ITEM 1. BUSINESS
General
OP-TECH Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial cleaning and decontamination services predominately in New York, New England, Pennsylvania, New Jersey, and Ohio. The Company provides environmental remediation services for sites contaminated by hazardous and non-hazardous materials. The Company also 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. OP-TECH also provides 24-hour emergency spill response services. The Company’s revenues are derived from state agencies, industrial companies, engineering firms and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies. The Company’s services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities. The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public.
Services
Excavation & Site Remediation Services
OP-TECH provides soil excavation, management, and transportation and disposal for complex projects that require handling large volumes of materials. Excavation and removal is a fundamental, remediation method involving the removal of contaminated soil, which typically are transported off-site for treatment or disposal.
“Specialized Excavation”
When conventional excavation techniques are not feasible or are impractical, OP-TECH employs “specialized excavation” techniques that safely provide a non-destructive and precise excavation practice in areas such as building basements, backyards, or other confined areas. Specialized excavation techniques are used to locate/identify underground utilities, tanks, structures, or excavation near buildings, retaining walls or foundations and for excavation of buried drums, cylinders and unknown materials.
Buried Drums and Cylinders
OP-TECH has vast experience handling complex buried drum, cylinders and unknown material excavation projects. OP-TECH applies “specialized excavation” techniques to excavate drums from the most challenging environments. We provide complete drum management services including, screening, sampling, profiling, manifesting and transportation and disposal of hazardous or non-hazardous waste. These projects require careful investigation due to a large number of anomalies and the complexity of coordinating heavy equipment operations, drum handling and final site closure.
In-Situ & Ex-Situ Treatment
OP-TECH has demonstrated experience in providing in-situ and ex-situ treatment systems. Utilizing chemical oxidation, stabilization and solidification and mobile treatment systems, we provide solutions in the most challenging environments.
Chemical Oxidation
OP-TECH provides chemical oxidation applications using peroxide (Fenton’s Reagent) and permanganate products, which cause the rapid and complete chemical destruction of many toxic organic chemicals. The Company’s experience includes direct in-situ injection application, ex-situ or off site for successful remediation of soil and groundwater.
Stabilization and Solidification
OP-TECH provides soil solidification and stabilization applications, which reduce the mobility of hazardous substances and contaminants in the environment through both physical and chemical means. Solidification and stabilization techniques are used alone or combined with other treatment and disposal methods to yield a product or material suitable for land disposal or in other cases that can be applied to beneficial use. These techniques have been used as both final and interim remedial measures.
Wetlands Mitigation
OP-TECH has exceptional experience with wetlands remediation and restoration projects. Project experience has included removal of sediments from many active water courses ranging from creeks and marshes to large scale marinas.
Mobile Treatment Applications
OP-TECH provides mobile treatment systems for routine, scheduled service applications or dispatches them on an emergency basis. The Company’s capacities range from 10 to approximately 500 gallons per minute and are available in a number of sizes and configurations. All systems are pre-assembled, self-contained, requiring minimal setup time upon mobilization, and are available as trailer-mount, skid-mount or containerized.
Site Closure Services
OP-TECH provides complete RCRA and Non-RCRA Site Closure Services in support of property transfer, facility closure, disaster recovery, development/redevelopment, and Brownfield transactions. The Company’s services include comprehensive decontamination, decommissioning, demolition and material/soil remediation.
Decontamination
OP-TECH offers a wide range of decontamination services. In emergency and scheduled situations, we evaluate the circumstances and develop a safe, comprehensive and cost efficient plan.
OP-TECH has preformed thousands of decontaminations and facility closures for small single buildings to multi-building expansive facilities.
Decommissioning and Demolition Services
OP-TECH provides Demolition and Dismantling Services in both emergency and scheduled situations. Applications may include building demolition and dismantling of partial or total building or plant structure.
Upgrading equipment or renovating production areas may require the removal of existing process equipment. Welded piping, stainless alloys, reactors, concrete structures, structural steel, pressure vessels and limited space requires the skillful selection of demolition techniques such as cold and hot cutting including plasma arc cutting, mechanical disassembly and/or rigging.
OP-TECH provides contamination identification, sampling, segregation and disposal. The Company implements efficient methodologies to reduce site emissions during demolition activities and cost-efficient disposal technologies.
Remedial Systems
OP-TECH fabricates and constructs integrated remediation systems configured to meet site-specific cleanup criteria while satisfying air and/or water quality discharge standards. The Company’s integrated remedial systems address all aspects of surface and subsurface contamination as it exists in groundwater and soil.
Operations and Maintenance Service
OP-TECH provides operation services and routine mechanical inspection and service of remediation systems and components.
Transportation and Disposal Services
The Company provides transportation of bulk and containerized hazardous and non-hazardous wastes from customer sites to customer-designated landfills and disposal facilities. OP-TECH also provides liquid tank truck transports equipped with vacuum pumps.
Asbestos Abatement
OP-TECH provides asbestos abatement contracting services to both the public and private sectors. OP-TECH 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
OP-TECH provides interior demolition services such as removing walls, ceilings, and flooring. In addition, OP-TECH 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
OP-TECH 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.
OP-TECH provides line cleaning, installation of petroleum piping and process piping. Water, storm, sewer and product piping as well as treatment systems.
24-Hour Emergency Spill Response
Many of the OP-TECH’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 steps performed by OP-TECH 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. OP-TECH 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.
Non-Hazardous Waste Transfer and Storage Facility
OP-TECH operates a New York State permitted non-hazardous waste treatment, storage and transfer facility in its Waverly, New York office. The Company accepts non-hazardous waste in bulk or containerized form, consolidates the waste and then transfers it to a landfill or recycling facility.
Technologies Employed
OP-TECH 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 material compliance with all federal, state, and local regulations governing its business.
RCRA. The Resources Conservation and Recovery Act of 1976 (“RCRA”) is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal. RCRA or EPA-approved state programs may govern any waste handling activities of 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.
Regulation of underground storage tanks 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.
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 area 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 Edison, New Jersey, Baltimore, Maryland and Cleveland, Ohio.
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 2008, the Company performed services for approximately 900 clients. These projects were substantially all short-term (three months or less) in nature. The largest business segment for the each of the years ended December 31, 2008, 2007, and 2006 was Environmental Remediation services. Environmental Remediation services accounted for 44%, 38% and 40% of the Company’s revenues for the years ended December 31, 2008, 2007, and 2006, respectively. For the past three fiscal years, all of the Company’s revenues were generated from customers in the United States.
During 2008, the Company had project revenue of approximately $7,071,000 related to several contracts with the New York State Department of Environmental Conservation, which totaled approximately 19% of the Company’s revenues. A portion of that revenue is related to the spill response and remediation contracts with the New York State Department of Environmental Conservation were extended to April 2009 and March 2009, respectively. The loss of this project revenue could have a material adverse effect on the Company. The Company anticipated receiving new contracts with the New York State Department of Environmental Conservation in the second quarter of 2009
Insurance
The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides aggregate coverage limits of $13 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.
Employees
The Company has entered into a contractual co-employment agreement with a third-party provider. As of February 1, 2009, the Company had a total of approximately 182 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 considers its relations with its employees to be good, and the Company has never had a work stoppage or threat of a work stoppage.
