ITEM 1. BUSINESS
General
OP-TECH Environmental Services, Inc. and Subsidiaries (the "Company"), a Delaware corporation, provides comprehensive environmental services predominately in New York, Massachusetts, Northern Pennsylvania, and New Jersey. The Company performs industrial cleaning of hazardous and 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 and non-hazardous materials and provides 24-hour emergency spill response services. The majority of the Company's revenues are derived from state agencies, 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.
In December 2001, the Company's Board of Directors approved a resolution to establish OP-TECH AVIX, Inc. ("AVIX"), a wholly-owned subsidiary of the Company, for purposes of pursuing and engaging in diversified lines of business including asset management technologies. AVIX was formed in January 2002. Information on business segments is included in Note 15 to the consolidated financial statements for the year ended December 31, 2002 included in item 15.
Services
Transportation and Disposal Services
The Company provides transportation of hazardous and non-hazardous wastes from customer sites to customer-designated landfills and disposal facilities. The Company also provides liquid tank truck transports equipped with vacuum pumps.
24-Hour Emergency Spill Response
The Company undertakes environmental remediation projects on both a planned and emergency basis. Emergency response actions may develop into planned remedial action projects when soil, groundwater, buildings, or facilities are extensively contaminated. The Company has established specially trained emergency response teams. Many of the Company's decontamination and mitigation activities result from a response to an emergency situation by one of its response teams. These incidents can result from transportation accidents involving chemical or petroleum substances, fires at chemical facilities or hazardous waste sites, transformer fires or explosions involving PCBs, and other unanticipated events. The substances involved may pose an immediate threat to public health or the environment, such as possible groundwater contamination. The Company derives a material portion of its revenues from an agreement with the New York State Department of Environmental Conservation (NYSDEC) to provide emergency response services in certain areas of New York state, 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.
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.
Excavation and Site Remediation Services
The Company provides excavation and soil blending services for treatment of contaminated soil using heavy equipment such as excavators and loaders. The Company primarily provides on-site soil blending to public utilities and municipal customers.
Hydrogeological/Drilling Services
The Company provides hydrogeological services to petroleum companies, engineering firms and local and state public entities through the use of qualified subcontractors. Through performing hydrogeological assessments, the Company evaluates and determines the need for ground water remediation systems, pump and treatment systems and sub-surface petroleum product recovery. In addition, the Company provides air sparging systems, long-term remediation system operations and maintenance as well as monitoring well and recovery well installations.
Overall Site Assessment and Implementation of Remediation Services
Hazardous Waste: The Company's hazardous waste projects include the design and construction of on-site facilities to monitor, isolate, or contain hazardous wastes existing in surface and subsurface water, the transport of contaminated soils, the decontamination of equipment and facilities related to the production and use of hazardous materials, industrial cleaning, building demolition and asbestos removal. Although the Company's projects vary widely in objective, scope, and duration, each project involves the Company providing one or more of the following services through the use of its own resources or the resources of selected subcontractors: strategic planning, site reconnaissance and security, remedial evaluation, clean-up evaluation, design, construction, and operation of facilities to treat, stabilize, or isolate the hazardous materials, and closure planning and monitoring.
Strategic Planning: On each of its projects, the Company attempts as early as possible, to formulate a complete strategy for directing all efforts toward solving the hazardous waste problem. The Company's strategic plans are designed to satisfy the demands of regulatory agencies and the public, sometimes under emergency conditions. Additionally, the Company attempts to balance the cost of the alternatives against risks to the client associated with potential litigation or unfavorable publicity. Through strategic planning, the Company attempts to minimize expenditures that will not lead to appropriate solutions, and to enhance the client's credibility with regulatory agencies and the public.
Site Reconnaissance and Security: In conducting a site reconnaissance, the Company makes a general assessment to determine the basic characteristics of a site and the limitations imposed thereby, climatological considerations and the proximity and degree of residential development. In providing site security, the Company's services include assessing the hazardous condition, restricting access to the affected area, assisting in the preparation of any necessary evacuation plans, eliminating or reducing potential risks of fire or explosion, containing or removing hazardous materials which might pose additional risk, and implementing measures to reduce or halt the spread of hazardous substances into adjacent areas.
Remedial Evaluation: A remedial investigation involves the detailed assessment of an affected area to determine the nature and extent of hazardous materials present. This is often done at the request of one or more regulatory agencies. In conducting such investigations, the Company often reviews the construction of a facility and past storage and handling practices regarding hazardous materials.
Clean-up Evaluation: A feasibility study addresses measures which may be implemented to remove hazardous wastes from a site, to treat, stabilize, or contain such wastes on-site or to otherwise mitigate their effects. Such studies take into account, among other things, available technology, regulatory considerations, and the cost-benefit relationship of alternative measures. Additionally, the Company reviews the project and alternative remedial measures in light of legitimate public concerns.
Construction and Operation of Remedial Facilities: Based on the results of remedial investigations and feasibility studies, the Company uses its expertise directly, or through subcontractors, to design an appropriate structure or system for use at a particular site, and performs the necessary remediation activities. These remediation activities might include such diverse measures as construction of a slurry wall to contain the hazardous materials, construction and operation of a pumping and filtration system to decontaminate surface or subsurface waters or construction and operation of an integrated system to excavate contaminated soil and remove it to a licensed disposal facility.
Closure Planning and Site Monitoring: The Resource Conservation and Recovery Act of 1976 ("RCRA") requires the planning of closure and postclosure monitoring for all licensed secure hazardous landfills, treatment facilities, and on-site hazardous waste storage areas. The Company plans and performs facility closures and postclosure monitoring programs. While certain monitoring requirements are mandated by RCRA, many sites have, at some time, contained hazardous wastes which also frequently require monitoring. The Company provides monitoring for sites and the corresponding data management services.
The Company usually contracts for and manages all aspects of the work related to the completion of a particular project. In addition, the Company performs all aspects of the work and certain other specialized operations, some of which are subcontracted to other parties. The Company does, however, occasionally, contract to perform only certain aspects of a particular project.
Technologies Employed
The Company utilizes a wide variety of physical and chemical treatment technologies in performing its remediation activities. Physical treatment technologies generally involve filtration and aeration techniques and are used to separate contaminants from soils, slurries, or water. Chemical treatment technologies generally involve flocculation, clarification, precipitation, polymer addition, chemical oxidation, chemical absorption, and stabilization. Depending on the contaminants present and the site characteristics, these technologies are combined into integrated treatment systems which reduce contaminant concentrations to levels consistent with prescribed regulatory standards.
Regulation
The business of the Company and its clients is subject to extensive, stringent, and evolving regulation by the EPA and various other federal, state, and local environmental authorities. These regulations directly impact the demand for the services offered by the Company. In addition, the Company is subject to the Federal Occupational Safety and Health Act, which imposes requirements for employee safety and health. The Company believes it is in compliance with all federal, state, and local regulations governing its business.
RCRA. The Resources Conservation and Recovery Act of 1976 is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal. RCRA, or EPA-approved state programs may govern any waste handling activities of substances classified as "hazardous." The 1984 amendments to RCRA substantially expanded its scope by, among other things, providing for the listing of additional wastes as "hazardous" and providing for 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 a 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").
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 hazardous substances, releases of hazardous substances during transportation, 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, continue to be very competitive. The Company competes with many different firms ranging from small local firms to large national firms, many 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, Waverly and Buffalo, New York, as well as Rockland, Massachusetts and Edison, New Jersey. While operations in the Syracuse, Massena, Albany, Buffalo and Waverly offices are substantial, the Rochester, Plattsburgh, Rockland and Edison operations operate at a lower volume.
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 state agencies, industrial companies, railroads, real estate developers, auto parts manufacturers, aluminum producers, utility companies, waste disposal firms, municipalities, and engineering firms. During 2002, the Company performed services for more than 600 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 2002, the Company had sales of approximately $5,600,000 related to a contract with the New York State Department of Environmental Conservation, which totaled approximately 37% of the Company's revenues. The loss of these sales could have a material adverse effect on the Company.
Insurance
The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides 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, 2002 and 2001, the Company had a backlog of orders of approximately $2,850,000 and $2,750,000, respectively.
Employees
In December 2001, the Company entered into a contractual co-employment agreement with a third party provider. As of March 15, 2003, the Company had a total of approximately 100 full-time employees under this contract. 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 maintains key-person insurance for the President and CEO only. 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.
