-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdKSQ/c1637UNNo46JmiFSTpMGlUXLn2Gr9erCZRzVdGdtcg8/uRL3XE9tbUJDsf RhCRWALR5FN5BSSBuk7IUA== 0000889812-97-001307.txt : 19970605 0000889812-97-001307.hdr.sgml : 19970605 ACCESSION NUMBER: 0000889812-97-001307 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE TECHNOLOGY CORP CENTRAL INDEX KEY: 0000781902 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 132842053 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14443 FILM NUMBER: 97619312 BUSINESS ADDRESS: STREET 1: 5400 RIO GRANDE AVENUE CITY: JACKSONVILLE STATE: FL ZIP: 32254 BUSINESS PHONE: 9043555558 MAIL ADDRESS: STREET 1: 5400 RIO GRANDE AVENUE CITY: JACKSONVILLE STATE: FL ZIP: 32254 10KSB/A 1 AMENDMENT TO ANNUAL REPORT ON FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 REPORT ON FORM 10-KSB/A (Mark one) /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 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 No. 0-14443 WASTE TECHNOLOGY CORP. (Name of small business issuer in its charter) Delaware 13-2842053 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5400 Rio Grande Avenue, Jacksonville, Florida 32254 (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (904) 355-5558. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share. Check whether the registrant (1) 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 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/ No / / Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $13,982,903. State the aggregate market value of the voting stock held by nonaffiliates (based on the closing price on February 10, 1997 of $1.375): $1,802,536. State the number of shares outstanding of the registrant's $.01 par value common stock as of the close of business on the latest practicable date (February 10 , 1997): 2,431,551. Documents Incorporated By Reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Results of Operations For fiscal 1996, consolidated sales were $13,982,901 as compared to consolidated sales of $10,329,759 for fiscal 1995, an increase of approximately 35.4%. The increase in sales was the result of sales at the International Press and Shear (IPS) subsidiary in Baxley, Georgia which completed its first full year of operation. Sales in 1995 increased $1,259,288, 13.9% over 1994 due to increased economic activity in certain niche markets including textiles and rubber. Although the Company had higher sales in fiscal 1996 due to products manufactured at its IPS subsidiary, net income was lower than in 1995. Consolidated net income for fiscal 1996 was a loss of $526,680 as compared to net income of $759,588 in fiscal 1995. Operating losses at the IPS subsidiary were the primary cause of the loss for the year. The operations of all other subsidiaries of the Company were profitable. Operating expenses were up by $936,442, 36.4% in 1996 and $470,632, 22.4% in 1995 due primarily to the costs of IPS which commenced production in the fourth quarter of 1995. Net income in 1995 and 1996 was affected by certain non-recurring items. In 1995 start-up costs at the new facility at Baxley, Georgia, were in excess of $300,000 in the fourth quarter of 1995, while only limited shipments were made by that facility in fiscal 1995. Second, the Company established a reserve of $162,000 for settlement of the Cavagnaro v. Waste Technology Corp. Litigation. (See Item 3, Legal Proceedings -- Waste Tech Litigation@). Also, in fiscal 1995 the Company recorded a deferred tax asset of $413,000 which was related to the Company's net operating loss carry forwards based on managements' estimate of future taxable income. In fiscal 1996 the Company set up a reserve of $49,840 for the receivable related to a real estate joint venture. Based on the results of operations in 1996 and current short term expectations, the Company reversed the recognition of the deferred tax asset discussed previously, at October 31, 1996. For fiscal 1996, the Company, and particularly its new plant in Baxley, Georgia, did not achieve its expected sales levels due to a drop in sales of corrugated cardboard balers because of the sharp drop in the market price of used corrugated board and paper. The Company is unable to predict how soon prices will recover, but, based on previous cyclical dips in corrugated and paper prices, the Company believes that prices will rise in the relatively near future with a resulting increase in sales and profits. Similarly, a severe drought in the southwestern United States caused a substantial drop in cotton production which resulted in a substantial reduction in sales of cotton mote balers. It is anticipated that sales of such balers will increase in fiscal 1997. The losses incurred by the new subsidiary were the result of start-up costs and the significant drop in corrugated board and paper prices in the recycled products market which caused actual sales to fall short of projections. IPS operations are now running efficiently and the number of employees have been reduced to a level which is commensurate with sales levels anticipated in view of current market conditions. It is the objective of the Company to get IPS to a profitable or near break-even level by the end of 1997. The decision by the Company to eliminate the deferred tax asset was based on the inability of the Company to predict whether any profit in the near future would be large enough to enable it to use the amount of net operating loss carry-forward which would result in such a large tax benefit. Financial Condition Working capital has decreased from $1,772,035 at October 31, 1995 to $1,541,678 at October 31, 1996. This decrease is the result of the reversal of the deferred tax asset and an increase