-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S8KJJjkGhJaz8fj2lg3k8tiLHmuCtBeQVnt7UYNz2seJjEPa6eBdnLS3lB/OCe3p XUJZPUsP1bXd6KxarmSWrA== 0000858748-02-000001.txt : 20020415 0000858748-02-000001.hdr.sgml : 20020415 ACCESSION NUMBER: 0000858748-02-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OP TECH ENVIRONMENTAL SERVICES INC CENTRAL INDEX KEY: 0000858748 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 911528142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19761 FILM NUMBER: 02593798 BUSINESS ADDRESS: STREET 1: 6392 DEERE ROAD CITY: SYRACUSE STATE: NY ZIP: 13206 BUSINESS PHONE: 3154631643 MAIL ADDRESS: STREET 1: 6392 DEERE RD CITY: SYRACUSE STATE: NY ZIP: 13206 FORMER COMPANY: FORMER CONFORMED NAME: MASADA CORP DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: MASADA INDUSTRIAL SERVICES INC DATE OF NAME CHANGE: 19600201 10-K 1 txt1201.txt OTES 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file No. 0-19761 OP-TECH Environmental Services, Inc. (Exact name of registrant as specified in its charter) Delaware 91-1528142 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6392 Deere Road, Syracuse, NY 13206 (Address of principal executive office) (Zip Code) (315) 463-1643 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X or No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the Company as of March 27, 2002 was $713,942 based upon the average bid and ask price of such stock on such day. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Company's classes of common stock, as of March 27, 2002. Common stock, $.01 par value. 11,703,963 PART I SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS The Company is including the following cautionary statement in this Form 10-K to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. This 10-K, press releases issued by the Company, and certain information provided periodically in writing and orally by the Company's designated officers and agents contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words expect, believe, goal, plan, intend, estimate, and similar expressions and variations thereof used are intended to specifically identify forward-looking statements. Where any such forward- looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. 2 ITEM 1. BUSINESS General OP-TECH Environmental Services, Inc. and Subsidiary (the "Company"), a Delaware corporation, provides comprehensive environmental services predominately in Upstate New York, Massachusetts, Northern Pennsylvania, and New Jersey. The Company performs industrial cleaning of hazardous and non- hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal. In addition, the Company provides remediation services for sites contaminated by hazardous and non-hazardous materials and provides 24-hour emergency spill response services. The majority of the Company's revenues are derived from industrial companies and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies. The Company's services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities. The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public. In December 2001, the Company's Board of Directors approved a resolution to establish OP-TECH AVIX, Inc. ("AVIX"), a newly formed, wholly-owned subsidiary of the Company, for purposes of pursuing and engaging in diversified lines of business. AVIX was formed in January 2002. SERVICES Transportation and Disposal Services The Company provides transportation of hazardous and non-hazardous wastes from customer sites to customer-designated landfills, disposal facilities, and the Company's own Aqueous Treatment/Part 360 facility. The Company also provides liquid tank truck transports equipped with vacuum pumps. Aqueous Treatment/Part 360 Facility The Company operates an Aqueous Treatment/Part 360 facility at the Company's Massena, New York location. The facility provides for the consolidation of non-hazardous solids and liquids as well as the treatment of contaminated water and its eventual discharge into the St. Lawrence River. The facility services the Company, its clients, and outside vendors. 3 24-Hour Emergency Spill Response The Company undertakes environmental remediation projects on both a planned and emergency basis. Emergency response actions may develop into planned remedial action projects when soil, groundwater, buildings, or facilities are extensively contaminated. The Company has established specially trained emergency response teams. Many of the Company's decontamination and mitigation activities result from a response to an emergency situation by one of its response teams. These incidents can result from transportation accidents involving chemical or petroleum substances, fires at chemical facilities or hazardous waste sites, transformer fires or explosions involving PCBs, and other unanticipated events. The substances involved may pose an immediate threat to public health or the environment, such as possible groundwater contamination. The Company also has an agreement with the New York State Department of Environmental Conservation (NYSDEC) to provide emergency response services in Upstate New York, payment of which is guaranteed by the NYSDEC. Emergency response projects require trained personnel who are equipped with protective gear and specialized equipment and are prepared to respond promptly whenever these situations occur. The Company's health and safety specialists and other skilled personnel closely supervise these projects during and subsequent to the clean-up process. The steps performed by the Company include rapid response, containment and control procedures, sampling for analytical testing and assessment, neutralization and treatment, and collection and transportation of the substance to an appropriate treatment or disposal facility. Asbestos Abatement The Company provides asbestos abatement contracting services to both the public and private sectors. The Company has expertise in all types of asbestos abatement including removal, disposal and enclosure, and encapsulation. Asbestos removal is performed in commercial buildings, industrial facilities, and governmental buildings. Interior Demolition/Structural Dismantling The Company provides interior demolition services such as removing walls, ceilings, and flooring. In addition, the Company offers structural dismantling services and has experience in razing concrete, wood and steel structures, concrete and brick chimneys, and concrete piers and foundations. 4 On-Site Industrial and Waste Management Services The Company provides on-site industrial cleaning and waste management services. Specialized services for the handling, processing and disposal of hazardous wastes are performed by vacuuming, soda blasting, hydroblasting, dredging, dewatering and sludge processing, sludge pumping, chemical cleaning, and tank cleaning. Excavation and Site Remediation Services The Company provides excavation and soil blending services for treatment of contaminated soil using heavy equipment such as excavators and loaders. The Company primarily provides on-site soil blending to public utilities and municipal customers. Hydrogeological/Drilling Services The Company provides hydrogeological services to petroleum companies, engineering firms and local and state public entities through the use of qualified subcontractors. Through performing hydrogeological assessments, the Company evaluates and determines the need for ground water remediation systems, pump and treatment systems and sub-surface petroleum product recovery. In addition, the Company provides air sparging systems, long-term remediation system operations and maintenance as well as monitoring well and recovery well installations. Overall Site Assessment and Implementation of Remediation Services Hazardous Waste: The Company's hazardous waste projects include the design and construction of on-site facilities to monitor, isolate, or contain hazardous wastes existing in surface and subsurface water, the transport of contaminated soils, the decontamination of equipment and facilities related to the production and use of hazardous materials, industrial cleaning, building demolition and asbestos removal. Although the Company's projects vary widely in objective, scope, and duration, each project involves the Company providing one or more of the following services through the use of its own resources or the resources of selected subcontractors: strategic planning, site reconnaissance and security, remedial evaluation, clean-up evaluation, design, construction, and operation of facilities to treat, stabilize, or isolate the hazardous materials, and closure planning and monitoring. Strategic Planning: On each of its projects, the Company attempts as early as possible, to formulate a complete strategy for directing all efforts toward solving the hazardous waste problem. The Company's strategic plans are designed to satisfy the demands of regulatory agencies and the public, sometimes under emergency conditions. Additionally, the Company attempts to balance the cost of the alternatives against risks to the client associated with potential litigation or unfavorable publicity. Through strategic planning, the Company attempts to minimize expenditures that will not lead to appropriate solutions, and to enhance the client's credibility with regulatory agencies and the public. 