ITEM 2. PROPERTIES
Syracuse, New York Branch and Corporate Headquarters
The Company leases approximately 17,000 square feet of office and shop space at a current rate of $6,375 per month plus utilities and real estate taxes. The term of the lease extends through June 30, 2006, and 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 ocean-going ships utilizing the St. Lawrence Seaway.
The land is improved with a concrete and timbered dock that extends about 90 feet into the river and about 260 feet along the riverbed. The property includes three petroleum tanks that have an aggregate capacity of approximately 200,000 barrels. There are four support buildings on the premises.
The Company is currently pursuing the sale of all or part of its Massena property.
Rockland, Massachusetts Branch
The Company currently leases approximately 4,500 square feet of office space at a current rate of $3,200 per month plus utilities. The term of the lease extends through March 31, 2003 and will not be renewed. The Company anticipates locating another office in the New England area by the end of 2003.
Buffalo, New York Branch
The Company leases approximately 3,200 square feet of office and shop space at a current rate of $2,850 per month plus utilities. The term of the lease extends through March 31, 2004 and does not include an escalation clause.
Rochester, New York Branch
The Company leases approximately 150 square feet of office space at a current rate of $170 per month. The term of the lease is on a month-to-month basis.
Waverly, New York Branch
The Company leases approximately 6,400 square feet of office and shop space at a current rate of $1,800 per month plus utilities. The term of the lease extends through December 31, 2003, and does not contain an escalation clause.
Albany, New York Branch
The Company leases approximately 11,000 square feet of office and shop space at a current rate of $3,957 per month plus utilities. The term of the lease extends through October 31, 2007. The lease payment is scheduled to increase an additional $458 in May of 2005.
Edison, New Jersey Branch
Through February 28, 2003, the Company leased approximately 300 square feet of office space from O'Brien & Gere Engineers (an affiliated party) at a rate of $443 per month. The term of the lease was on a month-to-month basis.
Effective March 1, 2003, the Company leases approximately 2,200 square feet of office and shop space at a current rate of $1,467 per month plus utilities. The term of the lease extends through February 2005. The lease payment is scheduled to increase an additional $44 in February 2004.
Plattsburgh, New York Branch
The Company leases approximately 2,100 square feet of office and shop space at a current rate of $700 per month plus utilities. The term of the lease extends through October 31, 2003, and does not contain an escalation clause.
Equipment
The Company's owned equipment consists primarily of construction equipment such as vacuum trucks, dump 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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholders meeting on December 4, 2002. The shareholders voted on the ratification of Dannible & McKee, LLP as the Company's auditors, the election of five directors, and the adoption of the OP-TECH stock option plan. The following votes were cast for each:
For Against Ratification of Dannible & McKee, LLP as the Company's auditors 9,103,021 -0-
Election of Directors: Robert J. Berger Director 9,103,021 -0- Richard L. Elander Director 9,103,021 -0- Cornelius B. Murphy, Jr. Director 9,103,021 -0- Steven A. Sanders Director 9,103,021 -0- Christopher J. Polimino Director 9,103,021 -0-
The adoption of the OP-TECH stock option plan 9,103,021 -0-
There were no other matters submitted to a vote of the Company's shareholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)The shares of the Company's common stock are listed on the Over the Counter Bulletin Board under the symbol OTES.OB.
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, 2001 $0.10 $0.06 June 30, 2001 $0.22 $0.02 September 30, 2001 $0.20 $0.10 December 31, 2001 $0.10 $0.07 March 31, 2002 $0.07 $0.06 June 30, 2002 $0.12 $0.06 September 30, 2002 $0.35 $0.08 December 31, 2002 $0.45 $0.14
First quarter through March 15, 2003 $0.46 $0.16
The aforementioned prices reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
(b) At March 15, 2003, there were approximately 185 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.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data
Year Ended December 31
2002 2001 2000 1999 1998
Project Billings $15,093,052 $13,243,081 $13,671,025 $12,517,772 $10,917,903 Net Income (Loss) $553,666 $511,393 $539,876 ($2,613,883) $812,753 Net Income (Loss) Per Share (Basic & Diluted) $.04 $.04 $.05 ($.23) $.07
Balance Sheet Data As of December 31
2002 2001 2000 1999 1998
Total Assets $8,130,139 $5,671,179 $5,734,277 $5,942,940 $6,632,753 Long-Term Obligations$3,570,103 $2,365,615 $2,432,374 $2,644,353 $1,526,560
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 the Company had cash and cash equivalents of $0 as compared to $51,818 at December 31, 2001. Cash in the Company's operating account is electronically reduced nightly to pay down the Company's revolving line of credit in order to minimize interest expense.
At December 31, 2002, the Company had working capital of $2,031,861 compared to working capital of $1,362,528 at December 31, 2001. The Company had a current ratio of approximately 1.60 to 1 at the end of 2002 compared to 1.59 to 1 at the end of 2001. The Company's improved working capital balance is primarily attributable to the increase in accounts receivable at December 31, 2002 compared to December 31, 2001.
Cash used in operating activities during 2002 was $248,065 compared to cash provided by operating activities of $1,007,933 during 2001. The decrease in cash provided by operating activities in 2002 was mostly attributable to the increase in accounts receivable partially offset by the increase in accounts payable.
The Company's net cash used in investing activities of $727,891 during 2002 was attributable to the purchase of various field and office equipment.
Cash provided by financing activities of $924,138 in 2002 was primarily due to the timing of paydowns and cash advances on the Company's line of credit, as was necessitated by the net cash used in operating and investing activities.
As of December 31, 2002, the Company had a loan agreement that provided for borrowings up to $2,300,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The loan is payable on May 31, 2004, bears interest at a rate of prime plus 1.25 percent, is subject to certain restrictive financial covenants, and is subject to default if there is a material adverse change in the financial or economic condition of the Company. As of December 31, 2002, borrowing against the revolving loan aggregated $1,896,700.
During 2002, all principal payments on the Company's debt were made within payment terms.
The Company expects, based on budgeted operating results and the continued availability of its line of credit, that it will be able to meet obligations as they come due.
THE MASSENA PORT FACILITY
The Massena Port Facility is a former oil tank farm that is located on the St. Lawrence River in Massena, NY. The property is improved with several buildings and a deep water docking facility for large ocean going ships. Currently, the Company uses the property for its Massena branch office headquarters and equipment storage. The property has been held for sale since 1996, during which time the carrying value has been reduced from $1,900,000 to $480,000.
During the third quarter of 2001, the Company recognized an additional provision for impairment of long-lived assets of $300,000 to adjust the carrying value of the Massena Port Facility to the estimated fair market value, less cost of disposal, of $480,000. Management's estimation of fair market value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions.
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 converted all or part of their indebtedness, including accrued interest, into Common Stock of the Company, and forgave 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. The OnBank ownership of the Company transferred to M&T Bank as a result of the merger of those financial institutions in 1998.
In May 2002, a private offering of the Company's common stock was made under Regulation D, Rule 506 of the Securities Act of 1933, as amended. Form D, Notice of sale of securities pursuant to regulation D, was filed with the Securities and Exchange Commission on June 13, 2002. The placement agent of the offering was Benchmark-Pellinore Securities Corp. The offering resulted in the sale of approximately 8,000,000 shares of the Company's common stock at $0.06 per share to twenty-one accredited investors. Gross proceeds from the offering were $480,000. Expenses and fees, including a placement commission paid to Benchmark-Pellinore Securities Corp. of $48,000, aggregated approximately $91,000. Net proceeds of the offering were approximately $389,000. Management used the proceeds from the offering to buy back into the treasury 4,385,170 shares of common stock from the Company's two largest shareholders.
On August 2, 2002, the Company purchased into treasury 4,385,170 shares of its common stock from the Company's then two largest shareholders. 2,811,070, shares were purchased from M&T Bank for $.10 per share, or $281,107. 1,574,100 shares were purchased from O'Brien & Gere Limited for $.10 per share, or $157,410.
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.