in current maturities of long-term debt, partially offset by a decrease in customer deposits. The decrease in cash of approximately $975,000 was used to fund higher accounts receivable and inventory required by the IPS subsidiary. The term note with SouthTrust Bank was renewed in August 1996, increased by $375,167 and extended to August 2002. The original note balance of $418,333 at October 31, 1996 was due in November 1997. Monthly payments on the original note were $15,833 per month, plus interest at the prime rate + 1%. The new note is due in equal monthly installments of $9,018, plus interest at the prime rate. The entire balance of this term note was classified as a current liability because the term loan has callable provisions relating to the revolving note described below. The note payable balance of $106,878 with Barnett Banks was paid off in December 1995 as the Company sold the related land and buildings of a discontinued subsidiary. The revolving note payable to SouthTrust Bank in the amount of $1,000,000 was renewed in July 1996 at the prime rate. Interest is payable monthly and all amounts borrowed are due in full on July 7, 1997. The balance due at October 31, 1996 was $531,652. At October 31, 1996, the Company is in violation of the covenants of the loan agreement related to minimum net worth and maximum debt to worth. As of the filing date, the lender has not waived these covenant violations nor has it demanded repayment. While no assurance can be given, management believes its available collateral to be sufficient to allow the Company to renegotiate an extension of the revolving debt and its covenant requirements prior to its expiration date or obtain alternative financing. It is anticipated that the note will be renewed in July, 1997. The Company also entered into financing arrangements in relation to the financing of the IPS subsidiary. First, a term note for $250,000 with Appling County, Georgia was entered into in July 1996 at a rate of 4%. Monthly payments of $3,417 including interest are payable for a period extending to July, 2003. Second, the Company entered into a capital lease agreement with Development Authority of Appling County, Georgia. Payments on this lease are $6,134.87 per month through April, 2011. For the year ended October 31, 1996 the Company had negative cash flow from operations. Management has taken actions to improve cash flows from operations primarily by reducing personnel to a minimum level and cutting operating costs at the IPS subsidiary where possible. Management anticipated that the IPS subsidiary will attain or exceed the sales levels of 1996 and with the cost structure in place this subsidiary should perform substantially better in 1997 than in 1996. However, if orders at IPS are not sufficient to sustain a minimum cash outflow rate, management will take further action as necessary to maintain the liquidity position of the entire company. Our auditors, Coopers & Lybrand, have stated in the Report of Independent Accountants to the shareholders of Waste Technology Corporation that there is substantial doubt about the Company's ability to continue as a going concern. While the Company understands why the accountants report had to include the explanatory paragraph, (the absence of a loan default waiver), and though the Company's Management and Board of Directors has substantial concern, it believes that it has several viable options to continue as a going concern for the following reasons: 1. The Company has the ability to take actions to reduce the operating and carrying costs of its IPS subsidiary to a level which will not jeopardize the liquidity of the company. 2. The Company violated covenants related to minimum net worth and maximum debt to worth. As of the date of issuance of this report, the lender has not waived these covenant violations nor has it demanded repayment. Management plans to negotiate an extension of the revolving debt and covenant requirements prior to the expiration date of the debt or obtain alternative financing. However, no assurance can be given that the Company will be successful. If the Company were unable to negotiate an extension or obtain alternative financing and the lender called the debt, Management would be required to shut-down and/or sell certain assets of the Company. Management believes its available collateral to be sufficient so as acceptable financing can be obtained. Inflation The costs of the Company and its subsidiaries are subject to the general inflationary trends existing in the general economy. The Company believes that expected pricing by its subsidiaries for balers will be able to include sufficient increases to offset any increase in costs due to inflation. Waste Technology Corp. and Subsidiaries REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS for the years ended October 31, 1996 and 1995 Table of Contents
Pages Report of Independent Accountants F-1 Consolidated Financial Statements: F-2 Consolidated Balance Sheets at October 31, 1996 and 1995 Consolidated Statements of Income for the Years Ended October 31, 1996 and 1995 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended October 31, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the Years Ended October 31, 1996 and 1995 F-5 Notes to Consolidated Financial Statements F-6-F-15