Available Information
The Company’s internet address is www.op-tech.us. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after the Company electronically files such material with the Securities and Exchange Commission (SEC) is available there. The information found on the Web site is not part of this or any other report the Company files or furnishes to the SEC.
The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the reports on its website at www.sec.gov.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters in East Syracuse, NY and its branch office locations in Syracuse, Buffalo, Rochester, Massena, Waverly, Albany, and Plattsburgh, NY, Baltimore, MD, Edison, NJ and Cleveland, OH. The Company leases an aggregate of approximately 105,670 square feet of office, shop and warehouse space at those locations. The leases expire at various times through September 30, 2013. The current aggregate monthly lease payment is $48,375 plus utilities.
Equipment
The Company’s owned equipment consists primarily of construction equipment such as vacuum trucks, dump trucks, tankers, excavation equipment, utility vehicles, pumps, generators, and compressors, some of which have been specially modified for the Company’s use.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has an accrued liability of $450,000 and $345,000 at December 31, 2008 and 2007, respectively. The liability has been recorded to cover management’s estimate of any potential legal indemnity settlement or other payments necessary to dispose of a particular claim against the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholders meeting on August 6, 2008. The shareholders voted on the ratification of Dannible & McKee, LLP as the Company’s auditors and the election of seven directors. The following votes were cast for each:
For Against
Ratification of Dannible & McKee, LLP as
the Company’s auditors 6,144,683 -0-
Election of Directors:
Robert J. Berger Director 6,144,683 -0-
Richard L. Elander Director 6,144,683 -0-
Cornelius B. Murphy, Jr. Director 6,144,683
Steven A. Sanders Director 6,144,683
George W. Lee Director 6,144,683
Richard Messina Director 6,144,683
Richard Jacobson Director 6,144,683
There were no other matters submitted to a vote of the Company’s shareholders. After the meeting, the Company had no other directors other than those elected at the meeting.
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.
The high and low closing bid prices for the shares of the Company’s common stock were as follows:
Quarter Ended High Bid Low Bid
March 31, 2007 $0.75 $0.75
June 30, $0.75 $0.42
September 30, 2007 $0.60 $0.25
December 31, 2007 $0.25 $0.20
March 31, 2008 $0.25 $0.20
June 30, 2008 $0.20 $0.10
September 30, 2008 $0.30 $0.17
December 31, 2008 $0.29 $0.14
First quarter through
March 18, 2008 $0.93 $0.14
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 2, 2009, there were approximately 194 holders of record of the Company’s common stock.
(c)
The Company has never paid any dividends.
Equity Compensation Plan Information
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)
(a)
Weighted-average exercise price of outstanding options, warrants and rights (1)
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (1)
(c)
Equity compensation plans approved by security holders
796,008
$0.15
251,336
Equity compensation plans not approved by security holders
-
-
-
Total
796,008
$0.15
251,336
.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data
Year Ended December 31,
Project Billings and Services
$36,634,822
$32,483,687
$35,069,989
$21,784,096
$18,170,103
Net Income (loss)
$654,924
($405,574)
$207,973
($145,744)
$200,086
Net Income (loss) per Share
- Basic
- Diluted
$.06
$.05
($.03)
($.03)
$.02
$.02
($.01)
($.01)
$.02
$.02
Balance Sheet Data
As of December 31,
Total Assets
$17,149,598
$16,254,072
$18,470,167
$13,185,755
$12,241,068
Long-Term Obligations
$6,249,748
$6,733,952
$7,859,741
$6,024,691
$5,366,959
Total Liabilities
$13,702,400
$13,439,236
$15,305,884
$10,303,758
$9,241,864
Shareholders’ Equity
$3,447,198
$2,814,836
$3,164,283
$2,881,997
$2,999,204
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008, the Company had cash and cash equivalents of $80,003 as compared to $93,535 at December 31, 2007. Cash in the Company’s operating account is electronically transferred nightly to pay down the Company’s revolving line of credit in order to minimize interest expense.
At December 31, 2008, the Company had working capital of $5,740,747 compared to working capital of $5,154,115 at December 31, 2007. The Company had a current ratio of approximately 1.77 to 1 at the end of 2008 and at the end of 2007.
Cash provided by operating activities during 2008 was $597,787 compared to $1,461,129 during 2007. The decrease in cash provided by operating activities in 2008 was mainly attributable to a net increase in accounts receivable due to higher project volume in the forth quarter.
The Company’s net cash used in investing activities of $482,404 during 2008 was attributable to the purchase of various field and office equipment.
Cash used in financing activities of $128,915 in 2008 was primarily due to the net pay downs on the Company’s line of credit.
The Company has a loan agreement that provides for borrowings up to $6,000,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The loan is payable on January 5, 2010, bears interest at a rate of prime plus .50 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. The loss of the availability of this line of credit after January 5, 2010 could have an adverse effect on the Company if alternate financing sources are not available. As of December 31, 2008, borrowing against the revolving loan aggregated $4,865,097.
During 2008, all principal payments on the Company’s debt were made within payment terms. The Company was not in compliance with the capital expenditure limit financial covenant and received a waiver at December 31, 2008.
The Company has an interest rate swap agreement that has been designated as a hedge. The swap will be evaluated for effectiveness on a quarterly basis and any ineffective portion will be charged to earnings. The effect of the swap is to fix the rate being paid on the term loan at 7.80%.
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.
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, and utilize its facilities and work force profitably in the face of intense price competition.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value as the exchange price that would be received for an asset, or the exit price paid to transfer a liability. It also establishes a fair value hierarchy, which prioritizes the use of market-based inputs over company-specific inputs, and requires expanded disclosures about the inputs and methods used to determine the fair value. The effect of our adoption of SFAS No. 157 on January 1, 2008 was not material and no adjustment to Accumulated Deficit was required. Refer to Note 13 for the required disclosures as a result of the adoption of SFAS No. 157.
On January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115,” which permits a company to elect to measure certain financial assets and financial liabilities at fair value. The Company has not elected to measure any financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. There has been no impact on the Company’s results of operations as a result of the adoption of this standard.
On January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” which supplements SFAS No. 109, “Accounting for Income Taxes,” which requires specific thresholds for measurement and recognition of income tax positions, as well as expanded disclosures. Tax positions recorded for financial statement purposes must be more likely than not to be sustained if challenged by the relevant jurisdiction, and must be re-evaluated at each balance sheet date. There has been no significant impact on the Company’s results of operations as a result of the adoption of this standard.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements at December 31, 2008 or December 31, 2007 that require disclosure under this item.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following critical accounting policies that affect the Company's more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates those estimates, including those related to assets held for sale, valuation allowances on deferred tax assets, revenue recognition, allowance for doubtful accounts and contingencies and litigation. The Company states these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates.
The Company believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements:
Contracts are predominately short-term in nature (less than three months) and revenue is recognized as costs are incurred. Project costs are generally billed in the month they are incurred and are shown as current assets. 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. Estimated losses are recorded in full when identified.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Additionally, management estimates a general allowance based on historical charge offs covering other amounts that may not be collectible.