2002 COMPARED TO 2001
Revenues
During the year ended December 31, 2002, the Company's revenues increased 14% to $15,093,052 as compared to $13,243,081 for the year ended December 31, 2001. The increase in billings is due to several factors. Revenues from New York State Department of Environmental Conservation ("NYSDEC") remediation projects increased approximately $2,165,000. The increased revenue from NYSDEC remediation projects is primarily due to a single large project in the Plattsburgh, NY area in the first quarter and single large projects in the Massena, NY and Albany, NY areas in the second quarter. Revenues from Tank Cleaning increased approximately $800,000 primarily from a single large project in the Baltimore, MD area in the fourth quarter. These increases were partially offset by a decrease in revenue from asbestos remediation projects totaling approximately $1,108,000. As part of the Company's plan to refocus its efforts on lines of work that are more profitable, the Company is being more selective in bidding on asbestos remediation projects. Revenues from OP- TECH Avix, Inc. were not material in 2002.
Project Costs and Gross Margin
Project costs for the year ended December 31, 2002 increased 15% to $10,916,214 from $9,466,613 for the year ended December 31, 2001. Project costs as a percentage of revenues increased to 72% for the year ended December 31, 2002 compared to 71% for the same period in 2001. The gross profit margin for the year ended December 31, 2002 was 27% versus 29% for the year ended December 31, 2001.
As a result of increased billing for 2002, project costs also increased. The slight decrease in the gross margin is due to the unusually large volume of excavation projects in the first half of the year. Excavation projects typically produce a lower gross margin as a result of trucking and landfill expenses that are treated as a pass-through expense at a specified mark-up.
Selling, General, and Administrative Expenses
During the year ended December 31, 2002, selling, general, and administrative ("SG&A") expenses increased 14% to $3,465,557 compared to $3,035,129 reported for the previous year. SG&A expenses were approximately 23% of sales for both the years ended December 31, 2002 and December 31, 2001.
When comparing 2002 to 2001, the overall increase in SG&A is due primarily to the commencement of operations of OP-TECH AVIX, Inc ("AVIX") in January 2002. AVIX accounted for SG&A of approximately $200,000 for 2002.
SG&A, net of AVIX, as a percentage of revenues decreased to 22% for 2002 compared to 23% for 2001.
Operating Income
As a result of the factors discussed above, for the year ended December 31, 2002, the Company reported operating income of $711,281 compared to $441,339 for the previous year.
Interest Expense
Interest expense decreased 24% to $167,542 in 2002 compared to $221,046 in 2001. The decrease in interest expense was primarily due to a decrease in the average interest rate incurred on the revolving loan and long-term debt, when comparing the year ended December 31, 2002 with the same period in 2001.
Net Income
Net income for the years ended December 31, 2002 and 2001 was $553,666 or $.04 per share basic & diluted, and $511,393, or $.04 per share basic and diluted, respectively.
Impact of Recently Issued Standards
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 became effective January 1, 2003 for the Company. The Company has not yet made a determination of the impact of this standard on its consolidated financial statements, if any.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which became effective January, 2002 for the Company. SFAS No. 144 outlines the requirements used to test long-lived assets, other than goodwill and intangibles not being amortized, for impairment. In addition, the statement proscribes accounting and reporting for long-lived assets or groups of assets to be disposed. The adoption of SFAS No. 144 had no effect on the results of operations of the Company in 2002, but did require reclassification in 2002 of certain assets previously classified as held for sale on the balance sheet to property and equipment as assets held and used.
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard is effective for exit or disposal activities initiated after December 31, 2002, and requires costs associated with exit or disposal activities, (including costs related to involuntary terminations and contract termination costs), to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. Specifically, costs associated with involuntary terminations are to be accrued on the date the employees are notified, assuming the period of time between the notification date and termination date is the lesser of 60 days or the legally required notification period. Otherwise, these costs are to be recognized evenly over the period from notification to termination. Contract termination costs are to be recognized when the contract is legally terminated or when the economic benefits of the contract are no longer being realized. The Company has not yet made a determination of the impact of this standard on its consolidated financial statements, if any.
2001 COMPARED TO 2000
Revenues
During the year ended December 31, 2001, the Company's revenues decreased 3% to $13,243,081 as compared to $13,671,025 for the year ended December 31, 2000. The slight decrease in billings is due to several factors. Revenues from spill response and remediation projects increased approximately $2,100,000. The increase in revenues from the spill response service line is primarily due to the fact that the Company's two-year emergency spill response contract with the New York State Department of Environmental Conservation began in October of 1999, and had not yet produced the volume in 2000 that the Company experienced in 2001. The Company's emergency spill response contract with the New York State Department of Environmental Conservation has been extended through 2003. This increase was offset by decreases in revenues from tank removal, cleaning and installation projects totaling approximately $500,000. This decrease is attributable to the performance of several large tank removal and installation projects during 2000. The Company also experienced a decrease in revenue from transportation and disposal of approximately $300,000 due to the completion of one large transportation and disposal project in the second quarter of 2000. The Company also experienced a decrease in revenue from asbestos removal projects of approximately $900,000 due to a management decision to eliminate asbestos removal from two of the Company's service locations. A decrease in revenue from Industrial cleaning of approximately $400,000 was due to a large emergency industrial cleaning project in 2000 that was the result of an explosion of a furnace. As part of the Company's plan to refocus its efforts on lines of work that are more profitable, the Company is no longer pursuing tank installation work and is being more selective in bidding on asbestos removal projects.
Project Costs and Gross Margin
Project costs for the year ended December 31, 2001 decreased 6% to $9,466,613 from $10,059,070 for the year ended December 31, 2000. Project costs as a percentage of revenues decreased to 71% for the year ended December 31, 2001 compared to 74% for the same period in 2000. The gross profit margin for the year ended December 31, 2001 was 29% versus 26% for the year ended December 31, 2000.
The increase in gross margin was a result of the reduction in project costs, which was a result of improved project management during 2001 as compared to 2000. The Company performed fewer public projects, particularly tank installation and large asbestos removal projects, when comparing 2001 to 2000. These projects typically produce lower gross margins than other service lines the Company offers. The Company also performed more work on a time-and- material basis. Time-and-material work typically produces higher margins than bidwork. Project meals and lodging expense also decreased approximately $78,000 from 2000 to 2001 as a result of the Company's efforts to place more staff at each location rather than borrowing personnel from other branches within the Company.
Selling, General, and Administrative Expenses
During the year ended December 31, 2001, selling, general, and administrative ("SG&A") expenses increased 8% to $3,035,129 compared to $2,800,661 reported for the previous year. SG&A expenses were approximately 23% of sales for the year ended December 31, 2001 compared to approximately 20% for the previous year.
When comparing the year ended December 31, 2001 to the same period in 2000, the overall increase in SG&A is due to several factors. First, payroll expense and related payroll taxes and benefits increased $179,063. During the fourth quarter of 2000 and the first quarter of 2001, several new employees were added in the Plattsburgh, Albany, Rochester, NY and Edison, NJ branch offices. Each of these offices added new employees as a result of expected increased sales volume and long-term growth plans. As is customary in adding new employees, it takes approximately six months for a new employee to meet the company's chargeability goals as set forth in the operating budget. Second, occupancy expense increased $57,197, primarily due to the relocation of the Albany, NY and Boston, MA branches to larger offices with higher rent than the previous locations. Third, depreciation expense increased $56,615 primarily due to the purchase of several large field vehicles.
Provision for Impairment of Long-Lived Assets
During the third quarter of 2001, the Company recognized an additional provision for impairment of long-lived assets of $300,000 to adjust the carrying value of the Massena Port Facility to the estimated fair market value, less costs of disposal, of $480,000.
Operating Income
As a result of the factors discussed above, for the year ended December 31, 2001, the Company reported operating income of $441,339 compared to $811,294 for the previous year.
Interest Expense
Interest expense decreased 21% to $221,046 in 2001 compared to $278,651 in 2000. The decrease in interest expense was primarily due to a decrease in the average interest rate incurred on the revolving loan and long-term debt, as well as a lower average balance on the Company's revolving loan, when comparing the year ended December 31, 2001 with the same period in 2000.
Net Income
Net income for the years ended December 31, 2001 and 2000 was $511,393, or $.04 per share basic & diluted, and $539,876, or $.05 per share basic and diluted, respectively.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the fact that the interest rate associated with the Company's revolving line of credit is based on the prime interest rate, the Company is exposed to interest rate risk. If the prime rate increases, the Company's monthly interest payments on its line of credit also increase, which could impact cash flow. Although the Company does not anticipate any material effects from interest rate risk, the Company attempts to keep its outstanding balance on its line of credit as low as possible at all times.