[COOPERS & LYBRAND LETTERHEAD] Report of Independent Accountants To the Stockholders of Waste Technology Corp. We have audited the accompanying consolidated balance sheets of Waste Technology Corp. and Subsidiaries (the Company) as of October 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity 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 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully discussed in Note 3, the Company has significant transactions with the Company's General Counsel and a member of senior management, who are also directors of the Company. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended, 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 8 to the financial statements, the Company is in violation of certain debt covenants, which could result in nonrenewal of the Company's revolving promissory note and acceleration of the due date of the related term note payable to bank, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans, should the lender choose to accelerate the due date or choose not to renew the revolving debt, are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Coopers & Lybrand L.L.P. Jacksonville, Florida December 20, 1996, except as to Note 8, for which the date is February 13, 1997 F-1
WASTE TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of October 31, 1996 and 1995 ASSETS 1996 1995 Current assets: Cash $ 140,000 $ 1,114,342 Accounts receivable, net of allowance for doubtful accounts of $91,000 and $92,447 1,410,956 1,157,560 Inventories 3,162,208 2,344,686 Prepaid expenses and other current assets 43,208 57,916 Deferred income tax asset 413,000 ------------- ------------- Total current assets 4,756,372 5,087,504 ------------- ------------- Property, plant and equipment 2,528,643 1,428,018 Real estate and other property held for sale 204,114 ------------- ------------- 2,528,643 1,632,132 ------------- ------------- Other assets: Loan to joint venture, including accrued interest (Note 4) 49,840 Intangible assets, net 67,152 78,946 Other assets 18,049 164,580 ------------- ------------- 85,201 293,366 ------------- ------------- Total assets $ 7,370,216 $ 7,013,002 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving promissory note $ 531,652 $ 296,878 Current portion of long-term debt and capital lease obligation 678,123 Accounts payable 1,031,224 901,444 Accrued liabilities 498,284 483,659 Customer deposits 683,324 1,201,144 Legal settlement payable 162,000 ------------- ------------- Total current liabilities 3,422,607 3,045,125 Accrued legal fees 315,696 270,344 Long-term debt 210,324 228,333 Obligation under capital lease, less current maturities 701,568 Minority interest in equity of subsidiary 509,369 481,782 ------------- ------------- Total liabilities 5,159,564 4,025,584 ------------- ------------- Contingent liabilities and commitments (Note 9, 10) Stockholders' equity: Common stock, par value $.01;25,000,000 shares authorized; 2,763,314 and 2,763,314 shares issued and outstanding 27,634 27,634 Preferred stock, par value $.0001, 10,000,000 shares authorized; none issued Additional paid-in capital 6,066,356 6,069,995 Accumulated deficit (2,588,935) (2,027,894) ------------- ------------- 3,505,055 4,069,735 Less: Treasury stock, 331,763 shares, at cost 419,306 419,306 Less: Notes receivable from shareholders 875,097 663,011 ------------- ------------- Total stockholders' equity 2,210,652 2,987,418 ------------- ------------- Total liabilities and stockholders' equity $ 7,370,216 $ 7,013,002 ============= =============
See accompanying notes. F-2
WASTE TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended October 31, 1996 and 1995 1996 1995 Net sales $ 13,982,903 $ 10,329,759 Cost of sales 10,502,750 7,061,919 --------------- ---------------- Gross profit 3,480,153 3,267,840 --------------- ---------------- Operating expenses: Selling 1,573,593 948,530 General and administrative 1,859,629 1,515,350 Provision for doubtful accounts and loan to joint venture 73,100 106,000 --------------- ---------------- 3,506,322 2,569,880 --------------- ---------------- Operating income (26,169) 697,960 --------------- ---------------- Other income (expenses): Interest 63,645 58,335 Net gain (loss) on disposal of fixed assets 24,985 1,994 Other (8,531) 67,383 Interest expense (150,023) (184,986) Provision for legal settlement (162,000) --------------- ---------------- (69,924) (219,274) --------------- ---------------- (96,093) 478,686 Minority interest in income of consolidated subsidiary (27,587) (52,098) --------------- ---------------- (Loss) income before income taxes (123,680) 426,588 --------------- ---------------- Income tax provision (benefit): Current 29,000 44,000 Deferred 413000 (413,000) --------------- ---------------- 442,000 (369,000) --------------- ---------------- Net (loss) income $ (565,680) $ 795,588 =============== ================ Earnings (loss) per share $ (.23) $ .33 =============== ================ Weighted average number of common and common equivalent shares outstanding 2,431,551 2,430,732 =============== ================
See accompanying notes. F-3
WASTE TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended October 31, 1996 and 1995 Common Stock Par Value $.01 Authorized 25,000,000 Shares Treasury Stock ------------------ ------------------ Notes Total Number Additional Accumu- Number Receivable Stock- of Shares Par Paid-In lated of From holders' Issued Value Capital Deficit Shares Cost Stockholder Equity ------------------ ---------- ------------ ------------------- ---------- ---------- Balance at October 31, 1994 2,263,314 $22,634 $5,574,995 $(2,823,482) 331,763 $(419,306) $(622,656) $1,732,185 Issuance of 500,000 shares of common stock 500,000 5,000 495,000 500,000 Adjustment of note receivable from shareholder as a reduction of stockholders' equity (40,355) (40,355) Net income 795,588 795,588 ---------- ------- ---------- ------------ --------- ---------- ---------- ---------- Balance at October 31, 1995 2,763,314 27,634 6,069,995 (2,027,894) 331,763 (419,306) (663,011) 2,987,418 Adjustment of notes receivable from shareholders as a reduction of stockholders' equity (212,086) (212,086) Other (3,639) 4,639 1,000 Net loss (565,680) (565,680) ---------- ------- ---------- ------------ --------- ---------- ---------- ---------- Balance at October 31, 1996 2,763,314 $27,634 $6,066,356 $(2,588,935) 331,763 $(419,306) $(875,097) $2,210,652 ========== ======= ========== ============ ========= ========== ========== ==========
