10-K 1 text05.txt OP-TECH 12/31/05 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, 2005 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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Indicate by check mark if the registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act: Yes [ ] or No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes [ ] or No [X] 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 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]. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act: Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] or No [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity as of the last business day of the registrants most recently completed second fiscal quarter: $2,321,524 Indicate the number of shares outstanding of each of the Company's classes of common stock, as of March 20, 2006. Common stock, $.01 par value: 11,745,371 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 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 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. In December 2004, the Company's wholly-owned subsidiary, OP-TECH AVIX, Inc., became inactive. The subsidiary is no longer pursuing a separate line of business and the Company now operates in only one business segment. Disclosures related to 2003 and 2004 have been restated to reflect this change. Services 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. The Company also provides liquid tank truck transports equipped with vacuum pumps. 24-Hour Emergency Spill Response 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 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. The Company derives a material portion of its revenues from an agreement with the New York State Department of Environmental Conservation (NYSDEC) to provide emergency response services in certain areas of New York State, payment of which is guaranteed by the NYSDEC. Asbestos Abatement The Company provides asbestos abatement contracting services on a limited basis 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. 3 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 Services The Company provides hydrogeological services to petroleum companies, engineering firms and local and state public entities. In addition to maintaining a hydrogeologist on staff, the Company has several teaming arrangements with other companies that provide drilling, geoprobe and support services to the Company. 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. Non-Hazardous Waste Transfer and Storage Facility The Company 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 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 material compliance with all federal, state, and local regulations governing its business. RCRA. The Resources Conservation and Recovery Act of 1976 is the principal federal statute governing hazardous waste generation, treatment, storage, and disposal. RCRA, or EPA-approved state programs may govern any waste handling activities of substances classified as "hazardous." The 1984 amendments to RCRA substantially expanded its scope by, among other things, providing for the listing of additional wastes as "hazardous" and providing for the regulation of hazardous wastes generated in lower quantities than previously had been regulated. Additionally, the amendments impose restrictions on land disposal of certain hazardous wastes, prescribe more stringent standards for hazardous waste land disposal sites, set standards for underground storage tanks and provide for "corrective" action at or near sites of waste management units. Under RCRA, liability and stringent operating requirements may be imposed on a person who is either a "generator" or a "transporter" of hazardous waste, or an "owner" or "operator" of a waste treatment, storage, or disposal facility. The Company does not believe its hazardous waste remediation services cause it to fall within any of these categories, although it might be considered an "operator" of a waste management facility or a "generator" of hazardous waste if it were to control the collection, source, separation, storage, transportation, processing, treatment, recovery, or disposal of hazardous wastes, including operation of a treatment unit for remedial purposes. 4 Regulation of underground storage tanks (UST) legislation, in particular Subtitle I of RCRA, focuses on the regulation of underground tanks in which liquid petroleum or hazardous substances are stored and provides for the regulatory setting for a portion of the Company's work. Subtitle I of RCRA requires owners of all existing underground tanks to list the age, size, type, location, and use of each tank with a designated state agency. The EPA has published performance standards and financial responsibility requirements for storage tanks over a five year period. These regulations also require all new tanks which are installed to have protection against spills, overflows, and corrosion. Subtitle I of RCRA provides civil penalties of up to $15,000 per violation for each day of non-compliance with tank requirements and $10,000 for each tank for which notification was not given or was falsified. RCRA also imposes substantial monitoring obligations on parties which generate, transport, treat, store, or dispose of hazardous waste. Superfund Act. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund Act") generally addresses clean-up of inactive sites at which hazardous waste treatment, storage, or disposal took place. The Superfund Act assigns joint and several liability for cost of clean-up and damages to natural resources to any person who, currently, or at the time of disposal of a hazardous substance who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport of hazardous substances owned or possessed by such person for disposal or treatment; and to any person who accepts hazardous substances for transport to disposal or treatment facilities or sites from which there is a release or threatened release. Among other things, the Superfund Act authorized the federal government either to clean up these sites itself or to order persons responsible for the situation to do so. The Superfund Act created a fund, financed primarily from taxes on oil and certain chemicals, to be used by the federal