The Company is aware that if the economy were to slow down, the Company's business could be affected by other companies closing operations or reducing production, which could reduce the amount of waste generated or industrial cleaning projects available. In order to try to mitigate this market risk, the Company continues to make every effort to secure more emergency spill response contracts and long-term environmental remediation and industrial cleaning projects.
For more information regarding market risk, see the audited financial statements submitted under Item 15 of this report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the report of Dannible & McKee LLP are submitted under Item 14 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
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 December 4, 2002 for a term of one year, except George W. Lee, Jr. who was elected by the Board of Directors on December 4th, 2002.
Each director has served continuously since he was first elected.
The Board of Directors held five meetings during the last calendar year. All of the directors attended more than 75% of the total number of meetings held by the Board of Directors.
Name, Age Principal Occupation Year First Elected Certain Other Information
Robert J. Berger (56) Director and Chairman of the Board Mr. Berger has served in his present position as Director since November 1998, and as Chairman of the Board since February 2000. Mr. Berger was employed in various positions for OnBank from 1978 through March 31, 1998, his last position being Senior Vice President, Treasurer, and Chief Financial Officer. From April through August 1998, he served as consultant to M&T Bancorp. pursuant to its merger agreement with OnBank. Since August 1998, he has been an Adjunct Professor at LeMoyne College in Syracuse, New York. From August 1998 through June 2002, he served as Director of the Madden Institute of Business Education at LeMoyne College. Mr. Berger is also Chairman, President, and Chief Executive Officer of St. Lawrence Industrial Services, Inc.
Richard L. Elander (61) Director Mr. Elander has served in his present position as a Director since November of 1991. Mr. Elander currently operates his own construction management consulting business, and he has been appointed to the position of Onondaga County Department of Water Environment Protection Commissioner.
Cornelius B. Murphy, Jr. (58) Director Dr. Murphy has served in his current position since December 1991. Dr. Murphy has been a director of O'Brien & Gere Limited since 1985 and O'Brien & Gere Engineers, Inc. from 1982 to date. Dr. Murphy also served as Chairman of the Board of O'Brien & Gere Limited from April 1999 to May 2000, and as Chief Scientist of O'Brien & Gere Engineers from January 1998 to December 1999. Dr. Murphy currently serves as President of the State University of New York College of Environmental Science and Forestry, which is located in Syracuse, New York.
Steven A. Sanders (57) Director Mr. Sanders has served in his present position as a Director since December 1991. Since January 1, 2001, he has been of counsel to the law firm of Spitzer & Feldman PC. Mr. Sanders served as a partner in the law firm of Beckman, Millman & Sanders LLP from October 1997 to December 2000 and has also been President of the Law Office of Steven A. Sanders PC since 1992.
Christopher J. Polimino (37) Director Mr. Polimino was named Chief Executive Officer in January 2001, and has been President of the Company since January 2000. He has been with the Company since December of 1994 and has previously served as Executive Vice President, General Manager, and Controller.
George W. Lee (54) Director Mr. Lee was elected to the Board in December 2002. Mr. Lee co-founded Blasland, Bouck and Lee, Inc., an Engineering News Record top 100 worldwide engineering and scientific services company in 1984. He served in various capacities in this firm, including Executive VP, Director of Marketing and Director Health and Safety from 1984 to 1994. Mr. Lee currently serves on the Board of Directors of this company. Since 1984 Mr. Lee has been active as a consultant to new business ventures involved in professional development and wastewater treatment.
AUDIT COMMITTEE
In October of 2002, the Company's Board of Directors formed an Audit Committee (the "Committee"). The initial members of the Committee are Messrs. Cornelius Murphy and Richard Elander. The Committee operates under a written charter adopted by the Board of Directors, a copy of which is attached hereto as Annex A. The Committee held 1 meeting during the year ended December 31, 2002. Its duties and responsibilities include the following:
- Provides oversight of the financial reporting process and management's responsibility for the integrity, accuracy and objectivity of financial reports, and accounting and financial reporting practices.
- Recommends to the Board the appointment of the Company's independent public accountants.
- Provides oversight of the adequacy of the Company's system of internal controls.
- Provides oversight of management practices relating to ethical considerations and business conduct, including compliance with laws and regulations.
The Committee has met and held discussions with the Chief Financial Officer and the Company's independent accountants, Dannible & McKee, LLP, regarding audit activities. Management has the primary responsibility for the Company's systems of internal controls and the overall financial reporting process. The independent accountants are responsible for performing an independent audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Committee's responsibility is to monitor and oversee these processes. However, the members of the Committee are not certified public accountants, professional auditors or experts in the fields of accounting and auditing and rely, without independent verification, on the information provided to them and on the representations made by management and the independent accountants.
The Committee recommended to the Board of Directors the appointment of Dannible & McKee, LLP as the Company's independent accountants for the year 2003, subject to shareholder ratification. The Company's independent accountants provided to the Committee the written disclosure required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent accountants that firm's independence.
Management represented to the Committee that the Company's consolidated financial statements were prepared in accordance with generally acepted accounting principles. The Committee has reviewed and discussed the consolidated financial statements with management and the independent accountants. The Committee discussed with the independent accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) as currently in effect. Based on these discussions and reviews, the Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 for filing with the Securities and Exchange Commission.
The aggregate fees billed by the Company's independent accounting firm, Dannible & McKee, LLP, for professional services rendered for the audit of the Company's annual financial statements for the year ended December 31, 2002 and the review of the financial statements to be included in the Company's Forms 10-Q for 2003 were $24,500. There were no other billed services rendered by Dannible & McKee, LLP.
As of the date hereof the Board of Directors have not formed either compensation or nomination committees. The Board of Directors as a whole acts in the capacities of these two committees.
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position Held
Christopher J. Polimino 37 President and Chief Executive Officer Charles B. Morgan 49 Chief Operating Officer Paul Misiaszek 41 Vice President Douglas R. Lee 32 Chief Financial Officer & Treasurer
Mr. Polimino was named Chief Executive Officer in January 2001, and has been President of the Company since January 2000. He has been with the Company since December of 1994 and has previously served as Executive Vice President, General Manager, and Controller.
Mr. Morgan was named Chief Operating Officer in August 2002 and has been President of OP-TECH AVIX, Inc since January 2002. Prior to joining OP-TECH, Mr. Morgan served as a Vice President with the firm of Camp, Dresser and McKee, an Engineering News Record top 20, Boston, MA based consulting, engineering, construction and operating firm. Mr. Morgan's 29 year career includes project assignments predominatly with private sector industrial clients completed for major national and international clients.
Mr. Misiaszek was named Vice President in August 2002. He has been with the Company since 1996 and has previously served as Branch Manager. He has a Bachelor of Science degree from the University of Maine and is a Certified Hazardous Materials Manager at the Masters level.
Mr. Lee was named Chief Financial Officer in August 2002 and Treasurer in December 2001, and has been Controller of the Company since March 2001. Mr. Lee is a Certified Public Accountant in New York State. He previously worked as an Auditor for a public accounting firm from 1993 to 1999, and as Controller for a manufacturing company from 1999 to February 2001.
ITEM 11.
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 by the Named Executive Officers.
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payments
Name and Other Annual # of LTIP All Other Principal Position Year Salary Compensation Options Payouts Compensation
Christopher J. Polimino CEO and President 2002 $135,000 $25,000 75,000 -0- -0- 2001 $110,000 $12,500 -0- -0- -0- 2000 $100,000 -0- -0- -0- -0-
Anthony R. Pongonis (1) Executive VP 2002 $106,000 -0- -0- -0- -0- 2001 $111,080 -0- -0- -0- -0- 2000 $106,542 -0- -0- -0- -0-
Charles B. Morgan Chief Operating Officer 2002 $100,000 -0- 50,000 -0- -0-
(1) Anthony Pongonis was terminated on September 30, 2002
The Company has no formal deferred compensation or bonus plans. The Company has adopted an incentive compensation plan.
Directors of the Company are paid $1,000 for each meeting plus reimbursement for their actual expenses incurred in attending meetings.