5 Site Reconnaissance and Security: In conducting a site reconnaissance, the Company makes a general assessment to determine the basic characteristics of a site and the limitations imposed thereby, climatological considerations and the proximity and degree of residential development. In providing site security, the Company's services include assessing the hazardous condition, restricting access to the affected area, assisting in the preparation of any necessary evacuation plans, eliminating or reducing potential risks of fire or explosion, containing or removing hazardous materials which might pose additional risk, and implementing measures to reduce or halt the spread of hazardous substances into adjacent areas. Remedial Evaluation: A remedial investigation involves the detailed assessment of an affected area to determine the nature and extent of hazardous materials present. This is often done at the request of one or more regulatory agencies. In conducting such investigations, the Company often reviews the construction of a facility and past storage and handling practices regarding hazardous materials. Clean-up Evaluation: A feasibility study addresses measures which may be implemented to remove hazardous wastes from a site, to treat, stabilize, or contain such wastes on-site or to otherwise mitigate their effects. Such studies take into account, among other things, available technology, regulatory considerations, and the cost-benefit relationship of alternative measures. Additionally, the Company reviews the project and alternative remedial measures in light of legitimate public concerns. Construction and Operation of Remedial Facilities: Based on the results of remedial investigations and feasibility studies, the Company uses its expertise directly, or through subcontractors, to design an appropriate structure or system for use at a particular site, and performs the necessary remediation activities. These remediation activities might include such diverse measures as construction of a slurry wall to contain the hazardous materials, construction and operation of a pumping and filtration system to decontaminate surface or subsurface waters or construction and operation of an integrated system to excavate contaminated soil and remove it to a licensed disposal facility. Closure Planning and Site Monitoring: The Resource Conservation and Recovery Act of 1976 ("RCRA") requires the planning of closure and postclosure monitoring for all licensed secure hazardous landfills, treatment facilities, and on-site hazardous waste storage areas. The Company plans and performs facility closures and postclosure monitoring programs. While certain monitoring requirements are mandated by RCRA, many sites have, at some time, contained hazardous wastes which also frequently require monitoring. The Company provides monitoring for sites and the corresponding data management services. 6 The Company usually contracts for and manages all aspects of the work related to the completion of a particular project. In addition, the Company performs all aspects of the work and certain other specialized operations, some of which are subcontracted to other parties. The Company does, however, occasionally, contract to perform only certain aspects of a particular project. Technologies Employed The Company utilizes a wide variety of physical and chemical treatment technologies in performing its remediation activities. Physical treatment technologies generally involve filtration and aeration techniques and are used to separate contaminants from soils, slurries, or water. Chemical treatment technologies generally involve flocculation, clarification, precipitation, polymer addition, chemical oxidation, chemical absorption, and stabilization. Depending on the contaminants present and the site characteristics, these technologies are combined into integrated treatment systems which reduce contaminant concentrations to levels consistent with prescribed regulatory standards. Regulation The business of the Company and its clients is subject to extensive, stringent, and evolving regulation by the EPA and various other federal, state, and local environmental authorities. These regulations directly impact the demand for the services offered by the Company. In addition, the Company is subject to the Federal Occupational Safety and Health Act, which imposes requirements for employee safety and health. The Company believes it is in compliance with all federal, state, and local regulations governing its business. RCRA. The Resources Conservation and Recovery Act of 1976 is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal. RCRA, or EPA-approved state programs may govern any waste handling activities of substances classified as "hazardous." The 1984 amendments to RCRA substantially expanded its scope by, among other things, providing for the listing of additional wastes as "hazardous" and providing of the regulation of hazardous wastes generated in lower quantities than previously had been regulated. Additionally, the amendments impose restrictions on land disposal of certain hazardous wastes, prescribe more stringent standards for hazardous waste land disposal sites, set standards for underground storage tanks and provide for "corrective" action at or near sites of waste management units. Under RCRA, liability and stringent operating requirements may be imposed on a person who is either a "generator" or a "transporter" of hazardous waste, or an "owner" or "operator" of a waste treatment, storage, or disposal facility. The Company does not believe its hazardous waste remediation services cause it to fall within any of these categories, although it might be considered an "operator" of a waste management facility or a "generator" of hazardous waste if it were to control the collection, source, separation, storage, transportation, processing, treatment, recovery, or disposal of hazardous wastes, including operation of a treatment unit for remedial purposes. 7 Regulation of underground storage tanks (UST) legislation, in particular Subtitle I of RCRA, focuses on the regulation of underground tanks in which liquid petroleum or hazardous substances are stored and provides for the regulatory setting for the principal portion of the Company's work. Subtitle I of RCRA requires owners of all existing underground tanks to list the age, size, type, location, and use of each tank with a designated state agency. The EPA has published performance standards and financial responsibility requirements for storage tanks over a five year period. These regulations also require all new tanks which are installed to have protection against spills, overflows, and corrosion. Subtitle I of RCRA provides civil penalties of up to $15,000 per violation for each day of non-compliance with tank requirements and $10,000 for each tank for which notification was not given or was falsified. RCRA also imposes substantial monitoring obligations on parties which generate, transport, treat, store, or dispose of hazardous waste. Superfund Act. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund Act") generally addresses clean-up of inactive sites at which hazardous waste treatment, storage, or disposal took place. The Superfund Act assigns joint and several liability for cost of clean-up and damages to natural resources to any person who, currently, or at the time of disposal of a hazardous substance who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport of hazardous substances owned or possessed by such person for disposal or treatment; and to any person who accepts hazardous substances for transport to disposal or treatment facilities or sites from which there is a release or threatened release. Among other things, the Superfund Act authorized the federal government either to clean up these sites itself or to order persons responsible for the situation to do so. The Superfund Act created a fund, financed primarily from taxes on oil and certain chemicals, to be used by the federal government to pay for the clean-up efforts. Where the federal government expends money for remedial activities, it may seek reimbursement from the Potentially Responsible Parties ("PRPs"). In October 1986, the Superfund Amendment and Reauthorization Act ("SARA") was enacted and has increased environmental remediation activities significantly. SARA authorizes federal expenditures of $8.5 billion over five years, while imposing more stringent clean-up standards and accelerated timetables. The requirements of SARA are expected to add 1,600 to 2,000 sites to the national priority list. Within 36 months of the enactment of SARA, remedial investigation and feasibility studies were to be conducted for at least 275 national priority list sites, and were this not achieved for at least 650 sites within five years. Physical on-site remedial work was to be commenced for at least 175 new sites in the 36 months after enactment and for an additional 200 sites in the following 24 months. SARA also contains provisions which expand the EPA's enforcement powers and which are expected to encourage and facilitate settlements with PRPs. The Company believes that, even apart from funding authorized by SARA, industry and governmental entities will continue to try to resolve hazardous waste problems due to their need to comply with other statutory and regulatory requirements and to avoid liabilities to private parties. 