The Company maintains a valuation allowance on its deferred tax asset based on the amount of net operating losses that management believes it will not utilize prior to the expiration dates of these losses. Management determines the adequacy of this allowance by continually evaluating its ongoing profitability and its ability to generate taxable income in the future sufficient to utilize the net operating losses. If the profitability of the Company were to change, it could effect the amount of net operating losses that could be utilized and require an adjustment to the valuation allowance.
The Company establishes accruals for loss contingencies related to litigation and claims. These estimates are prepared using information available to management at the time of the accrual and at each reporting period. Events and circumstances could change requiring management to revise or adjust amounts accrued for loss contingencies.
COMPARED TO 2007
Revenues
During the year ended December 31, 2008, the Company’s revenues increased 12.8% to $36,634,822 as compared to $32,483,687 for the year ended December 31, 2007.
When comparing 2008 to 2007, the overall increase in project revenue is due to an increase in larger projects performed by the Company during the year. The Company has made a planned effort to bid on larger projects based on overall increases in service capabilities.
Project Costs and Gross Margin
Project costs for the year ended December 31, 2008 increased 11.9% to $27,693,209 from $24,739,420 for the year ended December 31, 2007. Project costs as a percentage of revenues were 75.6% for the year ended December 31, 2008, compared to 76.2% for the year ended December 31, 2007. The gross profit margin for the year ended December 31, 2008 was 24.4% compared to 23.8% for the year ended December 31, 2007. Gross profit in dollars increased 15.5% to $8,941,613 from $7,744,267 in 2007. Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $1,037,000 in 2008 and $917,000 in 2007.
The increase in the gross margin percentage was planned and was due to the performance of several large projects and the Company’s ability to maximize purchasing efficiencies to reduce costs and increase overall gross margin dollars.
Selling, General, and Administrative Expenses
During the year ended December 31, 2008, selling, general, and administrative (“SG&A”) expenses increased 3% to $7,763,142 compared to $7,525,635 reported for the previous year.
SG&A expenses as a percentage of revenue decreased to 21% for the year ended December 31, 2008 from 23% for the year ended December 31, 2007.
When comparing 2008 to 2007, the reduction in 2008 operating expenses is primarily attributed to the following:
·
Payroll and related expenses decreased 10% to $3,274,281 from $3,648,657 in 2007. The decrease is related to an improvement in efficiencies and reductions of employee benefit costs and non-billable labor.
·
Business insurance decreased 20% to $506,123 from $636,180 in 2007 primarily as a result of the Company’s ability to mitigate risk and reduce claims.
Operating Income
As a result of the factors discussed above, for the year ended December 31, 2008, the Company reported operating income of $1,074,116 compared to operating income of $218,632 for the previous year.
Interest Expense
Interest expense decreased 33% to $449,785 in 2008 compared to $669,379 in 2007. The decrease in interest expense was primarily due to a decrease in the rates paid on the Company’s floating rate debt that is tied to changes in the prime rate. The prime rate decreased from 7.25% at December 31, 2007 to 3.25% at December 31, 2008.
Net Income Before Income Taxes
Net income before income taxes amounted to $633,653 in 2008 compared to net loss before income taxes of $451,619 in 2007.
Income Tax Expense
The Company recorded a net income tax benefit of $21,271 in 2008 compared to an income tax benefit of $46,045 in 2007.
Net Income
Net income for the year ended December 31, 2008 was $654,924 or $.06 per share basic and diluted compared to net loss of $405,574 or $.03 per share basic and diluted for the year ended December 31, 2007.
Key Performance Indicators
Management measures equipment utilization and labor efficiency on a monthly basis in addition to project revenue and gross margin discussed above.
2007 COMPARED TO
Revenues
During the year ended December 31, 2007, the Company’s revenues decreased 7.4% to $32,483,687 as compared to $35,069,989 for the year ended December 31, 2006.
When comparing 2007 to 2006, the overall decrease in project revenue is due to a decrease in the amount of larger low margin projects performed by the Company. The Company has made a concerted and planned effort to bid on projects at a higher gross margin percentage in order to increase overall gross margin dollars.
Project Costs and Gross Margin
Project costs for the year ended December 31, 2007 decreased 12% to $24,739,420 from $28,007,851 for the year ended December 31, 2006. Project costs as a percentage of revenues were 76% for the year ended December 31, 2007, compared to 80% for the year ended December 31, 2006. The gross profit margin for the year ended December 31, 2007 was 24% compared to 20% for the year ended December 31, 2006. Gross profit in dollars increased 10% to $7,744,267 from $7,062,138 in 2006. Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $917,000 in 2007 and $1,074,000 in 2006.
The increase in the gross margin percentage was planned and was due to the performance of several large projects that were bid at a higher gross margin percentage than was the Company’s average prior to 2007 in order to increase the overall gross margin dollars.
Selling, General, and Administrative Expenses
During the year ended December 31, 2007, selling, general, and administrative (“SG&A”) expenses increased 29% to $7,525,635 compared to $5,853,744 reported for the previous year.
SG&A expenses as a percentage of revenue increased to 23% for the year ended December 31, 2007 from 17% for the year ended December 31, 2006.
When comparing 2007 to 2006, the overall increase in operating expenses is primarily due to the following increases:
·
Payroll and related expenses increased 23% to $3,533,448 from $2,862,992 in 2006. The increase is related to an increase in workers compensation expense, and an increase in employee benefit costs and non-billable labor.
·
Business insurance increased 27.4% to $636,180 from $499,233.
·
Bad debt expense increased 315% to $258,253 from $62,157 in 2006 as a result several receivable collection difficulties reserved for in the allowance for doubtful accounts.
·
Equipment expense, net of usage credit increased 87% to $905,128 from $492,491 primarily attributed to increases in fuel expense, depreciation expense and repair expense.
Provision for Impairment of Land and Buildings Held for Sale
In September 2006, the Company recognized a provision for impairment of its land and buildings held for sale in the amount of $150,000 to adjust the carrying value of the land and building held for sale to its fair value. In November 2006, the Company sold the land and buildings for $700,000, which generated an additional loss of $49,873.
Operating Income
As a result of the factors discussed above, for the year ended December 31, 2007, the Company reported operating income of $218,632 compared to operating income of $1,058,394 for the previous year.
Interest Expense
Interest expense increased 9% to $669,379 in 2007 compared to $615,361 in 2006. The increase in interest expense was primarily due to an increase in the average outstanding balance on the revolving loan when comparing the year ended December 31, 2007 with the same period in 2006. The increase in interest expense is mitigated by a decrease in the rates paid on the Company’s floating rate debt that is tied to changes in the prime rate. The prime rate decreased from 8.25% at December 31, 2006 to 7.25% at December 31, 2007.
Net Income / Loss Before Income Taxes
Net loss before income taxes amounted to $451,619 in 2007 compared to net income before income taxes of $388,938 in 2006.
Income Tax Benefit / Expense
The Company recorded a net income tax benefit of $46,045 in 2007 compared to an income tax expense of $180,965 in 2006.