The following table sets forth information on option grants in 2002 to the Named Executive Officers
Option Grants in Last Fiscal Year
Number of Percent of Potential Realized Value Securities Options at Assumed Annual Rates Underlying Granted to of Stock Price Appreciation Options Employees Exp. for Option Term (2) Name Granted(1) in Fiscal Yr $/Share Date 5% 10%
Christopher J. 75,000 22% $0.06 May,2012 $2,831 $7,172 Polimino
Anthony R. -0- Pongonis
Charles B. 50,000 15% $0.06 May,2012 $1,887 $4,781 Morgan
(1) All options listed were granted pursuant to the 2002 Omnibus Plan. Option exercise prices were at the market price when granted. The options have a term of 10 years and vest ratably over 3 years.
(2)Potential realizable values are based on assumed annual rates of return specified by the Securities and Exchange Commission. The Company's management cautions shareholders and option holders that such increases in values are based on speculative assumptions and should not inflate expectations of the future value of their holdings.
Compensation of Directors
Directors of the Company are paid $1,000 for each quarter plus reimbursement for their actual expenses incurred in attending meetings.
ITEM 12.
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, 2003 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, 2003, 15,318,787 shares of common stock par value $.01 per share were outstanding. Each share of common stock is entitled to one vote.
Name and Address Amount and Nature of Beneficial Owner of Beneficial Ownership(1)(2) Percentage of Class (1)
Richard Messina 4,177,851(2)(3) 26% 340 E. 93rd St., Apt. L-M New York, NY 10128
M&T Bank 2,811,070 17% 101 S. Salina Street Syracuse, NY 13202
O'Brien & Gere Limited 1,574,100 10% 5000 Brittonfield Parkway East Syracuse, NY 13057
Cede & Co. 1,442,369 9% PO Box 222 Bowling Green Station New York, NY 10274
Robert Berger 1,030,000(4) 6% 121 Shirley Rd. Syracuse, NY 13224
United Investment Holding Ltd. 1,000,000 6% C/O Investaag Hardstrasse 4 CH-4127 Birsfelden Switzerland
Kevin Eldred 835,000 5% 1007 Overlook Terrace Cazenovia, NY 13035
(1)Based upon (a) 15,318,787 shares of common stock outstanding, (b) the issuance of 345,000 options to purchase shares pursuant to the Stock Option Plan, and (c) warrants to purchase 480,000 shares issued to Summit Capital & Associates, Inc.
(2)All shareholder's directly or beneficially own all shares except for Mr. Messina who owns 1,313,333 shares directly and 2,864,518 shares indirectly.
(3)Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc.
(4)Includes options to purchase 10,000 shares of Common Stock.
The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company's common stock at March 31, 2003 by each director and nominee for election as director and each elective officer. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to such shares of common stock.
Name of Number of Shares of Common Beneficial Owner Stock Beneficially Owned(3)(4) Percentage of Class
Robert J. Berger (1) 1,030,000 6%
Richard L. Elander (1) 419,565 3%
Steven A. Sanders (1) 35,352 <1%
Cornelius B.Murphy, Jr. (1) 11,424 <1%
Christopher J. Polimino (1) (2) 135,454 <1%
George W. Lee (1) 176,666 1%
Charles Morgan (2) 100,000 <1%
Paul Misiaszek (2) 25,000 <1%
Douglas R. Lee (2) 40,000 <1%
All Directors as a Group (6 persons) 1,808,461 11%
(1) Director (2) Officer (3) Includes options to purchase shares of common stock: -Mr. Berger 10,000 -Mr. Elander 10,000 -Mr. Sanders 10,000 -Mr. Murphy 10,000 -Mr. Polimino 75,000 -Mr. GW Lee 10,000 -Mr. Morgan 50,000 -Mr. Misiaszek 20,000 -Mr. DR Lee 40,000
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2002, the Company provided approximately $67,000 of remediation, sub- contract support, and project services to subsidiaries of 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, and consulting services from subsidiaries of O'Brien & Gere Limited, a shareholder. The costs for these services amounted to $38,000 in 2002.
Steven A. Sanders, a director of the Company, is of counsel to Spitzer & Feldman PC, which provides professional services to the Company, and it is anticipated that it will continue to do so.
The Company purchases subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by Robert J. Berger, a director of the Company. The costs for these services amounted to approximately $880,000 in 2002.
Warrants were issued to Summit Capital & Associates, affiliated with Richard Messina, a financial advisor and shareholder, in May 2002 to purchase 480,000 shares of common stock at $0.066 per share, expiring in May 2007.
ITEM 14
ITEM 14 - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Within the 90 days before the date of this Form 10-K, we evaluated the effectiveness of the design and operation of our "disclosure controls and procedures". OP-TECH conducted this evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.
(i) Definition of Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Controls. OP-TECH recognizes that a system of disclosure controls and procedures (as well as a system of internal controls), no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures. Subject to the limitations described above, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to OP-TECH required to be included in OP-TECH's periodic SEC filings.
(b) Changes in Internal Controls. There have been no significant changes in OP-TECH's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page (a) Financial Statements
(1) Reports of Independent Auditors Consolidated Balance Sheets at December 31, 2002 and 2001 Consolidated Statement of Operations for the years ended December 31, 2002, 2001, and 2000 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002, 2001, and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 Notes to Consolidated Financial Statements
(2) Schedule II, Valuation and Qualifying Accounts for the Years Ended 2002, 2001, and 2000
(b) Reports on Form 8-K November 26, 2002 - Item 4, Changes in Registrants Certifying Accountant, Incorporated herein by reference to the 8-K filed on November 26, 2002.
(c) Exhibits
10.1 Union and Employment Contracts (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 10.2 Voting Agreement (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 10.3 Memorandum of Agreement and Exchange (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 10.4 Stock Option Plan (1) Incorporated herein by reference to the Company's Information Statement filed November 6, 2002 21 Subsidiaries of the Company E-1
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/ Christopher J. Polimino Christopher J. Polimino President and Chief Executive Officer
March 26, 2003
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 26th day of March 2003.
/s/ Robert J. Berger Director and Chairman of the Board Robert J. Berger
/s/ Richard L. Elander Director Richard L. Elander
/s/ Cornelius B. Murphy, Jr. Director Cornelius B. Murphy, Jr.