See accompanying notes. F-4
WASTE TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended October 31, 1996 and 1995 1996 1995 Cash flows from operating activities: Net (loss) income $ (565,680) $ 795,588 ------------- -------------- Adjustments to reconcile net income to net cash (used in) provided by operating activities: Writedown on land and building held for sale 10,775 Writedown on investment in joint venture 49,840 Loss on disposal of property held for sale 9,648 Gain from sale of equipment (1,200) (1,994) Gain from sale of equity securities (12,101) Dissolution of non-operating subsidiaries 1,000 Depreciation and amortization 270,270 125,820 Provision for doubtful accounts 23,260 106,000 Increase in cash surrender value of key man life insurance policy (37,450) Insurance premiums paid on behalf of Company president, plus interest (47,181) Minority interest in income of subsidiary 27,587 52,098 Deferred income taxes 413,000 (413,000) Increase (decrease) from changes in: Accounts receivable (276,656) 7,603 Inventories (817,522) (1,025,560) Prepaid expenses and other current assets 14,708 24,674 Other assets (125) 5,658 Accounts payable 129,780 637,889 Accrued liabilities and legal fees 59,977 126,888 Customer deposits (517,820) 1,143,511 Reserve for legal settlement (162,000) 162,000 ------------- -------------- Total adjustments (823,434) 912,811 ------------- -------------- Net cash (used in) provided by operating activities (1,389,114) 1,708,399 ------------- -------------- Cash flows from investing activities: Increase in notes receivable from shareholders (18,250) (40,355) Repayment of notes payable--other (50,000) Purchase of property and equipment (639,100) (960,233) Proceeds from sale of marketable securities 37,101 Proceeds from sale of property held for resale 194,466 Proceeds from sale of equipment 1,200 2,181 ------------- -------------- Net cash used in investing activities (461,684) (1,011,306) ------------- -------------- Cash flows from financing activities: Proceeds from debt 2,589,167 Issuance of common stock 250,000 Principal payments of long-term debt agreements and capital leases (1,712,711) (332,557) ------------- -------------- Cash flows used in financing activities 876,456 (82,557) ------------- -------------- Net (decrease) increase in cash (974,342) 614,536 Cash at beginning of period 1,114,342 499,806 ------------- -------------- Cash at end of period $ 140,000 $ 1,114,342 ============= ============== Supplemental Schedule of Disclosure of Cash Flow Information Cash paid during period for: Interest $ 132,740 $ 85,665 ============= ============== Income taxes $ 39,500 $ 9,586 ============= ==============
Supplemental Disclosures of Non-Cash Transactions During 1996, the Company transferred a life insurance policy to its president, who is also a director, in exchange for a note receivable of $193,836, which represents the cash surrender value of the policy at date of transfer, plus premiums paid and interest. During 1996, the Company entered into a capital lease agreement in the amount of $720,000 relating to a new manufacturing facility. The General Counsel, who is also a director, exercised $250,000 of options during 1995 and the Company reduced the liability for legal fees payable to the director by $250,000. See accompanying notes. F-5 WASTE TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business: The Company is a manufacturer of baling machines which utilize mechanical, hydraulic and electrical mechanisms to compress a variety of materials into bales. The Company's customers include plastic recycling facilities, paper mills, textile mills and paper recycling facilities throughout the United States, the Far East and South America. The Company has two manufacturing subsidiaries, International Baler Corp. (IBC), located in Jacksonville, Florida, and International Press and Shear, Corp. (IPS), located in Baxley, Georgia. The IPS subsidiary was formed in the second quarter of fiscal 1995 and greatly expanded the manufacturing capacity of the Company. 2. Accounting Policies: Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Waste Technology and all of its wholly owned and majority owned subsidiaries (Company). Intercompany balances and material intercompany transactions have been eliminated in consolidation. Minority Interest - Minority interest represents the minority stockholders' proportionate share of the equity of International Baler Corp. (IBC). The Company owns 85.8% of the outstanding shares of IBC, its primary operating subsidiary, at October 31, 1996 and 1995. Pervasiveness 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories - Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Depreciation - The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the double-declining balance and straight line methods for financial reporting and other accelerated methods for income tax purposes. Gain or loss upon retirement or disposal of property, plant and equipment is recorded as income or expense. Intangibles - The cost over fair value of net tangible assets of an acquired business is amortized on the straight-line method over a period of 20 years. Other intangible assets, primarily patents and a covenant not to compete, are