Net Income / Loss
Net loss for the year ended December 31, 2007 was $405,574 or ($.03) per share basic and diluted compared to net income of $207,973 or $.02 per share basic and diluted for the year ended December 31, 2006.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates because of its variable rate debt. To manage the potential exposure, the Company enters into various derivative transactions, mainly interest rate swaps. The financial impact of these hedging instruments are offset in part or in whole by corresponding changes in the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. Note 9 to the consolidated financial statements includes a discussion of the Company’s accounting policies for financial instruments.
Interest rate swaps are used to hedge a term debt obligation. Based on the Company’s overall interest rate exposure as of and during the year ended December 31, 2008, including derivative and other rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $70,000 annually.
The Company is aware that as the economy slows down, the Company’s business could be affected by client companies closing operations or reducing production, which could reduce the amount of waste generated, industrial cleaning projects, and environmental remediation 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 and related financial schedule of the Company and the report of Dannible & McKee LLP are submitted under Item 15 of this report.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9a
ITEM 9a - MANAGEMENT’S REPORT ON FINANCIAL INFORMATION AND INTERNAL CONTROLS
Responsibility For Financial Information - We are responsible for the preparation, accuracy, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report. Such information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly, includes certain amounts that represent management’s best estimates and judgments. Actual amounts could differ from those estimates.
Responsibility for Internal Controls - We are also responsible for establishing and maintaining adequate internal controls over financial reporting. These internal controls consist of policies and procedures that are designed to assess and monitor the effectiveness of the control environment including: risk identification, governance structure, delegations of authority, information flow, communications and control activities. While no system of internal controls can ensure elimination of all errors and irregularities, OP-TECH’s internal controls, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported, and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should be balanced with their benefits. The Audit Committee of the Board of Directors, which is comprised solely of independent directors, meets regularly with OP-TECH’s senior financial management, and independent registered public accounting firm to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal controls. The Audit Committee is responsible for the selection and compensation of the independent registered public accounting firm. OP-TECH’s financial management, internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee at all times.
Report On Internal Control Over Financial Reporting - We have evaluated OP-TECH’s internal control over financial reporting as of December 31, 2008. This evaluation was based on criteria for effective internal control over financial reporting set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we have concluded that OP-TECH’s internal control over financial reporting is effective as of December 31, 2008. This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
Report On Disclosure Controls And Procedures - As of December 31, 2008, we carried out an evaluation of the effectiveness of the design and operation of OP-TECH’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, we concluded that OP-TECH’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in OP-TECH’s periodic filings under the Exchange Act is accumulated and communicated to us to allow timely decisions regarding required disclosures, and such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
ITEM 9b
ITEM 9b - OTHER INFORMATION
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 August 6, 2008 for a term of one year.
Each director has served continuously since he was first elected.
The Board of Directors held four 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.
INDEPENDENCE
The Board recognizes the importance of director independence. Under the rules of the New York Stock Exchange, to be considered independent, the Board must determine that a director does not have a direct or indirect material relationship with the Company. Moreover, a director will not be independent if, within the preceding three (3) years: (i) the director was employed by the company or receives $25,000 per year in direct compensation from the company, other than director and committee fees or other forms of deferred compensation for prior service, (ii) the director was partner of or employed by the company’s independent auditor, (iii) the director is part of an interlocking directorate in which an executive officer of the company serves on the compensation committee of another company that employs the director, (iv) the director is an executive officer or employee of another company that makes payments to, or receives payments from, the company for property or services in an amount which, in any single fiscal year, exceeds the greater of $100,000 or 2% of such other company’s consolidated gross revenues, (v) or the immediate family member in any of the categories in (i) - (iv) above.
The Board has determined that six (6) of the company’s seven (7) directors are independent under these standards. As a result of Director Berger’s ownership of St. Lawrence Industrial Services Corp., he is not considered to have independent status. Mr. Berger does serve on the Compensation committee based upon his prior business experience and the fact that he is a holder of almost ten percent (10%) of the outstanding shares of the company’s stock.
RELATED PARTY TRANSACTION REVIEW
The Board has adopted a policy concerning the review, approval and monitoring of transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning five percent (5%) or greater of the Company’s outstanding shares). The policy covers any transaction exceeding $1,000 in which the related person has a direct or indirect material interest. Related person transactions must be approved in advance by the Co-chairmen and reported to the Board at the next meeting following the transaction. The policy is intended to restrict transactions to only those which are in the best interests of the Company.
AUDIT COMMITTEE
The members of the Committee are Messrs. Cornelius Murphy, Richard Elander, and George Lee. The Committee operates under a written charter adopted by the Board of Directors. The Committee held three meetings during the year ended December 31, 2008. Its duties and responsibilities include:
·
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.
·
Recommending to the Board the appointment of the Company’s independent registered accounting firm.
·
Oversight of the adequacy of the Company’s system of internal controls.
·
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 auditing standards of the Public Company Accounting Oversight Board (United States), 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 2008, as ratified by shareholders. 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 accepted 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, 2008 for filing with the Securities and Exchange Commission.
The Committee does not have a financial expert. Due to the small size of the Company and lack of financial complexity, the Committee does not anticipate adding a financial expert.
REPORT OF AUDIT COMMITTEE
The Audit Committee reviews the company’s financial reporting process on behalf of the Board. Management has the primary responsibility for establishing and maintaining adequate internal financial controllership, for preparing the financial statements and for the public reporting process. Dannible & McKee, LLP, our company’s independent auditor for 2008, is responsible for expressing an opinion on the conformity of the company’s audited financial statements with generally accepted accounting principles.
In this context, the committee has reviewed and discussed with management and Dannible & McKee, LLP the audited financial statements for the year ended December 31, 2008. The committee has discussed with Dannible & McKee, LLP the matters that are required to be discussed by Statement on auditing Standards No. 61 (Communication with Audit committees). Dannible & McKee, LLP has provided to the committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the committee has discussed with Dannible & McKee, LLP that firm’s independence. The committee has concluded that Dannible & McKee, LLP’s provision of audit and non-audit services to the company is compatible with Dannible & McKee, LLP’s independence.
Based on the considerations and discussions referred to above, the committee recommended to the Board of Directors that the audited financial statements for the year ended December 31, 2008 be included in the Annual Report on form 10-K for 2008. This report is provided by the following independent directors, who comprise the committee:
Cornelius B. Murphy, PhD (Chairman)
Richard L. Elander
George W. Lee, Jr.
EXECUTIVE OFFICERS OF THE COMPANY
Charles Morgan (55)
Chief Executive Officer
Mr. Morgan was named Chief Executive Officer (“CEO”) in November 2006. He has been with the Company since January of 2002 and has previously served as Executive Vice President and Chief Operating Officer. Prior to joining the Company, 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 operations firm. Mr. Morgan has 34 years of experience as a senior executive and corporate director of environmental, engineering, construction and energy companies. Mr. Morgan has experience with all aspects of senior level company management including marketing and sales, strategic planning, financial management, product and service development, project management and mergers and acquisitions. Mr. Morgan has also managed a variety of large scale projects domestically and internationally for a broad spectrum of private sector industrial clients.