8 The liabilities provided by the Superfund Act could, under certain factual circumstances, apply to a broad range of possible activities by the Company, including generation of transportation of hazardous substances, releases of hazardous substances, failure to properly design a clean-up, removal or remedial plan and failure to achieve required clean-up standards, leakage of removed wastes in transit or at the final storage site, and remedial operations on ground water. Such liabilities can be joint and several where other parties are involved. Other. The Company's operations are subject to other federal laws protecting the environment, including the Clean Water Act and the Toxic Substances Control Act. Many states have also enacted statutes regulating the handling of hazardous substances, some of which are broader and more stringent than the federal laws and regulations. Competitive Conditions The markets for environmental remediation, as well as demolition and asbestos removal, have become increasingly competitive. The Company competes with many different firms ranging from small local firms to large national firms, some of which have greater financial and marketing resources than the Company. Competition in environmental services is based largely on competitive pricing and quality of service provided. Other competitive factors include geographic location as well as reputation. Management believes the Company is one of the few firms based in its market areas throughout the Northeastern United States that offers a high quality combination of environmental services at the most competitive prices. In addition, through its wide range of environmental services, good reputation, and competitive pricing, the Company hopes to maintain a competitive edge in the environmental services business. The Company operates field offices in Syracuse, Massena, Rochester, Albany, Plattsburgh, Waverly and Buffalo, New York, as well as Rockland, Massachusetts and Edison, New Jersey. While operations in the Syracuse, Massena, Albany, Buffalo, Rockland, and Waverly offices are substantial, the Rochester, Plattsburgh and Edison operations operate at a lower volume. Seasonality Typically during the first quarter of each calendar year there is less demand for environmental remediation due to the cold weather, particularly in the Northeast and Midwest regions. In addition, factory closings for the year-end holidays reduce the volume of industrial waste generated, which results in lower volumes of waste handled by the Company during the first quarter of the following year. 9 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 2001, the Company performed services for more than 600 clients. These projects ranged from short-term (three months or less) to projects which were on-going for 12 months or more. The majority of the projects were short-term in nature and continue to provide a substantial amount of revenue for the Company. During 2001, the Company had sales of approximately $3,435,000 to a state agency, which totaled approximately 26% of the Company's revenues. Insurance The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides aggregate coverage limits of $5 million. In addition, the Company also maintains workers compensation, comprehensive automobile, and Directors and Officers liability insurance. The Company's insurance coverage is consistent with the insurance requirements found in the environmental remediation industry. Backlog As of December 31, 2001, the Company had a backlog of orders of approximately $2,750,000. Employees In December 2001, the Company entered into a contractual co-employment agreement with a third party provider. As of March 27, 2002, the Company had a total of 82 full-time employees under this contract. The Company's ability to retain and expand its staff will be an important factor in determining the Company's future success. The Company maintains employment contracts with its key managers in its branch offices. Manager contracts are negotiated on an annual basis and encompass items such as salary, bonuses, and non-compete clauses. The Company does not maintain key-person insurance for such personnel. The Company considers its relations with its employees to be good, and the Company has never had a work stoppage or threat of a work stoppage. 10 ITEM 2. PROPERTIES Syracuse, New York Branch and Corporate Headquarters The Company leases approximately 17,000 square feet of office and shop space at a current rate of $6,375 per month plus utilities and real estate taxes. The term of the lease extends through June 30, 2006, and does not contain an escalation clause. Massena, New York Branch The Company owns a 13.93-acre parcel of land located in the Town of Massena, St. Lawrence County, New York. This parcel, which has approximately 1,300 feet of frontage on the St. Lawrence River, is located in a protected area where the water is forty-five feet deep. This provides excellent dockage for local ships and ocean-going ships utilizing the St. Lawrence Seaway. The land is improved with a well-maintained concrete and creosote timbered dock that extends about 90 feet into the river and about 260 feet along the riverbed. It is equipped with the necessary piping, valves, and fittings to serve the former Metropolitan Oil Petroleum Tank Farm. The property includes three petroleum tanks that have a capacity of approximately 200,000 barrels. There were four support buildings on the premises, consisting of an office building, a combination office, shop and boiler room building, and two storage sheds. On January 21, 2001, there was a fire in the main office building, and the building and the majority of its contents were either destroyed or damaged. Copies of any project related or payroll related records that were destroyed were also kept on file at the Company's corporate office. The building and its contents were insured, and the Company constructed new office space and replaced the lost items with the insurance proceeds. The Company is currently pursuing the sale of all or part of its Massena property. The property is listed for sale with a reputable real estate broker. Rockland, Massachusetts Branch The Company currently leases approximately 4,500 square feet of office space at a current rate of $2,950 per month plus utilities. The term of the lease extends through March 31, 2003. The lease payment is scheduled to increase an additional $125 per month in April of 2002. 11 Buffalo, New York Branch The Company leases approximately 3,200 square feet of office and shop space at a current rate of $2,850 per month plus utilities. The term of the lease extends through March 31, 2004 and does not include an escalation clause. Rochester, New York Branch The Company leases approximately 150 square feet of office space at a current rate of $150 per month. The term of the lease is on a month-to-month basis. Waverly, New York Branch The Company leases approximately 6,400 square feet of office and shop space at a current rate of $1,800 per month plus utilities. The term of the lease extends through December 31, 2003, and does not contain an escalation clause. Albany, New York Branch The Company leases approximately 5,000 square feet of office and shop space at a current rate of $2,292 per month plus utilities. The term of the lease extends through January 31, 2003, and does not contain an escalation clause. Edison, New Jersey Branch The Company leases approximately 300 square feet of office space from O'Brien & Gere Engineers (an affiliated party) at a current rate of $443 per month. The term of the lease is on a month-to-month basis. Plattsburgh, New York Branch The Company leases approximately 650 square feet of office and shop space at a current rate of $430 per month including utilities. The term of the lease extends through January 31, 2003, and does not contain an escalation clause. Equipment The Company's owned equipment consists primarily of construction equipment such as vacuum trucks, tankers, excavation equipment, pumps, generators, and compressors, some of which have been specially modified for the Company's use. Chemical trailers and other specialized equipment for short-term projects are typically leased from local equipment contractors. 12 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation or governmental proceedings that management believes could result in any judgements or fines against it or that would have a material adverse effect on the Company's cash flows, results of operations, or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual shareholders meeting on November 8, 2001. The shareholders voted on the ratification of PricewaterhouseCoopers LLP as the Company's auditors and the election of five directors. The following votes were cast for each: For Against Ratification of PricewaterhouseCoopers LLP as the Company's auditors 8,770,340 -0- Election of Directors: Robert J. Berger Director 8,770,340 -0- Richard L. Elander Director 8,770,340 -0- Cornelius B. Murphy, Jr. Director 8,770,340 -0- Steven A. Sanders Director 8,770,340 -0- There were no other matters submitted to a vote of the Company's shareholders. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The shares of the Company's common stock are listed in the "Pink Sheets" and on the NASDAQ Bulletin Board under the symbol OTES. The high and low bid prices for the shares of the Company's common stock were as follows: Quarter Ended High Bid Low Bid March 31, 2000 $0.41 $0.31 June 30, 2000 $0.31 $0.13 September 30, 2000 $0.22 $0.13 December 31, 2000 $0.13 $0.05 March 31, 2001 $0.10 $0.06 June 30, 2001 $0.22 $0.02 September 30, 2001 $0.20 $0.10 December 31, 2001 $0.10 $0.07 First quarter through March 27, 2002 $0.07 $0.06 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 27, 2002, there were approximately 170 holders of record of the Company's common stock. (c) The Company has never paid any dividends and does not anticipate paying dividends in the foreseeable future. 14 ITEM 6. SELECTED FINANCIAL DATA Statement of Operations Data Year Ended December 31 2001 2000 1999 1998 1997 Project Billings $13,243,081 $13,671,025 $12,517,772 $10,917,903 $6,993,221 Net Income (Loss) $ 511,393 $ 539,876($ 2,613,883)$ 812,753($1,747,543) Extraordinary Gain - - - - $1,000,000 Net Income (Loss) Per Share (Basic & Diluted) $.04 $.05 ($.23) $.07 ($.32) Balance Sheet Data As of December 31 2001 2000 1999 1998 1997 (a) Total Assets $5,671,179 $5,734,277 $5,942,940 $6,632,753 $4,776,471 Long-Term Obligations $2,365,615 $2,432,374 $2,644,353 $1,526,560 $ 228,855 (a) On October 14, 1997, the Company entered into an agreement with its two largest creditors to convert all or part of its indebtedness into common stock of the Company. The agreement included forgiveness of $1,000,000 of debt by O'Brien & Gere Limited (a shareholder) and the conversion of $540,000 of convertible debentures, plus accrued interest, into 1,080,000 shares of the Company's common stock. In addition, the Company's then financial institution converted $2,811,070 of principal and interest into 5,622,140 shares of the Company's common stock. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001 the Company had cash and cash equivalents of $51,818 as compared to $6,249 at December 31, 2000. Excess cash in the Company's operating account is electronically reduced nightly to pay down the Company's revolving line of credit. At December 31, 2001, the Company had working capital of $1,362,528 compared to a working capital deficit of $660,418 at December 31, 2000. The Company had a current ratio of approximately 1.59 to 1 at the end of 2001 compared to .86 to 1 at the end of 2000. The Company's improved working capital balance is primarily attributable to the fact that the terms of the Company's revolving loan resulted in the outstanding borrowings to be classified as a long-term liability at December 31, 2001 and a current liability at December 31, 2000. Cash provided by operating activities during 2001 was $1,007,933 compared to $368,529 during 2000. The increase in cash provided by operating activities in 2001 was mostly attributable to two factors. First, the Company's continued profitability for the year ended December 31, 2001, as discussed in the "Results of Operations - 2001 Compared to 2000" section of this report. Second, a net decrease in work-in-process of $202,262 compared to a net increase in work-in-process of $419,746 during 2000. The Company's net cash used in investing activities of $397,404 during the first nine months of the year was attributable to the construction of a replacement building for the Massena, NY branch office as well as the purchase of various field and office equipment, offset by insurance proceeds from a loss on real property. Cash used in financing activities of $564,960 in 2001 was primarily due to the timing of paydowns and cash advances on the Company's line of credit, as was necessitated by the net cash provided by operating and investing activities. As of December 31, 2001, the Company had a loan agreement that provided for borrowings up to $2,200,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The loan is payable on May 31, 2003, bears interest at a rate of prime plus 1.25 percent, is subject to certain restrictive financial covenants, and is subject to default if there is a material adverse change in the financial or economic condition of the Company. As of December 31, 2001, borrowing against the revolving loan aggregated $1,427,900. During 2001, all principal payments on the Company's debt were made within payment terms. The Company expects, based on improved operating results and the continued availability of its line of credit, that it will be able to meet obligations as they come due. 16 THE MASSENA PORT FACILITY The Massena Port Facility is a former oil tank farm that is located on the St. Lawrence River in Massena, NY. The property is improved with several buildings and a deep water docking facility for large ocean going ships. Currently, the Company uses the property for its Massena branch office headquarters, equipment storage and its Aqueous Treatment/360 Facility. The property has been held for sale since 1996, during which time the carrying value has been reduced from $1,900,000 to $480,000. During the third quarter of 2001, the Company recognized an additional provision for impairment of long-lived assets of $300,000 to adjust the carrying value of the Massena Port Facility to the estimated fair market value, less cost of disposal, of $480,000. Management's estimation of fair market value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions. CAPITAL RESTRUCTURING & BUSINESS OPERATIONS The Company entered into letters of agreement with its then two largest creditors, its then financial institution, OnBank & Trust Co. ("OnBank"), and O'Brien & Gere Limited ("OBG Limited"), a shareholder, on October 14, 1997, which were executed as of December 31, 1997, whereas OnBank and OBG Limited agreed to convert all or part of their indebtedness, including accrued interest, into Common Stock of the Company, and to forgive the remaining balance. OBG Limited, to which the Company was indebted for $1,540,000, including accrued interest of $140,000, forgave $1,000,000 of the debt and converted the balances into 1,080,000 shares of the Company's Common Stock. OnBank, to which the Company was indebted for $2,811,070, including accrued interest of $75,332, converted their debt and accrued interest for 5,622,000 shares of the Company's Common Stock. The price per share of $.50 was negotiated with the two creditors and the Company based on the price of recent sales and their estimates of future risk. The OnBank ownership of the Company transferred to M&T Bank as a result of the merger of those financial institutions in 1998. RESULTS OF OPERATIONS This financial review should be read in conjunction with the accompanying Consolidated Financial Statements and accompanying notes. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results may be affected by a number of factors, including the Company's ability to successfully increase market share in its existing service territory while expanding its services into other markets, realize benefits from cost reduction programs, sell all or part of the Massena Property, and utilize its facilities and work force profitably in the face of intense price competition. 17 2001 COMPARED TO 2000 Revenues During the year ended December 31, 2001, the Company's revenues decreased 3% to $13,243,081 as compared to $13,671,025 for the year ended December 31, 2000. The slight decrease in billings is due to several factors. Revenues from spill response and remediation projects increased approximately $2,100,000. The increase in revenues from the spill response service line is primarily due to the fact that the Company's two-year emergency spill response contract with the New York State Department of Environmental Conservation began in October of 1999, and had not yet produced the volume in 2000 that the Company experienced in 2001. The Company's emergency spill response contract with the New York State Department of Environmental Conservation has been extended through 2003. This increase was offset by decreases in revenues from tank removal, cleaning and installation projects totaling approximately $500,000. This decrease is attributable to the performance of several large tank removal and installation projects during 2000. The Company also experienced a decrease in revenue from transportation and disposal of approximately $300,000 due to the completion of one large transportation and disposal project in the second quarter of 2000. The Company also experienced a decrease in revenue from asbestos removal projects of approximately $900,000 due to a management decision to eliminate asbestos removal from two of the Company's service locations. A decrease in revenue from Industrial cleaning of approximately $400,000 was due to a large emergency industrial cleaning project in 2000 that was the result of an explosion of a furnace. As part of the Company's plan to refocus its efforts on lines of work that are more profitable, the Company is no longer pursuing tank installation work and is being more selective in bidding on asbestos removal projects. Project Costs and Gross Margin Project costs for the year ended December 31, 2001 decreased 6% to $9,466,613 from $10,059,070 for the year ended December 31, 2000. Project costs as a percentage of revenues decreased to 71% for the year ended December 31, 2001 compared to 74% for the same period in 2000. The gross profit margin for the year ended December 31, 2001 was 29% versus 26% for the year ended December 31, 2000. The increase in gross margin was a result of the reduction in project costs, which was a result of improved project management during 2001 as compared to 2000. The Company performed fewer public projects, particularly tank installation and large asbestos removal projects, when comparing 2001 to 2000. These projects typically produce lower gross margins than other service lines the Company offers. The Company also performed more work on a time-and- material basis. Time-and-material work typically produces higher margins than bidwork. Project meals and lodging expense also decreased approximately $78,000 from 2000 to 2001 as a result of the Company's efforts to place more staff at each location rather than borrowing personnel from other branches within the Company. 18 Selling, General, and Administrative Expenses During the year ended December 31, 2001, selling, general, and administrative ("SG&A") expenses increased 8% to $3,035,129 compared to $2,800,661 reported for the previous year. SG&A expenses were approximately 23% of sales for the year ended December 31, 2001 compared to approximately 20% for the previous year. When comparing the year ended December 31, 2001 to the same period in 2000, the overall increase in SG&A is due to several factors. First, payroll expense and related payroll taxes and benefits increased $179,063. During the fourth quarter of 2000 and the first quarter of 2001, several new employees were added in the Plattsburgh, Albany, Rochester, NY and Edison, NJ branch offices. Each of these offices added new employees as a result of expected increased sales volume and long-term growth plans. As is customary in adding new employees, it takes approximately six months for a new employee to meet the company's chargeability goals as set forth in the operating budget. Second, occupancy expense increased $57,197, primarily due to the relocation of the Albany, NY and Boston, MA branches to larger offices with higher rent than the previous locations. Third, depreciation expense increased $56,615 primarily due to the purchase of several large field vehicles. Provision for Impairment of Long-Lived Assets During the third quarter of 2001, the Company recognized an additional provision for impairment of long-lived assets of $300,000 to adjust the carrying value of the Massena Port Facility to the estimated fair market value, less costs of disposal, of $480,000. Operating Income As a result of the factors discussed above, for the year ended December 31, 2001, the Company reported operating income of $441,339 compared to $811,294 for the previous year. 19 Interest Expense Interest expense decreased 21% to $221,046 in 2001 compared to $278,651 in 2000. The decrease in interest expense was primarily due to a decrease in the average interest rate incurred on the revolving loan and long-term debt, as well as a lower average balance on the Company's revolving loan, when comparing the year ended December 31, 2001 with the same period in 2000. Net Income Net income for the years ended December 31, 2001 and 2000 was $511,393, or $.04 per share basic & diluted, and $539,876, or $.05 per share basic and diluted, respectively. 