amortized on the straight-line basis over their estimated lives of six to seventeen years. The Company periodically reviews intangibles to assess recoverability, and impairments would be recognized in operating results if a permanent decline in value were to occur. Accumulated amortization was $90,900 and $79,105 at October 31, 1996 and 1995, respectively. Amortization expense related to intangibles was $11,795 and $14,600 for the years ended October 31, 1996 and 1995, respectively. F-6 Notes to Consolidated Financial Statements, Continued 2. Accounting Policies, Continued: Income Taxes - The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method of deferred tax, assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Stock-Based Compensation - In 1997, the Company will adopt SFAS No. 123, "Accounting for Stock-Based Compensation." This standard establishes a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company intends to adopt this standard by disclosing the pro forma net income and earnings per share amounts assuming the fair value method was adopted on November 1, 1996. The adoption of this standard will not impact its results of operations, financial position or cash flows. 3. Loan and Notes Receivable--Officers and Directors: On April 12, 1990, four individuals, including the former Chairman of the Board, and the Executive Vice President, General Counsel, Secretary and Director of the Company, entered into an agreement with a group of dissident shareholders to purchase an aggregate of 294,182 shares of the Company at a purchase price of $4 per share. The former Chairman and the General Counsel each purchased 134,591 shares of common stock and the other two individuals purchased an aggregate of 25,000 shares. On July 15, 1991, the purchase of shares was finalized by the payment to the selling shareholders of the balance of the purchase price plus accrued interest. The financing of the transactions was paid with funds borrowed from the Company with the unanimous approval of the Company's Board of Directors. The four individuals executed promissory notes in favor of the Company, originally payable in three annual installments due July 15, 1992-94 plus accrued interest from July 15, 1991 at the rate of 9% per annum. The former Chairman's promissory note was satisfied in 1993. The Company has extended the initial installment date for the General Counsel to begin on July 15, 1997. The debt is collateralized by a lien on the 104,591 shares of the Company's common stock and a personal guarantee of each borrower to the extent of his loan and the guarantee of General Counsel's law firm to the extent of his loan. The Company expects that a primary source for repayment of the notes will be from the sale of the collateralized shares of the Company stock. The notes receivable from the General Counsel, who is also a major stockholder of the Company, is presented as a reduction of stockholders' equity. On June 13, 1995 the General Counsel and his law firm exercised their option to purchase 250,000 shares of Waste Technology Corporation common stock at $1.00 per share, whereby, the Company reduced the legal fees payable to the law firm in lieu of cash. These shares are also being held as collateral for the note receivable from the General Counsel. F-7 Notes to Consolidated Financial Statements, Continued 3. Loan and Notes Receivable--Officers and Directors, Continued: On December 29, 1995, the Company transferred a life insurance policy on the life of its president to the president in exchange for a note receivable. The amount of the note receivable is equal to the amount of the cash surrender value of the policy at the time of the transfer. Interest accrues at the rate of 6% per annum. No principal or interest is due until proceeds from the policy are realized. The note receivable from the president, who is also a major stockholder of the Company, is presented as a reduction of stockholders' equity. The following is an analysis of the notes receivable and accrued interest at October 31, 1996:
Accrued Total Net Principal Interest Note Reserve Total -------------- -------------- -------------- -------------- -------------- General Counsel $ 427,364 $ 253,897 $ 681,261 $ $ 681,261 President 185,727 8,109 193,836 193,836 Others 50,000 34,188 84,188 84,188 -------------- -------------- -------------- -------------- -------------- $ 663,091 $ 296,194 $ 959,285 $ 84,188 $ 875,097 ============== ============== ============== ============== ==============
The income statement includes interest income on officer and director notes receivable of $47,359 and $44,855 for 1996 and 1995, respectively. An officer and director is a partner in the law firm providing legal services to the Company and as of October 31, 1996 the Company is indebted in the amount of $315,695 to this firm. Accrued legal fees are classified as long-term as they will not be paid until the note receivable from the General Counsel has been satisfied. Legal expenses to the General Counsel and his law firm were $105,231 and $113,347 for fiscal 1996 and 1995, respectively. 