Jon Verbeck (48)
Chief Financial Officer & Treasurer
Mr. Verbeck was named Chief Financial Officer (“CFO”) and Treasurer in May 2007. Prior to joining the Company, Mr. Verbeck was the Managing Director of a business consulting firm. From 1991 to 2005, he was the CFO for a manufacturing and distributor company. Prior to 1991, he worked as an auditor for a public accounting firm from 1985 to 1991. Mr. Verbeck is a Certified Public Accountant in New York State.
CODE OF ETHICS FOR SENIOR OFFICERS
The Company has adopted a code of ethics that applies to its senior executive and financial officers. The Code of Ethics for senior officers is included in Exhibit 14.
BENEFICIAL OWNERSHIP AND REPORTING COMPANIES
Section 16(a) of the Exchange Act requires our directors, officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of ours. Directors, officers and 10% holders are required by Commission regulations to send us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the forms sent to us and the representations made by the reporting persons to us, we believe that during the fiscal year ended December 31, 2008, our directors, officers and 10% holders complied with the filing requirements under Section 16(a) of the Exchange Act.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
A. Compensation Committee
The Compensation Committee of the Board of Directors reviews and administers the Company’s compensation policies and practices for the executive officers of the Company. The Compensation Committee is currently comprised of Dr. Murphy, Mr. Messina and Mr. Berger, all of whom are nonemployee directors. The Company’s financial accounting group supports the Compensation Committee’s work by providing information reports to the Compensation Committee when requested. The Committee’s authority is not set out in a charter. The Committee has not delegated authority and has not hired compensation consultants.
B. Compensation Discussion and Analysis
Compensation Philosophy
The Compensation Committee has adopted an executive compensation policy that rewards executives if the Company achieves its operational, financial and strategic goals and for building shareholder value. The material elements of the total compensation which is considered for executives each year under the Company’s policy are (i) base salary, (ii) annual cash bonus, (iii) stock-based awards, and (iv) retirement, health and welfare and other benefits.
The Compensation Committee intends for the compensation earned by executive officers to be commensurate with performance and competitive with the compensation paid to executives at comparable companies. The Compensation Committee has not engaged in any benchmarking of total compensation or any material element thereof. The named executive officers do not play a role in the compensation setting process other than negotiating employment agreements on their own behalf.
Base Salaries
Base salaries provide a baseline level of compensation to executive officers. Base salaries are not linked to the performance of the Company, because they are intended to compensate executives for carrying out the day-to-day duties and responsibilities of their positions.
The Compensation Committee reviews and adjusts base salary levels in January each year. During the review and adjustment process, the Compensation Committee considers:
·
individual performance;
·
the duties and responsibilities of each executive officer position;
·
the relationship of executive officer pay to the base salaries of other employees of the Company; and
·
whether the base salary levels are competitive when compared to compensation paid to executives at comparable companies.
Annual Cash Bonus Awards
The Compensation Committee also considers bonus awards to the named executives at its January meeting each year. In general, the Committee does not award bonuses to executive officers under a pre-established plan or formula. Instead, the Committee makes bonus awards based on its review of the individual performance of the executives and the financial performance of the Company during the preceding year. The Committee believes that awarding bonuses in this manner keeps executives focused on making decisions that are in the long-term best interests of the Company and its shareholders and not for the purpose of achieving a pre-established performance level over a shorter term.
At its February 2009 meeting, the Compensation Committee made cash bonus awards to the named executives for 2008 in the amounts shown in the Summary Compensation Table.
Stock-Based Awards
The Compensation Committee follows procedures that are substantially similar to the bonus award procedures for making stock-based awards to executive officers. 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").
All stock-based awards are made under the Company’s Omnibus Plan. The number of shares included in stock-based awards is not determined under a pre-established formula. Instead, as is the case with bonus awards, all stock-based awards are discretionary based on the Committee’s review of the individual performance of the executives and the financial performance of the Company during the preceding year.
Retirement and Other Benefits
The Company sponsors the OP-TECH Environmental Services 401(k) Plan (the “Plan”), a tax-qualified Code Section 401(k) retirement savings plan, for the benefit of all of its employees, including the named executives. The Plan encourages saving for retirement by enabling participants to save on a pre-tax basis and by providing Company matching contributions equal to 25% of the first 6% that each employee contributes to the Savings Plan.
None of the named executives receive perquisites whose aggregate value exceeds $10,000 annually.
Post Termination of Employment Benefits -
The Company has not entered into employment agreements with any executive officers that provide severance or other benefits following their resignation, termination, retirement, death or disability
Mr. Morgan has signed a new employment agreement on March 28, 2008 that runs through March 31, 2011. Under the Agreement, if seventy-five percent (75%) of the common stock or assets of the Company is sold, Mr. Morgan shall be entitled to a sale fee. The sale fee shall be based on the total common stock value or total asset value in the case of an asset sale. The value, which shall be finally determined by the Board of Directors, shall not include debt, holdbacks, escrow funds, earn-outs or similar items.
D. Conclusion
The Compensation Committee has read the compensation discussion and analysis and has reviewed all components of the named executives’ compensation, including salary, bonus, long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value of all perquisites and other personal benefits. Based on this review, the Compensation Committee is of the view that the compensation payable under the new employment agreement with Mr. Morgan is reasonable and appropriate.
E. Executive Officer Compensation Disclosure Tables
Summary Compensation Table
(1) See relevant SFAS No. 123R assumptions in Note 2 of the Consolidated Financial Statements.
(2) Mr. Morgan was paid $18,700 and $22,700 for unused vacation in 2008 and 2007, respectively.
Column g, Non-Equity Incentive Plan Compensation, is not applicable and is omitted.
Grants of Plan-Based Awards Table
Grants of plan-based awards table is not included since the Company did not grant any plan-based awards in 2008.
Outstanding Equity Awards at Fiscal Year-End Table
Columns d, i and j related to Equity Incentive Plan Awards are not applicable and are omitted.
Aggregated Option Exercises in Last Fiscal Year
Option exercises and stock vested table is not included since no options were exercised in 2008.
Pension Benefits Table
Pension benefits table is not included since the Company does not maintain any qualified defined benefit plans or supplemental executive retirement plans.
Non-Qualified Deferred Compensation Table
Non-qualified deferred compensation table is not included since the Company does not maintain any plans on a non-qualified basis.
Director Compensation Table
The following table summarizes the compensation paid to the Chairman and each nonemployee director for his or her service to the Board and its committees during 2008:
(1) In 2008 Directors of the Company were paid $2,000 for each Board meeting attended and $500 for each sub-committee meeting attended.
Column c (Stock Awards), column e (Non-Equity Incentive Plan Compensation), and column f (Change in Pension Value and Nonqualified Deferred Compensation Earnings) are not applicable and are omitted.
Report of Compensation Committee
The Compensation committee reviewed and discussed the compensation Discussion and Analysis with management of the company. Based on such review and discussion, the compensation Committee recommended to the Board of Directors that the Compensation discussion and Analysis be included in the company’s Annual Report on Form 10-K for the last fiscal year for filing with the SEC.
Richard Messina (Chairman)
Robert Berger
Cornelius Murphy, Jr.
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 February 1, 2009 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 February 1, 2009, 11,940,372 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 4,208,451(2) (3) 33%
40 Fulton Street, 19th Floor
New York, NY 10038
Robert Berger 1,171,667 (4) 9%
Shirley Rd.