20 2000 COMPARED TO 1999 Revenues During the year ended December 31, 2000, the Company's revenues increased 9% to $13,671,025 as compared to $12,517,772 reported for the year ended December 31, 1999. The change in revenues was due to an increase of approximately $1.25 million in spill response revenue and an increase of approximately $900,000 in transportation and disposal revenue. The change in the spill response service line was mainly attributable to the NYSDEC spill response contract, which went into effect in October of 1999, and to several spill response contracts the Company secured with various rail companies during the year. The increase in transportation and disposal was attributable to several large projects the Company had during 2000. These increases were offset by a decrease in revenue of approximately $800,000 from underground storage tank installation projects, as the Company discontinued this service line in late 1999. The Company also had a large demolition project in 1999 that it did not have in 2000, which caused a decrease in revenue from this service line of approximately $120,000. Project Costs and Gross Margin Project costs for the year ended December 31, 2000 decreased 3% to $10,059,070 from $10,355,805 for the year ended December 31, 1999. Project costs as a percentage of revenues decreased to 74% for the year ended December 31, 2000 compared to 83% for the same period in 1999. The gross profit margin for the year ended December 31, 2000 was 26% versus 17% for the year ended December 31, 1999. The increase in gross margin was a result of the reduction in project costs, which was a result of improved project management during 2000 as compared to 1999. The Company also performed fewer public projects and large asbestos jobs in 2000 than in 1999, which typically produce lower margins than bid work and spill response projects. Project labor and project labor burden expense decreased approximately $220,000 combined because of the Company's increase in spill response and transportation and disposal projects, which are less labor intensive than other types of projects, such as large asbestos projects. The Company had fewer large asbestos jobs during 2000 than in 1999, which helped to reduce the Company's labor requirement. Project meals and lodging expense also decreased approximately $73,000 from 1999 to 2000 as a result of the Company's increased revenue from spill contracts. Branches typically staff emergency spills with its personnel rather than borrowing personnel from other branches within the Company, which reduced the need for project employee travel. 21 Selling, General, and Administrative Expenses During the year ended December 31, 2000, selling, general, and administrative ("SG&A") expenses decreased 19% to $2,800,661 compared to $3,439,654 reported for the previous year. SG&A expenses were approximately 20% of sales for the year ended December 31, 2000 compared to approximately 27% for the previous year. The significant decrease in SG&A when comparing the year ended December 31, 2000 to the same period in 1999 was primarily due to the Company's continuous efforts to reduce overhead expenses. Project managers and branch managers have been meeting or exceeding chargeability goals set by the Company, and the Company has been monitoring overhead at the branch level through the use of branch budgets. Several personnel at the administrative and manager levels were also discharged from the Company during late 1999, primarily due to performance issues. These changes have resulted in a decrease in payroll expense and related payroll taxes and benefits of approximately $530,000 for the year ended December 31, 2000 compared to 1999. The Company's focus on reducing SG&A expenses has also resulted in a decrease in office expense of approximately $29,000, in part because of efforts to reduce office supply use and the use of overnight mail. Travel and subsistence expense decreased approximately $34,000 due to efforts to eliminate nonessential travel between branch locations. These decreases were partially offset by increases in other SG&A expenses. Rent, phone and utilities expense increased approximately $41,000 due mainly to the relocation of the Albany, New York, and Rockland, Massachusetts, branches to new offices with higher rent than the previous locations. Professional services expense increased approximately $32,000 due to additional computer consultant support needed for the relocated branch offices, increased audit and legal fees, and fees for outsourced payroll processing which began in April of 1999. The Company's expenses related to its equipment showed an overall decrease when comparing 2000 to 1999. Depreciation expense decreased approximately $25,000 due to a write-off and an impairment of equipment the Company was not utilizing in the fourth quarter of 1999. Fuel expense decreased overall by approximately $20,000. Due to the significant increases in fuel prices during 2000, the Company implemented a 4% fuel surcharge on customer invoices. The Company collected approximately $96,000 in billed fuel surcharges through December of 2000, which was offset against fuel expense. Equipment operating lease expense increased approximately $58,000 due to the addition of several full-service leases of vacuum trucks and tractors in order to service the Company's major emergency spill contracts. Usage of the Company's equipment increased approximately $104,000. This change was attributable to the addition of equipment in late 1999, and to the Company's project managers meeting or exceeding utilization goals set for each piece of equipment. The costs associated with using the equipment are shown in the income statement as a reduction in SG&A expense and as an increase in project costs. Equipment costs related to equipment utilized on projects are then billed to customers. 22 Provision for Impairment of Long-Lived and Other Assets During the fourth quarter of 1999, the Company recognized a provision for impairment of long-lived and other assets of $1,109,877. Included in this provision was a loss of $825,427 recognized in order to reflect the carrying value of the Massena Port Facility at the lower of cost or market. The remainder of the impairment was due to a loss recognized on equipment and other assets the Company was no longer utilizing. Operating Income As a result of the factors discussed above, for the year ended December 31, 2000, the Company reported operating income of $811,294 compared to an operating loss of $2,387,564 for the previous year. Interest Expense Interest expense increased 46% to $278,651 in 2000 compared to $191,180 in 1999. The increase in interest expense was primarily due to the increase in the Company's average outstanding balance on its revolving line of credit, which was approximately $1,800,000 in 2000 and approximately $1,400,000 in 1999. The line of credit availability was increased from $1,500,000 to $2,000,000 in mid 1999. Higher interest rates when comparing 2000 to 1999 also contributed to the increase in interest expense. As of December 31, 2000, the Company had $2,000,000 in available borrowings on a revolving basis, and borrowings against the revolving loan aggregated $1,779,315. The increase was also attributable to the financing of new equipment during the second half of 1999. Net Income Net income (loss) for the years ended December 31, 2000 and 1999 was $539,876, or $.05 per share basic & diluted, and ($2,613,883), or ($.23) per share basic and diluted, respectively. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Due to the fact that the interest rate associated with the Company's revolving line of credit is based on the prime interest rate, the Company is exposed to interest rate risk. If the prime rate increases, the Company's monthly interest payments on its line of credit also increase, which could impact cash flow. Although the Company does not anticipate any material effects from interest rate risk, the Company attempts to keep its outstanding balance on its line of credit as low as possible at all times. The Company is aware that if the economy were to slow down, the Company's business could be affected by other companies closing operations or reducing production, which could reduce the amount of waste generated or industrial cleaning projects available. In order to try to mitigate this market risk, the Company continues to make every effort to secure more emergency spill response contracts and long-term environmental remediation and industrial cleaning projects. For more information regarding market risk, see the audited financial statements submitted under Item 14 of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the report of PricewaterhouseCoopers LLP are submitted under Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 24 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY The following table sets forth certain information about the directors of the Company, all of whom were unanimously elected at the Annual Meeting of Stockholders of the registrant on November 8, 2001 for a term of one year. Year Name, Age First Principal Occupation Elected Certain Other Information Robert J. Berger (55) Director and Chairman of the Board 1998 Mr. Berger has served in his present position as Director since November 1998, and as Chairman of the Board since February 2000. Mr. Berger was employed in various positions for OnBank from 1978 through March 31, 1998, his last position being Senior Vice President, Treasurer, and Chief Financial Officer. From April through August 1998, he served as consultant to M&T Bancorp. pursuant to its merger agreement with OnBank. Since August 1998, he has been an Adjunct Professor and Director of the Madden Institute of Business Education at LeMoyne College in Syracuse, New York. Mr. Berger is also Chairman, President, and Chief Executive Officer of St. Lawrence Industrial Services, Inc. Richard L. Elander (60) Director 1991 Mr. Elander has served in his present position as a Director since November of 1991. He served as Vice President and General Manager from June 1994 to December 1996. He also served as Chief Executive Officer from November 1991 to June 1994. Mr. Elander served as a Director of O'Brien & Gere Limited from August 1991 to September 1995. From 1983 to 1995, Mr. Elander served as President of OBG Operations. Mr. Elander currently operates his own construction management consulting business, and he has been appointed to the position of Onondaga County Department of Water Environment Protection Commissioner. 25 Cornelius B. Murphy, Jr. (57) Director 1991 Dr. Murphy has served in his current position since November 1991. He previously served as the Company's President from June 1994 to December 1996 and as Chariman of the Board from November of 1991 to June 1994. Dr. Murphy has been a director of O'Brien & Gere Limited since 1985 and O'Brien & Gere Engineers, Inc. from 1982 to date. Dr. Murphy served as President of O'Brien & Gere Engineers from 1992 to 1997. From 1982 to 1992, he served as President of O'Brien & Gere Technical Services, Inc. Dr. Murphy also served as Chairman of the Board of O'Brien & Gere Limited from April 1999 to May 2000, and as Chief Scientist of O'Brien & Gere Engineers from January 1998 to December 1999. Dr. Murphy currently serves as President of the State University of New York College of Environmental Science and Forestry, which is located in Syracuse, New York. Steven A. Sanders (56) Director 1991 Mr. Sanders has served in his present position as a Director since 1991. Since January 1, 2001, he has been of counsel to the law firm of Spitzer & Feldman PC. Mr. Sanders served as a partner in the law firm of Beckman, Millman & Sanders LLP from October 1997 to December 2000 and has also been President of the Law Office of Steven A. Sanders PC since 1992. 26 EXECUTIVE OFFICERS OF THE COMPANY Name Age Position Held Christopher J. Polimino 36 President and Chief Executive Officer Anthony R. Pongonis 49 Executive Vice President Douglas R. Lee 31 Treasurer Colleen Price 27 Assistant Secretary Mr. Polimino was named Chief Executive Officer in January 2001, and has been President of the Company since January 2000. He has been with the Company since December of 1994 and has previously served as Executive Vice President, General Manager, and Controller. Mr. Pongonis was hired during the fourth quarter of 1996. He previously served as the Company's President and is currently the Company's Eastern Region Manager and Executive Vice President. He has over twenty-five years of experience in the environmental services industry. Mr. Lee was named Treasurer in December 2001, and has been Controller of the Company since March 2001. He previously worked as an Auditor for a public accounting firm from 1993 to 1999, and as Controller for a manufacturing company from 1999 to February 2001. Mrs. Price was named Assistant Secretary in December 2001, and has been the Billing Supervisor of the Company since June 1999. She has been with the Company since March 1997 and has previously served as a billing clerk and various other positions. 27 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth summary information concerning compensation paid or accrued by the Company for services rendered during the last three fiscal years. Summary Compensation Table Annual Compensation Long Term Compensation Awards Payments Name and Other Annual # of LTIP All Other Principal Position Year Salary Compensation Options Payouts Compensation Christopher J. Polimino 2001 $110,000 $12,500 -0- -0- -0- CEO and President 2000 $100,000 -0- -0- -0- -0- 1999 $ 90,000 -0- -0- -0- -0- Anthony R. Pongonis 2001 $111,080 -0- -0- -0- -0- Executive Vice Pres. 2000 $106,542 -0- -0- -0- -0- 1999 $107,220 -0- -0- -0- -0- Year End Option Table There were no outstanding stock options held as of December 31, 2001 by the named executive officers. Compensation of Directors Directors of the Company are paid $1,000 for each quarter plus reimbursement for their actual expenses incurred in attending meetings. 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the company's common stock at March 15, 2002 by persons who, to the knowledge of the Board of Directors, beneficially own more than five percent of the outstanding shares of common stock of the Corporation. All voting power of the Corporation is vested in its common stock. As of the close of business on March 27, 2002, 11,703,963 shares of common stock par value $.01 per share were outstanding. Each share of common stock is entitled to one vote. Name and Address Number of Shares of Common Percentage of Beneficial Owner Stock Beneficially Owned (1) of Class M&T Bank 5,622,140 48% 101 S. Salina Street Syracuse, NY 13202 O'Brien & Gere Limited 3,148,200 27% 5000 Brittonfield Parkway Syracuse, NY 13220 Richard L. Elander 329,565 (3) 3% Cornelius B. Murphy, Jr. 1,424 (3) <1% Steven A. Sanders 25,752 (2) (3) <1% Robert J. Berger 20,000 (3) <1% All Officers & Directors (2)(3) <4% as a Group (8 persons) (1) The beneficial owners have sole voting and investment power over the shares owned. (2) Includes 200 shares, which are owned by Mr. Sanders' wife as custodian for his son, as to which Mr. Sanders disclaims beneficial ownership. (3) Director 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 2001, the Company provided approximately $27,000 of remediation, sub-contract support, and project services to subsidiaries of O'Brien & Gere Limited, a shareholder. Services provided to O'Brien & Gere Limited subsidiaries were at competitive rates which were bid on a project by project basis. The Company purchases technical, and consulting services from subsidiaries of O'Brien & Gere Limited, a shareholder. The costs for these services amounted to $43,000 in 2001. Steven A. Sanders, a director of the Company, is of counsel to Spitzer & Feldman PC, which provides professional services to the Company, and it is anticipated that it will continue to do so. The Company purchases subcontract labor services from St. Lawrence Industrial Services, Inc., which is owned by Robert J. Berger, a director of the Company. The costs for these services amounted to approximately $886,000 in 2001. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page (a) Financial Statements and Exhibits (1) Report of Independent Auditors F-1 Consolidated Balance Sheets at December 31, 2001 and 2000 F-2 Consolidated Statement of Operations for the years ended December 31, 2001, 2000, and 1999 F-3 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2001, 2000, and 1999 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 F-5 Notes to Consolidated Financial Statements F-7 (2) Schedule II, Valuation and Qualifying Accounts for the Years Ended 2001, 2000, and 1999 F-14 (3) Subsidiary of the Company: OP-TECH Environmental Services Limited - Ontario, Canada (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the three months ended December 31, 2001. (c) Exhibits 10.1 Union and Employment Contracts (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 10.2 Voting Agreement (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 10.3 Memorandum of Agreement and Exchange (1) Incorporated herein by reference to the Company's Form 10-K F/Y/E December 31, 1997. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OP-TECH Environmental Services, Inc. (Registrant) By:/s/ Christopher J. Polimino Christopher J. Polimino, President, Chief Executive Officer, and Chief Accounting Officer March 29, 2002 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 29th day of March 2002. /s/ Robert J. Berger Director and Chairman of the Board /s/ Richard L. Elander Director /s/ Cornelius B. Murphy, Jr. Director /s/ Steven A. Sanders Director /s/ Christopher J. Polimino President, Chief Executive Officer, and Chief Accounting Officer /s/ Anthony R. Pongonis Executive Vice President /s/ Douglas R. Lee Treasurer /s/ Colleen Price Assistant Secretary 32 Report of Independent Accountants Shareholders and Board of Directors OP-TECH Environmental Services, Inc. and Subsidiary In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and shareholder's equity and of cash flows present fairly, in all material respects, the financial position of OP-TECH Environmental Services, Inc. and Subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP March 8, 2002 F1 OP-TECH Environmental Services, Inc. and Subsidiary Consolidated Balance Sheets December 31, 2001 and 2000 Assets 2001 2000 ---------- ---------- Current assets: Cash $ 51,818 $ 6,249 Accounts receivable (net of allowance for doubtful accounts of approximately $195,000 in 2001 and $149,000 in 2000) 2,885,683 3,055,996 Costs on uncompleted projects in excess of billings 420,115 633,178 Prepaid insurance 82,386 48,697 Other assets 232,764 