4. Inventories: Inventories consisted of the following: 1996 1995 Finished products $ 326,358 $ 262,528 Work in process 1,347,229 574,528 Raw materials 1,488,621 1,507,630 ---------------- ----------------- $ 3,162,208 $ 2,344,686 ================ ================= 5. Real Estate Venture: In December 1990, the Company formed a wholly owned subsidiary, Waste Tech Real Estate Corp. ("WT Real Estate"), for the purpose of having that corporation enter into a joint venture with a non-affiliated company, Rock-Tech Realty Corp. ("RT"), to purchase a parcel of land in Far Rockaway, Queens, New York and to build residential single family homes on the property. F-8 Notes to Consolidated Financial Statements, Continued 5. Real Estate Venture, Continued: RT had previously entered into a contract to purchase the property for $625,000, $50,000 being paid on the execution of the contract and the balance to be paid $200,000 on closing and $375,000 by a purchase money mortgage to the seller. RT has assigned the contract to the joint venture. WT Real Estate has a 21% interest in the profits and losses of the joint venture. As of October 31, 1996, the Company had committed to fund up to $175,000 for its share of loans and loaned the sum of $166,980 to the joint venture on behalf of WT Real Estate. Management does not believe that it will be required to advance funds in excess of the amount loaned to date. WT Real Estate has a mortgage lien on the property as collateral for all sums it advances to the joint venture except that mortgage shall be subordinated to any purchase money mortgage or construction loan mortgage. The Company was to receive interest at 10% per annum, but since no interest has ever been received, accrual of interest was suspended prior to the periods covered by these financial statements. As of October 31, 1996, the total receivable balance of $218,012 has been reserved as uncollectible with related charges to income of $49,840 and $50,000 in 1996 and 1995, respectively. 6. Property, Plant and Equipment: The following is a summary of property, plant and equipment, at cost, less accumulated depreciation:
1996 1995 Land $ 75,000 $ 75,000 Buildings and improvements 2,264,675 1,274,339 Machinery and equipment 1,112,161 743,452 Vehicles 181,330 217,582 ----------------- ----------------- 3,633,166 2,310,373 Less: accumulated depreciation and amortization 1,104,523 882,355 ----------------- ----------------- $ 2,528,643 $ 1,428,018 ================= =================
Depreciation expense was $258,475 and $111,219 in 1996 and 1995, respectively. Included in buildings and improvements are assets recorded under a capital lease in the amount of $1,359,189. Amortization of the assets under capital lease in the amount of $43,647 is included in depreciation expense. 7. Notes Payable--Other: In August 1991, a note was issued by the Company to the father of the former owner of Ram Industrial Coating, Inc., a former subsidiary of the Company, in consideration of a loan in the amount of $150,000 carrying interest at 10 1/2% per annum. The remaining balance of the note payable of $50,000 was repaid in fiscal 1995. F-9 Notes to Consolidated Financial Statements, Continued 8. Long-Term Debt: Long-term debt consists of the following:
1996 1995 Term note payable to bank, at prime rate, due in equal monthly installments of $9,028, plus interest, through August 2002. $ 631,944 $ 418,333 Note payable to bank, at prime rate plus 2.5%, due in equal monthly installments of $4,000, including interest, with the remaining balance due in January 1996, collateralized by real estate with a net book value of $204,114. 106,878 Revolving promissory note payable to bank in the amount of $1,000,000. Interest at prime payable monthly. All amounts borrowed are due in full on July 7, 1997. 531,652 Term note payable to Appling County, Georgia at 4.0%, due in monthly installments of $3,417, including interest through July 2003. 242,222 ----------------- ----------------- 1,405,818 525,211 Amounts classified as current 1,195,494 296,878 ----------------- ----------------- $ 210,324 $ 228,333 ================= =================
The bank's prime rate at October 31, 1996 was 8.25%. The carrying value of the Company's debt approximates fair value. The term note payable to bank and the revolving promissory note contain certain covenants, whereby the Company must maintain, among other things, specified levels of minimum net worth and working capital, and maintain a specified ratio of maximum debt to worth, and current ratio. The term note payable contains cross default provisions as related to the revolving promissory note and other debt agreements. The Company violated covenants related to minimum net worth and maximum debt to worth. As of the date of issuance of these financial statements, the lender has not waived these covenant violations nor has it demanded repayment. Management plans to negotiate an extension of the revolving debt and covenant requirements prior to the expiration date of the debt or obtain alternative financing. However, no assurance can be given that the Company will be successful. If the Company were unable to negotiate an extension or obtain alternative financing and the lender called the debt, management would be required to shut down and/or sell certain assets of the Company. Management believes its available collateral to be sufficient so as acceptable financing can be obtained. The Company has pledged substantially all of its assets as collateral under the term loan and revolving loan agreement. F-10 Notes to Consolidated Financial Statements, Continued 8. Long-Term Debt, Continued: Contractual maturities are as follows: Aggregate Obligation ---------------- Period ending October 31: 1997 $ 671,883 1998 141,531 1999 142,883 2000 144,291 2001 145,756 Beyond 159,474 ---------------- $ 1,405,818 ================ 9.Capital Lease: During 1996, the International Press and Shear (IPS) subsidiary entered into a lease agreement for its manufacturing facility, which has been accounted for as a capital lease, as the ownership of the facility is transferred to IPS when the lease obligation is satisfied. The following schedule provides for the minimum future lease payments and the present value of the commitment for the capital lease as of October 