Syracuse, NY 13224
Jurg Walker 1,000,000 8%
3 Avenue De La Costa
Monaco
Kevin Eldred 835,000 7%
Overlook Terrace
Cazenovia, NY 13035
(1)
Based upon the sum of (a) 11,940,372 shares of common stock outstanding, and (b) underlying options and warrants that have vested and not been exercised and underlying options and warrants that will vest within the next 60 days relating to a particular shareholder.
(2)
All shareholder’s directly or beneficially own all shares except for Mr. Messina who owns 1,343,933 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., an affiliate of Mr. Messina.
(4)
Includes options to purchase 13,333 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 February 1, 2009 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) Percentage of Class (4)
Richard Messina (1) 4,208,451 (5)
33%
Robert J. Berger (1) 1,171,667
10%
Richard L. Elander (1) 429,565
3%
Steven A. Sanders (1) 45,352
<1%
Cornelius B. Murphy, Jr. (1) 21,424
<1%
George W. Lee, Jr. (1) 186,666
1%
Richard Jacobson (1) -0-
0%
Charles Morgan (2) 200,000
1%
Jon S. Verbeck (2) -0-
0%
All Directors as a Group (7 persons) 6,063,125
47%
(1)
Director
(2)
Officer
(3)
Includes unexercised options to purchase shares of common stock:
·
Mr. Berger 13,333
·
Mr. Elander 10,000
·
Mr. Sanders 13,333
·
Mr. Murphy 10,000
·
Mr. Lee 16,667
·
Mr. Morgan 100,000
(4)
Based upon the sum of (a) 11,940,372 shares of common stock outstanding, and (b) shares underlying options and warrants that have vested and not been exercised and shares underlying options and warrants that will vest within the next 60 days relating to a particular shareholder.
(5)
Includes 480,000 shares issuable upon the exercise of warrants to purchase common stock issued to Summit Capital Associates, Inc., an affiliate of Mr. Messina.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Steven A. Sanders, one of our directors, is a partner at the law firm of Sanders, Ortoli, Vaughn-Flam, Rosenstadt, LLP, and formerly of counsel at the law firm of Rubin, Bailin, Ortoli, LLP which provides professional services to the Company, and it is anticipated that it will continue to do so. The cost of these services in 2008 was approximately $23,882.
We purchase subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by Robert J. Berger, one of our directors. Pricing for these services are based on cost plus an agreed upon mark-up. The costs for these services amounted to approximately $1,216,000 in 2008, which includes approximately $120,000 paid for services of the CFO.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees billed by Dannible & McKee, LLP, the Company’s principal accountants in the aggregate for each of the last two years were as follows:
2008 2007
Audit Fees $ 60,720 $ 32,500
Audit Related Fees $ 0 $ 0
Tax Fees $ 26,750 $ 13,500
There were no other fees billed for services other than those noted above.
The fees for tax services represent fees for compliance related to Federal and state tax return preparation and filing.
The fees for audit and tax services for 2008 were proposed to the audit committee and approved by that committee in an engagement letter. No other services were provided by the accountants that would require approval by the audit committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
(a)
Financial Statements
(1) Report of Independent Accountants
Consolidated Balance Sheets at December 31, 2008 and 2007
Consolidated Statement of Operations for the years ended
December 31, 2008, 2007, and 2006
Consolidated Statements of Shareholders’ Equity and Comprehensive
Income for the years ended December 31, 2008, 2007, and 2006
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
(2)
Schedule II, Valuation and Qualifying Accounts for the Years
Ended 2008, 2007, and 2006
All other schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the Financial Statements or notes thereto.
(b) Exhibits
10.1
Stock Option Plan - Incorporated herein by reference to the
Company’s Information Statement filed November 6, 2002*
14 Code of Ethics*
21 Subsidiaries of the Registrant*
31.1 CEO Certification
31.2 CFO Certifications
32.1 Section 1350 CEO Certifications
32.2 Section 1350 CFO Certifications
* Incorporated by reference to previous filings
OP-TECH Environmental
Services, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2008 and 2007
Independent Registered Accounting Firm
To the Shareholders and Board of Directors of
OP-TECH Environmental Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Dannible & McKee, LLP
Syracuse, New York
March 23,
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2008 and 2007
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, 2008 , 2007 and 2006
The accompanying notes are an integral part of the consolidated financial statements.
OP-TECH Environmental Services, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Years Ended December 31, 2008 , 2007 and 2006
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, 2008 , 2007 and 2006
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. and Subsidiaries (the “Company”), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial services predominately in New York, New England, Pennsylvania, New Jersey, and Ohio. 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 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.
OP-TECH AVIX, Inc. (AVIX) is a subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to pursue and engage in diversified lines of business. In the fourth quarter of 2004, this subsidiary became inactive, and the Company is no longer pursuing the lines of business that AVIX performed. Therefore, separate segment information is no longer presented in the Financial Statements.
OP-TECH Environmental Services, Ltd. is an inactive Canadian subsidiary of OP-TECH Environmental Services, Inc.
J.O. Technologies is a partnership that is owned 50% by the Company. The partnership activities are not material to the operations of the Company.
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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Project Income Recognition
Contracts are predominately short-term in nature (less than three months), and revenue is recognized as costs are incurred. Project costs include all direct material, equipment, and labor costs and those indirect costs related to contract performance.
Revenues recognized in excess of amounts billed are recorded as a current asset. Deferred revenue resulting from billings that exceed costs and estimated profit is reflected as a current liability.
Provisions for estimated losses are made in the period in which such losses are determined.
Normal delays relating to receipt of job-related vendor invoices, payroll processing, and billing compilation typically cause customer invoices relating to revenue earned in a certain month to be mailed in the first two weeks of the following month. Such invoices mailed after year-end that are included in December 31, 2008 and December 31, 2007 accounts receivable are approximately $2,825,000 and $2,000,000, respectively.
Certain states impose a sales tax on the Company’s sales to nonexempt customers. The Company collects the required sales tax from customers and remits the entire amount to the respective state. The Company’s policy is to exclude the tax collected and remitted from revenues and expenses.
Concentration of Business Risk - Significant Customers
Sales to one customer amounted to approximately $7,071,000, $7,212,000, and $8,509,000 in 2008, 2007 and 2006, respectively. Accounts receivable at December 31, 2008 and 2007, include $1,835,000 and $711,000 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.
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 estimates a general allowance based on historical chargeoffs covering other amounts that may not be collectible.
Inventory
Inventory, 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 is provided for using the straight-line method over useful lives typically ranging from 3 to 15 years and 40 years for leasehold improvements.
Financial Instruments
The Company maintains various financial instruments in the ordinary course of business, which consist of cash, accounts receivable and payable, notes payable, long-term debt, a line of credit and interest rate swap transaction. The carrying value of the Company’s financial instruments approximates their fair value at December 31, 2008 and 2007. The fair values of fixed rate notes payable and long-term debt are determined using incremental borrowing rates available to the Company for similar types of borrowings. The fair value of the interest rate swap agreement is fully discussed in Note 13. All other financial instruments are short-term in nature and their fair values are based on the amounts that they have been or will be settled for subsequent to the balance sheet date.