/s/ Steven A. Sanders Director Steven A. Sanders
/s/ George W. Lee Director George W. Lee
/s/ Christopher J. Polimino President and Chief Executive Officer Christopher J. Polimino
/s/ Charles B. Morgan Chief Operating Officer Charles B. Morgan
/s/ Paul Misiaszek Paul Misiaszek Vice President
/s/ Douglas R. Lee Chief Financial Officer and Treasurer Douglas R. Lee
CERTIFICATIONS
Certification of Chief Executive Officer
I, Christopher J. Polimino, certify that:
1.I have reviewed this annual report on Form 10-K of OP-TECH Environmental Services, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Christopher J. Polimino Christopher J. Polimino President and Chief Executive Officer
Certification of Chief Financial Officer
I, Douglas R. Lee, certify that:
1.I have reviewed this annual report on Form 10-K of OP-TECH Environmental Services, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer
Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Christopher J. Polimino, President and Chief Executive Officer of OP-TECH Environmental Services, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1)the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 26, 2003 /s/ Christopher J. Polimino Christopher J. Polimino President and Chief Executive Officer
Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Douglas R. Lee, Chief Financial Officer and Treasurer of OP-TECH Environmental Services, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1)the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 26, 2003 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer
OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2002 and 2001
Report of Independent Accountants
Shareholders and Board of Directors OP-TECH Environmental Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2002, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the index at Item 15. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/Dannible & McKee, LLP Dannible & McKee, LLP Syracuse, New York
February 12, 2003
Report of Independent Accountants
Shareholders and Board of Directors OP-TECH Environmental Services, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet as of December 31, 2001 and the related consolidated statements of operations and shareholders' equity and of cash flows present fairly, in all material respects, the financial position, results of operations and cash flows of OP-TECH Environmental Services, Inc. and Subsidiary at December 31, 2001 and for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP March 8, 2002
OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2002 and 2001
2002 2001 Assets
Current assets: Cash (Note 4) $- $51,818 Accounts receivable, net (Note 5) 4,639,731 2,885,683 Costs on uncompleted projects applicable to future billings 398,888 420,115 Inventory 172,848 133,186 Prepaid expenses and other current assets, net 198,201 181,964 --------- --------- Total current assets 5,409,668 3,672,766
Property and equipment, net (Note 6) 2,697,608 1,518,413 Assets held for sale (Note 7) - 480,000 Other assets 22,863 - --------- --------- Total Assets $8,130,139 $5,671,179 ========== ==========
Liabilities and Shareholders' Equity
Current liabilities: Outstanding checks in excess of bank balance(Note 4)$ 74,662 $ 20,659 Accounts payable 1,863,203 1,174,639 Billings in excess of costs and estimated profit on uncompleted contracts 567,423 541,373 Accrued expenses and other current liabilities 315,909 334,198 Current portion of long-term debt 556,610 239,369 --------- ---------- Total current liabilities 3,377,807 2,310,238
Long-term debt, net of current portion (Note 8) 1,116,793 698,346 Note payable to bank under line of credit (Note 8) 1,896,700 1,427,900 --------- ---------- Total liabilities 6,391,300 4,436,484
Shareholders' equity: Common stock, par value $.01 per share; authorized 20,000,000 shares; 15,318,787 and 11,703,963 shares outstanding as of December 31, 2002 and 2001, respectively 197,040 117,040 Additional paid-in capital 7,705,482 7,791,152 Accumulated deficit (6,119,831) (6,673,497) Treasury stock, par value (43,852) - ----------- ----------- Shareholders' equity, net 1,738,839 1,234,695 ----------- ----------- Total Liabilities and Shareholders' Equity $8,130,139 $5,671,179 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
Project billings and services $15,093,052 $13,243,081 $13,671,025 Project costs 10,916,214 9,466,613 10,059,070 ----------- ----------- ----------- Gross margin 4,176,838 3,776,468 3,611,955
Selling, general and administrative expenses 3,465,557 3,035,129 2,800,661 Provision for impairment of long-lived assets - 300,000 - ----------- ---------- ----------- Operating income 711,281 441,339 811,294 ----------- ---------- -----------
Other income (expense): Interest expense (167,542) (221,046) (278,651) Casualty gain from insurance proceeds, net - 301,881 - Other, net 9,927 2,219 (4,767) ----------- ---------- ---------- (157,615) 83,054 (283,418) ----------- ---------- ----------
Net income before income taxes 553,666 524,393 527,876
Income taxes (Note 10) - 13,000 (12,000) ----------- ---------- ----------
Net Income $553,666 $511,393 $539,876 =========== ========== ==========
Earnings per common share - basic and diluted (Note 2) $0.04 $0.04 $0.05
The accompanying notes are an integral part of the consolidated financial statements
OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 2002, 2001 and 2000
Additional Common Common Paid-In Accumulated Treasury Shares Stock Capital Deficit Stock Total
Balances at December 31, 1999: 11,603,963 $116,040 $7,787,152 $(7,724,766) $- $178,426 Net income - - - 539,876 - 539,876 ----------------------------------------------------------- Balance at December 31, 2000: 11,603,963 116,040 7,787,152 (7,184,890) - 718,302 Issuance of 100,000 shares 100,000 1,000 4,000 - - 5,000 Net income - - - 511,393 - 511,393 ----------------------------------------------------------- Balance at December 31, 2001: 11,703,963 117,040 7,791,152 (6,673,497) - 1,234,695 Issuance of 7,999,994 Shares 7,999,994 80,000 308,995 - - 388,995 Purchase of 4,385,170 Shares (4,385,170) - (394,665) - (43,852) (438,517) Net Income - - - 553,666 - 553,666 ------------------------------------------------------------ Balance at December 31, 2002: 15,318,787$197,040$7,705,482$(6,119,831)$(43,852)$1,738,839 ============================================================
The accompanying notes are an integral part of the consolidated financial statements
OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000 Operating activities: Net income $553,666 $511,393 $539,876 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Bad debt expense 12,058 135,999 116,500 Depreciation and amortization 317,380 328,220 266,709 Provision for impairment of long-lived assets - 300,000 - Loss (gain) on sale of equipment - 1,167 (10,000) Gain on insurance proceeds from loss on real property - (301,881) - Common stock issued for services rendered - 5,000 - (Increase) decrease in operating assets and increase (decrease) in operating liabilities: Accounts receivable (1,766,106) 34,314 136,455 Costs on uncompleted projects applicable to future billings 21,227 213,063 (153,208) Prepaid expenses, Inventory and other assets, net (82,615) 108,841 103,011 Billings and estimated profit in excess of costs of uncompleted contracts 26,050 (10,801) (266,538) Accounts payable and other accrued expenses 670,275 (317,382) (364,276) -------- -------- --------- Net cash (used in) provided by operating activities (248,065) 1,007,933 368,529 ---------- --------- ---------
Investing activities: Purchases of property and equipment (727,891) (705,571) (66,723) Insurance proceeds from loss on real property - 308,167 - Proceeds from sale of property and equipment - - 10,000 --------- --------- --------- Net cash used in investing activities (727,891) (397,404) (56,723) --------- --------- ---------
Financing activities: Proceeds from issuance of common stock, net 388,995 - - Purchase of treasury stock (438,517) - - Outstanding checks in excess of bank balance 54,003 (184,549) 94,254 Proceeds from notes payable to banks and long-term borrowings, net of financing costs 8,665,285 6,382,500 4,350,593 Principal payments on current and long-term borrowings (7,745,628)(6,762,911)(4,765,438) ----------- ---------- ---------- Net cash provided by (used in) financing activities 924,138 (564,960) (320,591) ----------- ---------- ----------
Increase (decrease) in cash and cash equivalents (51,818) 45,569 (8,785)
Cash and cash equivalents at beginning of year 51,818 6,249 15,034 ---------- --------- --------- Cash and Cash Equivalents at End of Year $- $51,818 $6,249 ========== ========= =========
Non-cash items: Equipment purchased through bank and other financing sources $284,831 $155,478 $285,702 Non-cash financing of insurance - 158,174 - Debt transfer upon sale of asset - - 31,341 Common stock issued for services rendered - 5,000 -
The accompanying notes are an integral part of the consolidated financial statements
OP-TECH Environmental Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
OP-TECH Environmental Services, Inc., headquartered in Syracuse, NY, provides comprehensive environmental services predominately in New York, Massachusetts, Northern Pennsylvania and New Jersey. 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.
OP-TECH AVIX, Inc. is a subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to pursue and engage in diversified lines of business including asset management services.
OP-TECH Environmental Services, Ltd. is an inactive Canadian subsidiary of OP- TECH Environmental Services, Inc.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of OP- TECH Environmental Services, Inc. and its two wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 7, the Company has certain property held for sale. Future changes in the estimates, or other assumptions utilized by management to evaluate the asset's carrying value, may have a material effect on the conclusions reached and the ultimate determination of impairment and carrying value.
Project Income Recognition and Unbilled Project Costs
Contracts are predominately short-term in nature (less than three months) and revenue is recognized as costs are incurred and billed. Income on long-term fixed-priced contracts greater than three months is recognized on the percentage-of-completion method, measured by the cost to cost method. Project costs include all direct material and labor costs and those indirect costs related to contract performance, and are generally billed in the month they are incurred and are shown as current assets. General and administrative costs are charged to expense as incurred.
Revenues recognized in excess of amounts billed are recorded as an asset. In the event interim billings exceed costs and estimated profit, the net amount of deferred revenue is shown as a current liability. Provisions for estimated losses are made in the period in which such losses are determined.
1. Summary of Significant Accounting Policies (Continued)
Project Income Recognition and Unbilled Project Costs (Continued)
Normal delays relating to payroll processing and billing compilation typically cause customer invoices relating to services performed in a certain month to be billed in the first two weeks of the following month. Such unbilled amounts at December 31, 2002 and 2001 are included in accounts receivable.
Concentration of Business Risk - Significant Customers
Sales to one customer, other than an affiliated party, amounted to approximately $5,600,000, $3,435,000 and $1,728,000 in 2002, 2001 and 2000, respectively. Accounts receivable at December 31, 2002 and 2001 include $1,350,000 and $550,000, respectively, from this customer.
Receivables and Credit Policies
Accounts receivable are unsecured customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Interest is not accrued on past-due invoices. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice. Customer account balances with invoices dated over 90 days old are considered delinquent.
The carrying amount of accounts receivable is reduced by a valuation allowance that represents management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Additionally, management applies a two-year weighted average of write-offs to the aggregate remaining accounts receivable to estimate a general allowance covering those amounts. The weighted average is adjusted for management's estimate of any changes in future economic conditions that might give rise to results that differ from past experience.