217,120 ---------- ---------- Total current assets 3,672,766 3,961,240 Property and equipment, net 1,518,413 993,037 Assets held for sale 480,000 780,000 ---------- ---------- Total Assets $5,671,179 $5,734,277 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Bank overdraft $ 20,659 $ 205,208 Note payable to bank under line of credit - 1,779,315 Accounts payable 1,174,639 1,401,494 Billings in excess of costs and estimated profit on uncompleted contracts 541,373 552,174 Accrued payroll and other expenses 334,198 424,725 Current portion of long-term debt 239,369 258,742 ---------- ---------- Total current liabilities 2,310,238 4,621,658 Long-term debt, net of current portion 698,346 394,317 Note payable to bank under line of credit 1,427,900 - ---------- ---------- Total liabilities 4,436,484 5,015,975 ---------- ---------- Shareholders' equity: Common stock, par value $.01 per share; authorized 20,000,000 shares; 11,703,963 and 11,603,963 shares outstanding as of December 31, 2001 and 2000, respectively 117,040 116,040 Additional paid-in capital 7,791,152 7,787,152 Accumulated deficit (6,673,497) (7,184,890) ----------- ----------- Shareholders' equity, net 1,234,695 718,302 ----------- ----------- Total Liabilities and Shareholder' Equity $5,671,179 $5,734,277 ========== ========== The accompanying notes are an integral part of the consolidated financial statements F2 OP-TECH Environmental Services, Inc. and Subsidiary Consolidated Statements of Operations Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 ----------- ----------- ----------- Project billings and services $13,243,081 $13,671,025 $12,517,772 Project costs 9,466,613 10,059,070 10,355,805 ----------- ----------- ----------- Gross margin 3,776,468 3,611,955 2,161,967 Selling, general and admin. expenses 3,035,129 2,800,661 3,439,654 Provision for impairment of long- lived assets 300,000 - 1,109,877 ----------- ----------- ----------- Operating income (loss) 441,339 811,294 (2,387,564) ----------- ----------- ----------- Other income and expense: Interest expense (221,046) (278,651) (191,180) Casualty gain from insurance proceed 301,881 - - Other (expense) income, net 2,219 (4,767) 8,841 ----------- ----------- ----------- 83,054 (283,418) (182,339) ----------- ----------- ----------- Net income (loss) before income taxes 524,393 527,876 (2,569,903) Income taxes 13,000 (12,000) 43,980 ----------- ----------- ----------- Net Income (Loss) $ 511,393 $ 539,876 $(2,613,883) =========== =========== ============ Earnings (loss) per common share - basic and diluted $0.04 $0.05 $(0.23) The accompanying notes are an integral part of the consolidated financial statements F3 OP-TECH Environmental Services, Inc. and Subsidiary Consolidated Statements of Shareholders' Equity Years Ended December 31, 2001, 2000, and 1999 Additional Common Common Paid-In Accumulated Shares Stock Capital Deficit Total ---------- -------- ---------- ------------ ---------- Bal. at Dec. 31, 1998 11,603,963 $116,040 $7,787,152 $(5,110,883) $2,792,309 Net loss - - - (2,613,883) (2,613,883) ---------- -------- ---------- ------------ ----------- Bal. at Dec. 31, 1999 11,603,963 116,040 7,787,152 (7,724,766) 178,426 Net income - - - 539,876 539,876 ---------- -------- ---------- ------------ ----------- Bal. at Dec. 31, 2000 11,603,963 116,040 7,787,152 (7,184,890) 718,302 Issuance of 100,000 Shares 100,000 1,000 4,000 - 5,000 Net income - - - 511,393 511,393 ---------- -------- ---------- ------------ ---------- Bal. at Dec. 31, 2001 11,703,963 $117,040 $7,791,152 $(6,673,497) $1,234,695 ========== ======== ========== ============ ========== The accompanying notes are an integral part of the consolidated financial statements F4 OP-TECH Environmental Services, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 ---------- ---------- ------------ Operating activities: Net income (loss) $ 511,393 $ 539,876 $(2,613,883) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loss on accounts receivable 135,999 116,500 108,700 Depreciation and amortization 328,220 266,709 303,287 Provision for impairment of long-lived assets 300,000 - 1,109,877 Loss (gain) on sale of equipment 1,167 (10,000) 216 Gain on insurance proceeds from loss on real property (301,881) - - Common stock issued for services rendered 5,000 - - (Increase) decrease in operating assets and increase (decrease) in operating liabilities: Accounts receivable 34,314 136,455 (461,460) Costs on uncompleted projects applicable to future billings 213,063 (153,208) (190,202) Prepaid expenses and other assets 108,841 103,011 97,171 Billings and estimated profit in excess of costs of uncompleted contracts (10,801) (266,538) 249,319 Accounts payable and other accrued expenses (317,382) (364,276) 491,089 ---------- ---------- ---------- Net cash provided by (used in) operating activities 1,007,933 368,529 (905,886) ---------- ---------- ----------- Investing activities: Purchases of property and equipment (705,571) (66,723) (113,976) Insurance proceeds from loss on real property 308,167 - - Proceeds from sale of property and equipment - 10,000 30,530 -------- ---------- ---------- Net cash used in investing activities (397,404) (56,723) (83,446) -------- ---------- ---------- The accompanying notes are an integral part of the consolidated financial statements (Continued) F5 OP-TECH Environmental Services, Inc. and Subsidiary Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 ----------- ---------- --------- Financing activities: Cash overdrafts (repayments) $ (184,549) $ 94,254 $ 65,869 Proceeds from notes payable to banks and long-term borrowings, net of financing costs 6,382,500 4,350,593 4,998,188 Principal payments on current and long-term borrowings (6,762,911) (4,765,438)(4,181,797) ----------- ----------- ---------- Net cash (used in) provided by financing activities (564,960) (320,591) 882,260 ----------- ----------- ---------- Increase (dec.) in cash and cash equivalents 45,569 (8,785) (107,072) Cash and cash equivalents at beg. of year 6,249 15,034 122,106 ----------- ----------- ---------- Cash and Cash Equivalents at End of Year $ 51,818 $ 6,249 $ 15,034 ========== ========== ========== Non-cash items: Equipment purchased through bank and other financing sources $ 155,478 $ 28,702$ $ - Non-cash financing of insurance 158,174 - - Debt transfer upon sale of asset - 31,341 - Common stock issued for services rendered 5,000 - - The accompanying notes are an integral part of the consolidated financial statements F6 OP-TECH Environmental Services, Inc. and Subsidiary Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation OP-TECH Environmental Services, Inc. and Subsidiary (the "Company"), provides comprehensive environmental services predominately in Upstate New York, Massachusetts, Northern Pennsylvania and New Jersey. The Company performs industrial cleaning of non-hazardous materials, provides varying services relating to plant facility closure including demolition and asbestos services, provides remediation services for sites contaminated by hazardous materials and provides emergency spill response services. The Company has an inactive Canadian subsidiary, OP-TECH Environmental Services, Ltd. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. One of the more significant estimates includes the evaluation of impairment of the Company's long-lived assets. As more fully described in Note 4, the Company has certain property held for sale. Future changes in the estimates, or other assumptions utilized by management to evaluate the asset's carrying value, may have a material effect on the conclusions reached and the ultimate determination of impairment and carrying value. Project Income Recognition and Unbilled Project Costs Contracts are predominately short-term in nature (less than three months) and revenue is recognized as costs are incurred and billed. Income on long-term fixed-priced contracts greater than three months is recognized on the percentage-of-completion method. 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. Concentration of Business Risk - Significant Customers Sales to one customer, other than an affiliated party, amounted to approximately $3,435,000, $1,728,000 and $1,025,700 in 2001, 2000 and 1999, respectively. Accounts receivable at December 31, 2001 and 2000 include $550,000 and $463,000, respectively, from this customer. F7 1. Summary of Significant Accounting Policies (Continued) Property and Equipment Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of assets including those recorded under capital leases is provided for using the straight-line method. Assets Held for Sale Assets held for sale are stated at the lower of carrying amount or estimated fair value less costs of disposal. Long and Short-Term Debt The carrying amounts of the Company's short-term collateralized and unsecured borrowing and non-traded variable-rate long-term debt agreements approximate fair value. Income Taxes The Company provides for income taxes in accordance with the liability method as set forth in Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect in the years in which the differences are expected to reverse. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period, which were 11,641,771, 11,603,963 and 11,603,963 for the years ended December 31, 2001, 2000 and 1999, respectively. Diluted earnings per share includes the potentially dilutive effect of common stock equivalents. Warrants issued to a financial advisor in 1998 to purchase 302,500 shares of common stock at $1.65 per share expired in 2001. 2. Related Party Transactions The Company purchases technical, accounting, and consulting services and rented certain office and warehouse space from a shareholder and its affiliates. The cost for these services amounted to approximately $43,000, $50,000 and $299,000 in 2001, 2000 and 1999, respectively. Additionally, the Company provided approximately $27,000, $143,000 and $970,000 of remediation, sub-contract support and project services to a shareholder and its affiliates for the years ending December 31, 2001, 2000 and 1999, respectively. During 2001, the Company purchased approximately $886,000 of subcontract labor services from St. Lawrence Industrial Services, Inc. which is owned by a director of the Company. F8 3. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31: 2001 2000 ---------- ---------- Furniture and fixtures $ 13,820 $ 42,743 Buildings 414,541 - Office machines 122,879 79,282 Field equipment 2,024,400 1,697,254 Aqueous treatment system 121,728 98,330 --------- --------- 2,697,368 1,917,609 Less: Accumulated depreciation (1,178,955) (924,572) --------- --------- $1,518,413 $ 993,037 ========= ========= Depreciation expense approximated $327,000, $267,000 and $294,000 for 2001, 2000 and 1999, respectively. During the second quarter of 2001, the Company received insurance proceeds in the amount of $308,167 related to the insured replacement value of a property that was destroyed by a fire. The proceeds received were used to replace the destroyed building and contents at substantially the same cost. A loss on disposal of assets, representing the net book value of all the destroyed assets as of the date of the fire, was recorded in the amount of $6,286. Accordingly, the Company realized a casualty gain of $301,881 as a result of the proceeds collected. 4. Assets Held for Sale The Company continues to pursue the disposal of its Massena Port Facility ("Facility"), which was acquired in 1991 for the purpose of developing a large aqueous treatment facility. Management's estimation of fair value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions and certain other factors. During the third quarter of 2001 the Company, based on management's estimate of the Facility's fair value, recognized an additional impairment loss on the carrying value of the Facility of approximately $300,000. F9 5. Debt and Lease Obligations Long-term debt is summarized as follows at December 31, 2001: Line of credit, due May 31, 2003. (a) $ 1,427,900 Term Loan, due in monthly installment payments of $12,500, plus interest at prime plus 1.25% (6% at December 31, 2001).(a) 687,500 Equipment Line of Credit, due in monthly installment payments of $2,765, including interest at prime plus 1.25% (6% at December 31, 2001). (a) 135,245 Equipment Note, due in monthly installment payments of $2,730, including interest at 7.5%, collateralized by equipment with a carrying value of $80,900. 78,808 Insurance Financing Note, due in monthly installment payments of $18,304, including interest at 9.85%, collateralized by the assignment of unearned premiums. 36,162 ----------- 2,365,615 Less: Current portion (239,369) ------------ $ 2,126,246 ============ (a) In June 2001, the Company entered into financing agreements (the Agreements) with a new lender including a Line of Credit agreement to refinance its previous Line of Credit, which provides for borrowings up to $2,200,000 to be used for working capital and expires on May 31, 2003, unless renewed by the lender; a $750,000 Term Loan agreement to refinance its previous term loans outstanding, which expires in August 2006; and a $200,000 Equipment Line of Credit which matures on May 31, 2002, unless renewed by the lender. Borrowings under the Equipment Line of Credit are converted to term loans to be paid in monthly installments over the shorter of five years or the useful life of the equipment. During 2001 the Company borrowed $108,535 and $33,850 under the Equipment Line of Credit, both of which were converted to term notes maturing September 1, 2006 and November 1, 2006, respectively. The Agreements are collateralized by all accounts receivable, inventory and equipment now owned or subsequently acquired. Availability on the Line of Credit is subject to a specified borrowing base calculation using eligible accounts receivable and costs in excess of billings. The Agreements also include certain financial covenants including a minimum fixed charge ratio, a tangible net worth ratio and a debt to net worth ratio; cross-collateralization provisions; and a material adverse change clause which permits the financial institution to call its obligation if the Company fails to comply with covenants, as defined, or in the event of a material adverse change in the Company's business. Management does not anticipate any adverse changes in the next twelve months, however, there can be no assurances. Interest is charged at prime plus 1.25%, or 6% at December 31, 2001. The weighted average borrowing rates under short-term credit facilities were 8.16% and 10.49% at December 31, 2001 and 2000, respectively. Interest paid amounted to approximately $207,000, $267,000 and $191,000 in 2001, 2000 and 1999, respectively. F10 5. Debt and Lease Obligations (Continued) Scheduled principal payments on long-term debt for the next five years are as follows: 2002 $ 239,369 2003 1,634,942 2004 200,131 2005 180,761 2006 110,412 --------- $2,365,615 ========= Office facilities, a portion of which is with an affiliate of the Company's shareholder, are leased under noncancelable operating leases expiring at various dates through 2006. Rent expense incurred amounted to approximately $519,000, $553,000 and $515,000 in 2001, 2000 and 1999, respectively. Future minimum lease payments under noncancelable operating leases are as follows: 2002 - $372,000, 2003 - $274,000, 2004 - $184,000, 2005 - $163,000 and 2006 - $63,000. 6. Income Taxes The following summarizes the income tax (benefit) expense at December 31, 2001: 2001 2000 1999 --------- ---------- --------- Current: Federal $ - $ - $ - State 13,000 (12,000) 43,980 --------- ---------- --------- $ 13,000 $ (12,000) $ 43,980 ========= ========== ========= The difference between the expected tax provision resulting from the application of the federal statutory income tax rate to pre-tax income is due principally to (i) for 2001 and 2000, reversal of the valuation allowance related to utilized net operating loss carryforwards and (ii) for 1999, the recognition of a valuation allowance against generated net operating losses. At December 31, 2001, the Company has federal net operating loss ("NOL") and alternative minimum tax ("AMT") credit carryforwards of approximately $6,054,000 and $6,564,000, for income tax purposes. The federal net operating loss carryforward expires at various times through the year ending December 31, 2019. Alternative minimum tax credit carryforwards do not expire. Income taxes and franchise taxes paid were approximately $13,000 and $3,500 in 2001 and 2000, respectively. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recorded a valuation allowance amounting to the entire net deferred tax asset due to uncertainty as to the ultimate recovery of the assets. F11 6. Income Taxes (Continued) Significant components of the Company's deferred tax liabilities and assets as of December 31, 2001 and 2000 are as follows: 2001 2000 ---------- ---------- Deferred tax liabilities: Depreciation $ 126,358 $ 64,625 ---------- ---------- Deferred tax assets: Net operating loss carryforward $2,058,385 $2,470,447 Accounts receivable reserve 77,153 59,156 Other 513,400 568,947 AMT tax credits 25,083 18,785 ---------- ---------- Total deferred tax assets 2,674,021 3,117,335 Valuation allowance for deferred assets (2,547,663) (3,052,710) ---------- ---------- Deferred tax assets $ 126,358 $ 64,625 ---------- ---------- Net deferred tax assets $ - $ - ========== ========== 7. Employee Benefit Plan The Company maintains a defined contribution employee retirement plan which covers substantially all employees. The Plan is funded by voluntary employee contributions which are matched by the Company at a designated percentage, and additional contributions by the Company at the discretion of the Board of Directors. There were matching contributions to the plan of approximately $26,000, $18,700 and $9,900 in 2001, 2000 and 1999, respectively, by the Company. The Company did not make discretionary contributions to the Plan in 2001, 2000 and 1999. 8. 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. F12 9. Two-Year Selected Quarterly Financial Data (Unaudited) Year Ended December 31, 2001 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 September 30 December 31 ---------- ---------- ---------- ----------- Project billings $2,869,570 $3,378,960 $3,664,400 $3,330,151 Gross margin 894,927 987,408 926,036 968,097 Net income (loss) 53,429 419,528 (162,448) 200,884 Net income (loss) per share (basic and dilutive $0.00 $0.04 $(0.01) $0.02 Year Ended December 31, 2000 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 September 30 December 31 ---------- ---------- ---------- ----------- Project billings $2,717,158 $3,377,878 $3,358,271 $4,217,718 Gross margin 778,363 915,882 935,650 982,060 Net income (loss) 51,174 173,269 161,920 153,513 Net income (loss) per share (basic and dilutive $0.00 $0.01 $0.01 $0.01 (See also Notes 3 and 4.) F13 SCHEDULE II Balance at Balance at Beginning End of Description of Period Additions Deductions Period YEAR ENDED DECEMBER 31, 2001 Reserves deducted from assets to which they apply: Doubtful accounts receivable $ 149,346 $ 135,999 $ 90,563(a) $ 194,782 Valuation allowance for deferred assets $3,052,710 $ - $505,047 $2,547,663 YEAR ENDED DECEMBER 31, 2000 Reserves deducted from assets to which they apply: Doubtful accounts receivable $ 132,155 $ 116,500 $ 99,309(a) $ 149,346 Valuation allowance for deferred assets $2,934,212 $ 118,498 $ - $3,052,710 YEAR ENDED DECEMBER 31, 1999 Reserves deducted from assets to which they apply: Doubtful accounts receivable $ 125,960 $ 108,700 $102,505(a) $ 132,155 Valuation allowance for deferred assets $1,726,508 $1,207,704 $ - $2,934,212 (a) Doubtful accounts written off and adjustments. F14 -----END PRIVACY-ENHANCED MESSAGE-----