31, 1996: 1997 $ 73,618 1998 73,619 1999 73,618 2000 73,619 2001-2011 677,983 ---------------- Total net minimum lease payments 972,457 Less: Amounts representing interest (256,608) ---------------- Present value of net minimum obligations 715,849 Less current portion (14,281) ---------------- Long-term obligations $ 701,568 ================ The present value of minimum future obligations shown above are calculated based on an 8.25% interest rate determined to be applicable at the inception of the lease. Interest expense on the outstanding obligations under capital leases was $32,658 for the period ending October 31, 1996. The cost, accumulated amortization and net book value of equipment under capital lease at October 31, 1996 are shown below. Cost represents the Company's direct investment in the facility. Cost $ 1,359,189 Accumulated amortization (43,647) ---------------- Net book value $ 1,315,542 ================ F-11 Notes to Consolidated Financial Statements, Continued 10. Contingent Liabilities and Commitments: Litigation - The Company is subject to legal proceedings and claims which arise in the ordinary course of business. While any litigation contains an element of uncertainty, management, based upon the opinion of the Company's General Counsel and other attorneys acting on behalf of the Company, presently believes that the outcome or cost of defending such proceedings or claims individually and in the aggregate, which are pending or threatened, will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. Other - The Company had an employment agreement with its president for a term of five years commencing on August 1, 1993 and ending August 1, 1998. Annual compensation pursuant to the contract was $100,627, increased 5% per year for the years 1993 to 1998. Effective October 1, 1996, the Company has amended its employment agreement with its president. The new agreement has a term of five years and the annual compensation is $150,034 in year one with a 5% increase each year in the term. In the event of a change in ownership of the Company and the president is not retained, he shall receive as a lump sum the compensation owed for the remaining term of the agreement. Additionally, the Company has a severance agreement with its president, whereby in the event of change of control of IBC and the subsequent termination of employment of him for any reason other than cause, IBC shall be required to pay to him an amount equal to 2.99 times his salary at IBC prior to any change in control. The Company has also committed to pay premiums on a life insurance policy owned by its president to keep the policy in force. Annual premiums approximate $40,000. 11. Income Taxes: The differences between the federal statutory tax rate and the Company's effective rate are as follows:
Fiscal 1996 Fiscal 1995 ----------------------------- ---------------------------- Amount Percentage Amount Percentage ------------- --------------- ------------ -------------- Federal income tax at statutory rate $ (43,600) (34)% $ 145,000 34% State income taxes (benefit), net of federal income tax effect (3,000) (2) 15,000 4 Non-utililization of operating losses 43,600 34 Benefit of operating loss carryforwards (145,000) (34) Alternative minimum taxes 7,000 2 Other 32,000 25 22,000 5 Change in valuation allowance 413,000 (413,000) (97) ------------- --------------- ------------ -------------- Provision (benefit) for income taxes $ 442,000 23% $ (369,000) (86)% ============= =============== ============ ==============
The Company files consolidated federal income tax returns with its subsidiaries and separate corporate state income tax returns. F-12 Notes to Consolidated Financial Statements, Continued 11. Income Taxes, Continued: The net change in the total valuation allowance for the year ended October 31, 1996 was an increase of $493,000. Realization of net deferred tax assets is dependent on generating sufficient taxable income in the future. Based on current and anticipated future economic condition, management cannot ascertain that it is more likely than not that any portion of the net deferred tax asset will be realized. The significant components of the net deferred tax asset at October 31, 1996 are as follows:
1996 1995 Reserves and allowances $ 242,000 $ 254,000 Property, Plant and equipment 60,000 52,000 General business credit carryforward 41,000 40,000 Net operating loss carryforward 578,000 516,000 Other 94,000 73,000 ---------------- --------------- 1,015,000 935,000 Valuation allowance 1,015,000 522,000 ---------------- --------------- $ $ 413,000 ================ ===============
Net operating loss carryforwards for tax purposes are $1,401,000, which expire in years 2005 through 2007. The difference in net operating losses results primarily from recognition of bad debt expense and accrued expenses for financial reporting purposes, not recognized for tax purposes. IBC has general business credit carryforwards of approximately $41,000, which expire in the years 1997 through 2000. The Company has an Alternative Minimum Tax Credit of approximately $15,000. 12. Earnings (Loss) Per Common and Common Equivalent Share: Earnings (loss) per common and common equivalent share are calculated using the weighted average number of common shares outstanding during each year and on the net additional number of shares which would be issuable upon the exercise of stock options, assuming that the Company used the proceeds received to purchase additional shares at market value in the case of income. Options are not considered in loss years as they would be antidultive. 