Inventory
Inventories, consisting of spill response and remediation supplies and materials, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of assets including those recorded under capital leases is provided for using the straight-line method over useful lives typically ranging from 3 to 10 years.
Long and Short-Term Debt
The carrying amounts of the Company's short-term collateralized and unsecured borrowing and non-traded variable-rate long-term debt agreements approximate fair value.
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company provides for income taxes in accordance with the liability method as set forth in Statement of Financial Accounting Standards ("SFAS") 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.
Impact of Recently Issued Standards
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 became effective January 1, 2003 for the Company. The Company has not yet made a determination of the impact of this standard on its consolidated financial statements, if any.
In October, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which became effective January, 2002 for the Company. SFAS No. 144 outlines the requirements used to test long-lived assets, other than goodwill and intangibles not being amortized, for impairment. In addition, the statement proscribes accounting and reporting for long-lived assets or groups of assets to be disposed. The adoption of SFAS No. 144 had no effect on the results of operations of the Company in 2002, but did require reclassification in 2002 of certain assets previously classified as held for sale on the balance sheet to property and equipment as assets held and used.
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard is effective for exit or disposal activities initiated after December 31, 2002, and requires costs associated with exit or disposal activities, (including costs related to involuntary terminations and contract termination costs), to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. Specifically, costs associated with involuntary terminations are to be accrued on the date the employees are notified, assuming the period of time between the notification date and termination date is the lesser of 60 days or the legally required notification period. Otherwise, these costs are to be recognized evenly over the period from notification to termination. Contract termination costs are to be recognized when the contract is legally terminated or when the economic benefits of the contract are no longer being realized. The Company has not yet made a determination of the impact of this standard on its consolidated financial statements, if any.
2. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period, which were 14,273,139, 11,641,771, and 11,603,963 for the years ended December 31, 2002, 2001 and 2000, respectively. Basic earnings per share is computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share includes the potentially dilutive effect of common stock equivalents.
Warrants issued to a financial advisor in 1998 to purchase 302,500 shares of common stock at $1.65 per share expired in March 2001.
Warrants were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share, expiring in May 2007.
In May 2002, a private offering of the Company's common stock was made under Regulation D, Rule 506 of the Securities Act of 1933, as amended. Form D, Notice of sale of securities pursuant to regulation D, was filed with the Securities and Exchange Commission on June 13, 2002. The placement agent of the offering was Benchmark-Pellinore Securities Corp. The offering resulted in the sale of 7,999,994 shares of the Company's common stock at $0.06 per share to twenty-one accredited investors. Gross proceeds from the offering were approximately $480,000. Expenses and fees, including an underwriting commission paid to Benchmark-Pellinore Securities Corp. of $48,000, aggregated approximately $91,000. Net proceeds of the offering were approximately $389,000. Management used the proceeds from the offering to buy back into treasury 4,385,170 shares of common stock from the Company's two largest shareholders.
On August 2, 2002, the Company purchased into treasury 4,385,170 shares of its common stock from the Company's two largest shareholders. 2,811,070 shares were purchased from M&T Bank for $.10 per share, or $281,107. 1,574,100 shares were purchased from O'Brien & Gere Limited for $.10 per share, or $157,410.
3. Related Party Transactions
The Company purchases subcontract labor services from St. Lawrence Industrial Services, Inc. which is owned by a director of the Company. The cost for these services amounted to approximately $880,000, $886,000 and $735,000 in 2002, 2001 and 2000, respectively.
A director of the Company is of counsel to Spitzer & Feldman PC, which provides professional services to the Company, and it is anticipated that it will continue to do so. The cost for these services amounted to approximately $18,468, $11,501, and $0 in 2002, 2001 and 2000, respectively.
The Company purchases technical services and rents certain office and warehouse space from a shareholder and its affiliates. The cost for these services amounted to approximately $38,000, $43,000 and $50,000 in 2002, 2001 and 2000, respectively.Additionally, the Company provided approximately $67,000, $27,000 and $143,000 of remediation, sub-contract support and project services to a shareholder and its affiliates for the years ending December 31, 2002, 2001 and 2000, respectively.
4. Cash
The Company voluntarily applies all available cash in excess of $25,000 in the Company's operating account to pay down the Company's note payable to bank under line of credit (Note 8) daily. Outstanding checks in excess of bank balance represents the amount of outstanding checks issued in the normal course of business that are in excess of the remaining balance in the Company's operating account.
5. Accounts Receivable
Accounts receivable at December 31, 2002 and 2001 consist of:
2002 2001
Accounts Receivable, gross $4,779,731 $3,080,683 Allowance for uncollectible receivables (140,000) (195,000) ----------- ----------- Accounts Receivable, net $4,639,731 $2,885,683 =========== ===========
All customer accounts receivable collateralize the Company's outstanding loans with its primary lender (see Note 8).
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2002 and 2001:
2002 2001
Furniture and fixtures $17,011 $13,820 Buildings and land 907,107 414,541 Office machines 136,220 122,879 Field equipment 2,950,548 2,024,400 Aqueous treatment system 121,728 121,728 --------- --------- 4,132,614 2,697,368 Less: Accumulated depreciation (1,435,006) (1,178,955) ----------- ----------- $2,697,608 $1,518,413 =========== ===========
Depreciation expense approximated $314,000, $327,000 and $267,000 for 2002, 2001 and 2000, respectively.
During the second quarter of 2001, the Company received insurance proceeds in the amount of $308,167 related to the insured replacement value of a property that was destroyed by a fire. The proceeds received were used to replace the destroyed building and contents at substantially the same cost. A loss on disposal of assets, representing the net book value of all the destroyed assets as of the date of the fire, was recorded in the amount of $6,286. Accordingly, the Company realized a casualty gain of $301,881 as a result of the proceeds collected.
7. Assets Held for Sale
Assets held for sale are stated at the lower of carrying amount or estimated fair value less costs of disposal. Management's estimation of fair value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions and certain other factors. During the third quarter of 2001 the Company, based on management's estimate of the Facility's fair value, recognized an additional impairment loss on the carrying value of the Facility of approximately $300,000. At December 31, 2002 these assets were reclassified to property and equipment as assets held and used since they no longer met the criteria to be classified as assets held for sale.
8. Long-Term Debt Obligations
Long-term debt is summarized as follows at December 31, 2002 and 2001:
2002 2001
Note payable to bank under line of credit, Due May 31, 2004. (a) $1,896,700 $1,427,900 ---------- ----------
Term Loan, due in monthly installment payments of $12,500, plus interest at prime plus 1.25% (5.5% at December 31, 2002). (a) 550,000 687,500 Term Loans under equipment line of credit, due in monthly installment payments aggregating $13,823, including interest at prime plus 1.25% (5.5% at December 31, 2001). (a) 649,156 135,245 Insurance Financing Note, due in monthly installment payments of $24,327, plus interest at prime plus 1.25% (5.5% at December 31, 2002). (a) 170,289 - Insurance Financing Note, due in monthly installment payments of $18,304, including interest at 9.85%, collateralized by the assignment of unearned premiums. - 36,162 Equipment Notes, due in monthly installment payments aggregating $4,241, including interest at rates ranging from 4.9% to 7.5%, collateralized by equipment with a carrying value of $130,000. 129,075 78,808 Equipment Notes, due in monthly installment payments aggregating $5,142, with 0% interest, collateralized by equipment with a carrying value of $175,000 174,883 - ---------- --------- 1,673,403 937,715 Less: Current portion (556,610) (239,369) ---------- --------- $1,116,793 $698,346 =========== =========
(a) The Company has entered into financing agreements (the "Agreements") with a lender including a Line of Credit agreement which provides for borrowings up to $2,300,000, with interest at prime plus 1.25%, to be used for working capital and expires on May 31, 2004, unless renewed by the lender; a $750,000 Term Loan agreement to refinance its previous term loans outstanding, which expires in August 2006; and a $1,050,000 Equipment Line of Credit which matures on May 31, 2003, unless renewed by the lender. Borrowings under the Equipment Line of Credit are converted to term loans to be paid in monthly installments over the shorter of five years or the useful life of the equipment.