Cash overdraft liability
At December 31, 2008 and 2007, the Company had outstanding checks in excess of its operating bank account balance, as funds are only transferred to the operating account as necessary to cover checks that are presented for payment. The Company’s bank accounts maintained a positive cash balance and the Company’s line of credit is sufficient to cover checks that clear before additional deposits are made.
Income Taxes
The Company provides for income taxes in accordance with the liability method. 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 Accounting Standards
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value as the exchange price that would be received for an asset, or the exit price paid to transfer a liability. It also establishes a fair value hierarchy, which prioritizes the use of market-based inputs over company-specific inputs, and requires expanded disclosures about the inputs and methods used to determine the fair value. The effect of our adoption of SFAS No. 157 on January 1, 2008 had no impact on the amounts recorded in the financial statements. Refer to Note 13 for the required disclosures as a result of the adoption of SFAS No. 157.
On January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115,” which permits a company to elect to measure certain financial assets and financial liabilities at fair value. The Company has not elected to measure any financial assets and financial liabilities at fair value which were not previously required to be measured at fair value, therefore, there has been no impact on the Company’s results of operations based on the adoption of this standard.
On January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,” which supplements SFAS No. 109, “Accounting for Income Taxes,” which requires specific thresholds for measurement and recognition of income tax positions, as well as expanded disclosures. Tax positions recorded for financial statement purposes must be more likely than not to be sustained if challenged by the relevant jurisdiction, and must be re-evaluated at each balance sheet date. There has been no significant impact on amounts recorded or disclosed in the Company’s financial statements as a result of the adoption of this standard.
2.
Stock Based Compensation and Earnings Per Share
The Company maintains an equity incentive plan under which it may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, performance awards, or other forms of stock-based compensation to employees. Stock-based compensation is accounted for in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award (generally three years) using the straight-line method. See Note 14 for additional details.
Basic earnings per share is computed by dividing net income (loss) by the weighted average shares outstanding for the period, which were 11,938,706, 11,858,706, and 11,746,476 for the years ended December 31, 2008, 2007 and 2006, respectively. Diluted earnings per share includes the potentially dilutive effect of common stock issuable upon conversion of stock options or warrants, using the treasury stock method.
There are warrants outstanding to purchase 480,000 shares of the Company’s common stock at a price of $0.066 per share. The warrants are exercisable at the holder’s option at any time and from time to time, in whole or in part, until expiration in May of 2010.
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 $1,216,000, $1,042,000, and $1,074,000 in 2008, 2007, and 2006, respectively.
A director of the Company is a partner in or has been of counsel for law firms that provided professional services to the Company. The cost for these services amounted to approximately $24,000, $15,000, and $5,000 in 2008, 2007 and 2006, respectively.
4. Cash
Using a zero balance account, the Company voluntarily applies all available cash in the Company’s operating account to pay down the Company’s note payable to bank under the line of credit (Note 9) nightly. From time to time cash balances held at the financial institution may exceed the Federal Deposit Insurance Corporation limits.
5. Accounts Receivable
Accounts receivable at December 31, 2008 and 2007 consists of:
Accounts Receivable, gross $ 9,313,290
$ 8,616,187
Allowance for uncollectible receivables
(399,159)
(260,907)
Accounts Receivable, net $ 8,914,131
$ 8,355,280
All customer accounts receivable collateralize the Company’s outstanding loans with its primary lender (see Note 9).
OP-TECH Environmental Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6.
Property and Equipment
Property and equipment at December 31, 2008 and 2007 consist of:
Depreciation expense approximated $717,000, $716,000, and $610,000 for years ended December 31, 2008, 2007 and 2006, respectively.
7.
Land and Buildings Held for Sale
On November 17, 2006, the Company sold approximately 14 acres of land, and buildings thereon, which it owned on the St. Lawrence River in Massena, NY for $692,208 and recorded a loss on sale of property in the amount of $199,873, which included a $150,000 impairment loss recognized in the quarter ended September 30, 2006.
8.
Accrued Litigation Reserve
The Company has accrued a liability of $450,000 and $345,645 at December 31, 2008 and 2007, respectively. The liability has been recorded to cover management’s estimate of any potential legal indemnity settlement or other payments necessary to dispose of a particular claim against the Company.
OP-TECH Environmental Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9.
Long-Term Debt Obligations
Long-term debt at December 31, 2008 and 2007 consists of:
(a)
The Company has entered into financing agreements (the “Agreements”) with a lender (“Primary Lender”).
As of December 31, 2008, the Agreements include a Line of Credit note which provided for borrowings up to $6,000,000 to be used to provide working capital and expires on January 5, 2010, unless renewed by the lender. Interest is charged at prime plus .50%.
The Agreements also include a Term Loan agreement which is due in monthly principal installment payments of $24,848 plus interest at a rate of prime plus .75%, hedged by an Interest Rate Swap Transaction.
On January 25, 2005, the Company entered into an Interest Rate Swap Transaction with its Primary Lender to hedge against rising interest rates on the floating rate Term Loan debt. The liability being hedged is the variability in cash flows related to fluctuations in interest payments made. The fluctuation in interest rates exposes the Company to the risk of higher interest expense. The purpose of the Swap Agreement is to limit the Company’s exposure to rising interest rates during the term of the floating rate Term Loan noted above. The swap has been designated as a cash flow hedge.
The interest rate swap hedge instrument has a fixed rate of 7.05%, matures on February 1, 2012, and has a notional amount that remains equal to the principal balance on the Term Loan. The difference between the prime rate, as periodically adjusted, and the Interest Rate Swap rate of 7.05% will be settled monthly. The effect of the interest rate swap is to fix the floating rate on the Term Loan at 7.80%. The Mark to Market valuation, representing the net present value of the expected cash flow from the Interest Rate Swap, is a liability of $48,665 and $10,800 at December 31, 2008 and 2007, respectively and is included in long-term debt. The Company made additional payments to settle the Interest Rate SWAP of $17,828 for the year ended December 31, 2008 and had payment reductions of $15,575 for the year ended December 31, 2007.
The Agreements also include Term Loan agreements, which are not hedged by Interest Rate Swap Transactions, which are due in monthly principal installment payments that aggregate $19,443 plus interest at prime plus .75 %.
The Agreements are collateralized by all present and future right, title and interest in all of the personal property of the Company including, but not limited to, all accounts receivable, inventory and equipment. This collateral has a carrying value at December 31, 2008 as follows:
Accounts Receivable, net of Allowance for Doubtful Accounts $ 8,914,131
Inventory
426,412
Equipment, net of Accumulated Depreciation 3,031,899
$ 12,372,442
The Agreements also include certain financial covenants including a minimum fixed charge coverage ratio, a tangible net worth ratio, a debt to net worth ratio, and a consecutive quarterly net loss provision; 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.
The Company was not in compliance with the capital expenditure limit financial covenant and received a waiver at December 31, 2008. The Company was not in compliance with the covenants as of December 31, 2007 and received a waiver.
