income tax purposes.
The federal net operating loss carryforward expires at various
times through the year ending December 31, 2012. 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 decreased its valuation allowance in 1998 due to
utilization of its net operating loss carryforwards based on
taxable income generated in the current year. In 1997, the
Company increased its valuation allowance by $118,408, 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 uncertainty as
to the ultimate recovery of the assets.
F-13
Significant components of the Company's deferred tax liabilities
and assets as of December 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax liabilities:
Tax over book depreciation $ 76,021 $ 60,218
Deferred tax assets:
Net operating loss carryforward $ 1,660,144 $ 1,844,768
Accounts receivable reserve 42,826 24,602
Other 84,559 6,289
AMT tax credits 15,000 -
Total deferred tax assets 1,802,529 1,875,659
Valuation allowance for
deferred assets (1,726,508) (1,815,441)
Deferred tax assets $ 76,021 $ 60,218
Net deferred taxes $ 0 $ 0
9. 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 $11,500, $9,100 and
$12,000 in 1998, 1997 and 1996, respectively, by the Company. The
Company did not make discretionary contributions to the Plan in
1998, 1997 and 1996.
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.
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.
F-14