The Agreements are collateralized by all accounts receivable, inventory and equipment now owned or subsequently acquired. This collateral has a carrying value at December 31, 2002 as follows:
Accounts Receivable $4,639,731 Inventory 172,848 Equipment 2,950,548 ---------- $7,763,127 ==========
The Agreements also include certain financial covenants including a minimum fixed charge coverage ratio, a tangible net worth ratio and a debt to net worth ratio; cross-collateralization provisions; and a material adverse change clause which permits the financial institution to call its obligation if the Company fails to comply with covenants, as defined, or in the event of a material adverse change in the Company's business. Management does not anticipate any adverse changes in the next twelve months, however, there can be no assurances.
Interest paid amounted to approximately $153,000, $207,000 and $267,000 in 2002, 2001and 2000, respectively
Scheduled principal payments on long-term debt for the next five years, not including the note payable to bank under line of credit, are as follows:
2003 $556,610 2004 384,394 2005 360,051 2006 259,254 2007 113,094 ---------- $1,673,403 ==========
At December 31, 2002 the Company has outstanding commitments in the form of standby letters of credit in the amount of $244,770 securing various agreements.
9. Operating Lease Obligations
Office facilities and various field equipment are leased under noncancelable operating leases expiring at various dates through 2007. Rent expense incurred under these operating leases amounted to approximately $456,000, $519,000 and $553,000 in 2002, 2001 and 2000, respectively. Future minimum lease payments under noncancelable operating leases are as follows:
2003 $336,376 2004 235,845 2005 214,486 2006 116,344 2007 44,150 Thereafter - -------- $947,201 ========
10. Income Taxes
The following summarizes the income tax (benefit) expense at December 31, 2002, 2001 and 2000:
2002 2001 2000 Current: Federal $- $- $- State - 13,000 (12,000) -------- --------- ---------- $- $13,000 $(12,000) ======== ========= ==========
In 2002, 2001 and 2000, the difference between the expected tax provision resulting from the application of the federal statutory income tax rate to pre-tax income is due principally to adjustment of the valuation allowance related to utilized net operating loss carryforwards.
At December 31, 2002, the Company has federal net operating loss ("NOL") carryforwards of approximately $5,550,040 for income tax purposes. The federal net operating loss carryforward expires at various times beginning in 2014 through the year ending December 31, 2019. Income taxes and franchise taxes paid were approximately $13,000 and $3,500 in 2001 and 2000, 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. The Company has recorded a valuation allowance amounting to the entire net deferred tax asset due to uncertainty as to the ultimate recovery of the assets.Significant components of the Company's deferred tax liabilities and assets as of December 31, 2002 and 2001 are as follows:
2002 2001 Deferred tax liabilities: Depreciation $- $126,358 ---------- --------- Deferred tax assets: Net operating loss carryforward $2,220,016 $2,391,282 Accounts receivable reserve 54,472 77,153 Accrued expenses 169,063 180,503 AMT tax credits - 25,083 ---------- ---------- Total deferred tax assets 2,443,551 2,674,021 Valuation allowance for deferred assets (2,443,551) (2,547,663) ----------- ----------- Deferred tax assets $- $126,358 ----------- ----------- Net deferred tax assets $- $- =========== ===========
11. Employee Benefit Plan
The Company maintains a defined contribution employee retirement plan ("Retirement Plan") which covers substantially all employees. The Retirement 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. Matching contributions made by the Company to the Retirement Plan were approximately $16,000, $26,000 and $18,700 in 2002, 2001 and 2000, respectively. The Company did not make discretionary contributions to the Retirement Plan in 2002, 2001 and 2000.
12. Stock Option Plan
The 2002 Omnibus Plan ("Omnibus Plan") maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees. Awards granted under the Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options ("NQSO's) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company ("Common Stock"). Shares delivered upon exercise of the Awards, at the election of the Board of Directors of the Company may be stock that is authorized but previously unissued or stock reacquired by the Company, or both. The maximum number of shares with respect to which the Awards may be granted under the Plan shall not exceed 1,000,000 shares of Common Stock; provided, however, that such number of shares of Common Stock may also be subject to adjustment, from time to time, at the discretion of the Board of Directors of the Company.
Under the Omnibus Plan, on May 21, 2002 the Company granted 335,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.06), and an NQSO's maximum term is 10 years. The NQSO's vest and are exercisable on a three-year graded schedule. A summary of the status of the Company's NQSO's granted under the Omnibus Plan as of December 31, 2002, and changes during the year ending on that date follows:
Shares Exercise Price
Outstanding at beginning of year - - Granted 335,000 $0.06 Exercised - - Forfeited - - Expired - - -------- -------- Outstanding at end of year 335,000 $0.06 -------- --------
Options exercisable at year-end - --------
The Company applies APB Opinion 25 and related Interpretations in accounting for its Omnibus Plan. Accordingly, no compensation cost has been recognized for the NQSO's granted on May 21, 2002. Had compensation cost for the Company's Omnibus Plan been determined based on the fair value at the grant dates for awards under the Omnibus Plan consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the year ended December 31, 2002 would not be materially different from the amounts reported.
13. 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.
14. Subsequent Event
In January 2003 the Company purchased equipment costing approximately $105,000. This purchase was financed with a note payable due in monthly installments of $2,911 through 2005.
15. Financial Information Concerning Segment Reporting
The Company reports its operations principally in two business segments, as follows:
(1)	OP-TECH Environmental Services, Inc. ("OP-TECH") engages in diversified and comprehensive environmental remediation services for customers located primarily in the northeastern United States.
(2)	OP-TECH AVIX, Inc. ("AVIX"), a subsidiary of OP-TECH, was formed in January 2002 to pursue and engage in diversified lines of business including asset management services.
Segment data for the year ended December 31, 2002 follows:
OP-TECH AVIX Total
Project billings and services to external customers $15,081,710 $11,342 $15,093,052 Intersegment project billings and services - - - ----------- --------- ----------- Total Project billings and services $15,081,710 $11,342 $15,093,052 ----------- --------- -----------
Operating earnings (loss) $903,670 $(192,389) $711,281 Interest expense (159,733) (7,809) (167,542) Other income, net 9,927 - 9,927 ----------- --------- ---------- Earnings (loss) before income taxes $753,864 $(200,198) $553,666 ----------- --------- ----------
Total assets $8,114,089 $16,050 $8,130,139 Depreciation and amortization 316,143 1,237 317,380 Capital expenditures 1,006,777 5,945 1,012,722
16. Two-Year Selected Quarterly Financial Data (Unaudited)
Year Ended December 31, 2002 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 September 30 December 31
Project billings $3,080,364 $3,644,734 $3,728,173 $4,639,781 Gross margin 918,727 965,984 1,149,473 1,368,468 Net income 2,133 138,038 194,368 219,127 Net income per share (basic and dilutive) $0.00 $0.01 $0.01 $0.02
Year Ended December 31, 2001 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 September 30 December 31
Project billings $2,869,570 $3,378,960 $3,664,400 $3,330,151 Gross margin 894,927 987,408 926,036 968,097 Net income 53,429 419,528 (162,448) 200,884 Net income per share (basic and dilutive) $0.00 $0.04 $(0.01) $0.02
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at Beginning End of Description of Period Additions Deductions Period
YEAR ENDED DECEMBER 31, 2002 Reserves deducted from assets to which they apply: Doubtful accounts receivable $194,782 $43,805 $98,587(a) $140,000 Valuation allowance for deferred assets $2,547,663 $- $104,112 $2,443,551
YEAR ENDED DECEMBER 31, 2001 Reserves deducted from assets to which they apply: Doubtful accounts receivable $149,346 $135,999 $90,563(a) $194,782 Valuation allowance for deferred assets $3,052,710 $- $505,047 $2,547,663
YEAR ENDED DECEMBER 31, 2000 Reserves deducted from assets to which they apply: Doubtful accounts receivable $132,155 $116,500 $99,309(a) $149,346 Valuation allowance for deferred assets $2,934,212 $118,498 $- $3,052,710
(a) Doubtful accounts written off and adjustments.
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
The listing below includes the subsidiaries of OP-TECH Environmental Services, Inc. ("OP-TECH"). All subsidiaries are owned 100% by OP-TECH. OP-TECH does not have ownership interests in any special purpose entities that are not included in the consolidated financial statements.
1. OP-TECH AVIX, Inc. (NY)
2. OP-TECH Environmental Services, Ltd. (Canada)
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