Interest paid amounted to approximately $450,000, $670,000, and $615,000 in the year ended December 31, 2008, 2007 and 2006, 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:
At December 31, 2008, the Company has outstanding commitments in the form of standby letters of credit in the amount of approximately $250,000 securing various agreements.
10. Operating Lease Obligations
Office facilities and various field equipment are leased under noncancelable operating leases expiring at various dates through 2013. Rent expense incurred under operating leases amounted to approximately $659,000, $896,000, and $725,000 in 2008, 2007 and 2006, respectively. Future minimum lease payments under noncancelable operating leases are as follows:
$ 677,403
545,687
433,009
202,823
61,516
$ 1,920,438
The Company is currently evaluating purchasing a building to replace a rented facility.
11.
Income Taxes
The following summarizes the income tax (benefit) expense at December 31, 2008, 2007 and 2006:
The deferred tax expense (benefit) recognized in 2008, 2007 and 2006 represents the effect of changes in temporary differences and net operating loss carryforwards.
OP-TECH Environmental Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A reconciliation of the statutory federal income tax rate with the Company’s effective income tax rate was as follows:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2008 and 2007 are as follows:
As of December 31, 2008, the Company has federal net operating loss (“NOL”) carryforwards of approximately $4,400,000, which expire at various times beginning in 2010 and through the year ending December 31, 2027.
The Company will establish a valuation allowance if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets. The valuation allowance as of December 31, 2008 and December 31, 2007 was related to the portion of the net operating losses that based on taxable income projections may expire before being utilized. The net change in the total valuation allowance for the years ended December 31, 2008 and December 31, 2007, was a decrease of $350,000 and an increase of $150,000, respectively. The valuation allowance was reduced in the year ended December 31, 2008 as a result of taxable income for the year that utilized a portion of the NOL due to expire in upcoming years, while the valuation allowance was increased during the year ended December 31, 2007 as the Company did not utilize a portion of the NOL as planned during the year.
Income taxes and franchise taxes paid were approximately $14,000, $7,000, and $9,000 in the year ended December 31, 2008, 2007, and 2006, respectively. Taxes currently payable of approximately $20,500 are included in “Accrued Expenses” on the consolidated balance sheets as of December 31, 2008. The Company received refunds for certain tax credits of $16,790, $1,385, and $0 in 2008, 2007, and 2006, respectively. Interest expense and penalties on tax payments are included in income tax expense in the period recognized.
12.
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 $28,000, $33,000, and $27,000 in the year ended December 31, 2008, 2007 and 2006, respectively. The Company did not make discretionary contributions to the Retirement Plan in the year ended December 31, 2008, 2007 and 2006.
13.
Fair Values of Assets and Liabilities
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS 157 defines fair value as the exchange price that would be received for an asset or the exit price to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
The Company has recorded its interest rate swap transaction at fair value, resulting in a liability of $48,665 and $10,800 as of December 31, 2008 and December 31, 2007, respectively. The interest rate swap arrangement is not exchange traded and quoted market prices are not readily available. The fair value of the arrangement is derived by the issuing entity using pricing models that use primarily market observable inputs, such as interest rate yield curves and credit curves. The Company classifies this within Level 2 of the valuation hierarchy. The impact on the derivative liabilities for the Company and the counterparties’ non-performance risk to the derivative trades is considered when measuring the fair value of derivative liabilities.
14. 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 Omnibus 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 Omnibus 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. These Awards generally vest over a three-year period, and have contractual terms of 10 years. The Company did not issue any grants during the year ended December 31, 2006, 2007 or 2008.
Stock options are granted at the fair market value of the stock on the date of grant. The Company uses the Black-Scholes-Merton option pricing model to value its grants, which requires the input of various assumptions. These assumptions include expected term of the options, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to exercise. Compensation cost is measured based on the grant-date fair value of the award, and is recorded over the vesting period for those options expected to vest.
The Company did not issue any awards during the periods ended December 31, 2008 and December 31, 2007. As of December 31, 2007, all compensation cost related to vesting option awards had been recognized; accordingly, no compensation cost was recorded for 2008. The Company recorded compensation cost of $68,613 and $57,227 for the periods ended December 31, 2007 and December 31, 2006, respectively. The tax benefit for these costs was approximately $27,000 and $22,500 for the periods ended December 31, 2007 and December 31, 2006, respectively.
The following table summarizes changes in the status of outstanding options:
Shares
Weighted Average Exercise Price
Outstanding at January 1, 2008
335,343
$ 0.28
Exercised
(3,334)
$ 0.06
Forfeited
(16,000)
$ 0.40
Outstanding at December 31, 2008
316,009
$ 0.28
Exercisable at December 31, 2008
316,009
$ 0.28
The Company received $200 during 2008 for exercise of stock options, and realized a $267 tax benefit for the exercise. The intrinsic value of the exercised options was $667.
The remaining weighted average contractual life of options outstanding at December 31, 2008 is approximately 5.3 years, and the aggregate intrinsic value of options outstanding at December 31, 2008 is approximately $7,300.
15.
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.
The State of New York (NYS) began an examination of the Company’s sales and use tax returns for 2005 through 2008 in the first quarter of 2008 that is estimated to be completed during the first quarter of 2009. As of December 31, 2008, NYS has proposed adjustments to the Company’s sales and use tax positions, and Management is currently evaluating those proposed adjustments. The Company has accrued a liability of $200,000 as of December 31, 2008, in accordance with Financial Accounting Standard 5, “Accounting for Contingencies”, which is included within accrued expenses. The Company estimates that the range of this possible liability is between $100,000 and $300,000 and anticipates that this liability will be paid during 2009. The Company does not anticipate that any changes in this estimated liability would result in a material change to its financial position.
OP-TECH Environmental Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Two-Year Selected Quarterly Financial Data (Unaudited)
The Company recorded a forth quarter adjustment to settle a worker’s compensation audit reducing selling general and administrative expense by $87,000.
The Company increased the sales & use tax accrual in the forth quarter by $100,000 to provide for a potential settlement of a sales tax audit. This is recorded in selling, general and administrative expenses.
The Company adjusted a litigation reserve in the forth quarter $175,000 to cover management’s estimate of any potential legal indemnity settlement or other payments necessary to dispose of a particular claim against the Company. This is recorded in the litigation reserve and selling, general and administrative expenses.
The Company reduced the valuation allowance for deferred tax assets to $300,000 from $650,000 in the forth quarter based on management’s current estimate. This is recorded in income tax expense.
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/ Charles B. Morgan
Charles B. Morgan
Chief Executive Officer
March 24,
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 24th day of March 2009.
/s/ Robert J. Berger
Director and Co-Chairman of the Board
Robert J. Berger
/s/ Richard Messina
Director and Co-Chairman of the Board
Richard Messina
/s/ Richard L. Elander
Director
Richard L. Elander
/s/ Cornelius B. Murphy
Director
Cornelius B. Murphy
/s/ Richard Jacobson
Director
Richard Jacobson
/s/ Steven A. Sanders
Director
Steven A. Sanders
/s/ George W. Lee, Jr
Director
George W. Lee Jr.
/s/ Charles B. Morgan
Chief Executive Officer
Charles B. Morgan
/s/ Jon S. Verbeck
Chief Financial Officer and Treasurer
Jon S. Verbeck