13. Stock Options: Effective in fiscal 1995, the Board of Directors of the Company adopted the 1995 Stock Option Plan ("1995 Plan"). Under the 1995 Plan, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, may be granted to key employees, including officers, and/or stock appreciation rights ("SARs") may be granted to key employees, officers, directors and consultants of the Company and its present and future subsidiaries to purchase an aggregate of 1,000,000 shares of the Company's common stock (the "Common Stock"). F-13 Notes to Consolidated Financial Statements, Continued 13. Stock Options, Continued: The purpose of the 1995 Plan is to aid the Company in attracting and retaining key employees, officers, directors and consultants and to secure for the Company the benefits of the incentive inherent in equity ownership by such persons who are responsible for causing the Company's growth and success. The maximum number of shares as to which options may be granted under the 1995 Plan (subject to adjustment as described below) is 1,000,000 shares of Common Stock. Upon expiration, cancellation or termination of unexercised options, the shares with respect to which such options shall have been granted will again be available for grant under the 1995 Plan. The 1995 Plan is administered by the Board of Directors, or if appointed, by a stock option committee consisting of at least two members of the Board of Directors, none of whom is eligible to participate under the 1995 Plan. (The group administering the 1995 Plan is referred to as the "Committee"). The Committee has the authority under the 1995 Plan to determine the terms of options and/or SARs granted under the 1995 Plan, including, among other things, whether an option shall be an incentive or a nonqualified stock option, the individuals who shall receive them, whether a SAR shall be granted separately, in tandem with or in addition to options, the number of shares to be subject to each option and/or SAR, the date or dates each option or SAR shall become exercisable and the exercise price or base price of each option and SAR; provided, however, that the exercise price of an incentive stock option may not be less than 100% of the fair market value of the Common Stock on the date of grant and not less than 110% of the fair market value in the case of an optionee who at the time of grant owns more than ten percent of the total combined voting power of the Company, or of any subsidiary or parent of the Company. During 1995, the Board of Directors issued 880,000 non-qualified stock options to purchase 880,000 shares of the Company's common stock at prices ranging from $1.50 to $2.00 per share, respectively. The stock options granted are not to be subject to the Company's stock option plan. The options were issued to key employees. The options grant the right to purchase shares of the Company's common stock at the date of the grant. The options have anti-dilutive rights in the event of a split, reverse split, or recapitalization and are exercisable in whole or in part through 2005. The options or shares purchased thereunder may be registered pursuant to the Securities Act of 1933. In March 1994 and February 1993, the Board of Directors issued 275,000 and 350,000 non-qualified stock options, respectively, to purchase 275,000 and 350,000 shares, respectively, of the Company's common stock at $1 per share. The options have anti-dilutive rights in the event of a split, reverse split or recapitalization and are exercisable in whole or in part through March 2004 and September 1, 2002, respectively. The options or shares purchased thereunder may be registered pursuant to the Securities Act of 1933. Options outstanding as of October 31, 1996 are 25,000 and 100,000, respectively. F-14 Notes to Consolidated Financial Statements, Continued 13. Stock Options, Continued: In 1993, the board of directors granted 65,000 options to a creditor in satisfaction of a liability. The options are exercisable at $1 5/8, the market value of the Company's stock at the date of the grant, and vested upon issuance. The options have anti-dilutive rights in the event of a split, reverse split or recapitalization and are exercisable in whole or in part through December 1998. Stock option activity is shown below:
Option Price Per Share Shares ---------------- ----------------- Outstanding, October 31, 1994 690,000 $1.00-$1.625 Granted 880,000 $1.50-$2.00 Exercised (500,000) $1.00 Canceled or surrendered ---------------- Outstanding, October 31, 1995 1,070,000 Granted Exercised Canceled or surrendered ---------------- Outstanding, October 31, 1996 1,070,000 ================ Shares exercisable 710,000 $1.00-$2.00 ================
14. Employees' Benefit Plan: The Company instituted a profit sharing plan for its employees in 1989 by contributing 375,000 shares of its stock to the trust, having a fair market value of $165,000 on the transfer date. The Company contributed $50,000 to the plan in fiscal 1995 and no contributions were made in fiscal 1996. 15. Export Sales: Export sales were approximately 15% for each of the years ended October 31, 1996 and 1995. The principal international markets served by the Company, among others include Canada, India, Japan, China and Korea. No sales in one geographic region exceed 10%. EX-27 2 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the financial statements and is qualified in its entirety by reference to such financial statements. 1000 YEAR OCT-31-1996 OCT-31-1996 140,000 0 1,501,956 91,000 3,162,208 4,756,372 3,633,166 1,104,523 7,370,216 2,898,996 0 0 0 27,634 2,138,018 7,370,216 13,982,903 13,982,903 10,502,750 14,009,072 (52,512) 0 150,023 (123,680) 442,000 (565,680) 0 0 0 (565,680) (0.23) (0.23)
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