government to pay for the clean-up efforts. Where the federal government expends money for remedial activities, it may seek reimbursement from the Potentially Responsible Parties ("PRPs"). The liabilities provided by the Superfund Act could, under certain factual circumstances, apply to a broad range of possible activities by the Company, including generation of hazardous substances, releases of hazardous substances during transportation, failure to properly design a clean-up, removal or remedial plan and failure to achieve required clean-up standards, leakage of removed wastes in transit or at the final storage site, and remedial operations on ground water. Such liabilities can be joint and several where other parties are involved. Other. The Company's operations are subject to other federal laws protecting the environment, including the Clean Water Act and the Toxic Substances Control Act. Many states have also enacted statutes regulating the handling of hazardous substances, some of which are broader and more stringent than the federal laws and regulations. Competitive Conditions The markets for environmental remediation, as well as demolition and asbestos removal, continue to be very competitive. The Company competes with many different firms ranging from small local firms to large national firms, many of which have greater financial and marketing resources than the Company. Competition in environmental services is based largely on competitive pricing and quality of service provided. Other competitive factors include geographic location as well as reputation. Management believes the Company is one of the few firms based in its market areas throughout the Northeastern United States that offers a high quality combination of environmental services at the most competitive prices. In addition, through its wide range of environmental services, good reputation, and competitive pricing, the Company hopes to maintain a competitive edge in the environmental services business. The Company operates field offices in Syracuse, Massena, Rochester, Albany, Plattsburgh, Waverly and Buffalo, New York, as well as Edison, New Jersey and Cleveland, Ohio. While operations in the Syracuse, Massena, Albany, Buffalo and Waverly offices are substantial, the Rochester, Plattsburgh, Edison and Cleveland operations operate at a lower volume. 5 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 2005, the Company performed services for more than 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, 2005, 2004, and 2003 was Emergency Spill Response services. Emergency Spill Response accounted for 33%, 33% and 29% of the Company's revenues for the years ended December 31, 2005, 2004, and 2003, respectively. During 2005, the Company had sales of approximately $6,047,000 related to a contract with the New York State Department of Environmental Conservation, which totaled approximately 28% of the Company's revenues. The contract with the New York State Department of Environmental Conservation runs through 2008. The loss of these sales could have a material adverse effect on the Company. Insurance The Company maintains commercial general liability, asbestos liability and pollution liability insurance which provides aggregate coverage limits of $9 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 March 14, 2006, the Company had a total of approximately 120 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 Our internet address is www.op-tech.us. There we make available, free of charge, our 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 we electronically file such material with the Securities and Exchange Commission (SEC). The information found on our Web site is not part of this or any other report we file with or furnish to the SEC. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room located at 450 Fifth Street NW, 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 our reports on its website at www.sec.gov. 6 ITEM 1A. RISK FACTORS Operations of the Company are funded by a working capital line of credit. On February 13, 2006 the Line of Credit note was amended to increase the borrowing limit to $5,100,000 and extend the expiration date to April 1, 2007. The loss of the availability of this line of credit after April 1, 2007 could have an adverse effect on the Company if alternate financing sources are not available. Sales to one customer, the New York State Department of Environmental Conservation ("NYS DEC") accounted for 28%, 33% and 29% of the Company's revenues for the years ended December 31, 2005, 2004 and 2003, respectively. The Company's contract with the NYS DEC expires in November 2008. The loss of the NYS DEC contract after November 2008 could have an adverse effect on the Company. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES Syracuse, New York Branch and Corporate Headquarters The Company leases approximately 21,000 square feet of office and shop space at a rate of $7,792 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. The Company is currently in negotiations with the landlord for a renewal of its lease at this location. 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. There are three support buildings on the premises. The Company is currently pursuing the sale of this parcel. On March 9, 2006 the Company entered into an option agreement ("the Agreement") with a prospective purchaser ("Purchaser)" that grants the Purchaser the exclusive option to purchase the land. If the option is exercised, the Company believes that it will be able to enter into a lease for suitable office and shop space in the Massena, NY area. Buffalo, New York Branch The Company leases approximately 8,445 square feet of office and shop space at a rate of $3,695 per month plus utilities. The term of the lease extends through October 31, 2009 and does not contain an escalation clause. The lease contains an option for the Company to renew the lease for 60 additional months, to October 31, 2014, at the rate of $3,695 per month plus utilities. 7 Rochester, New York Branch The Company leases approximately 4,050 square feet of office and shop space at a current rate of $2,550 per month plus utilities. The term of the lease extends through June 30, 2007. The lease contains a rate escalation clause which increases the monthly rent to $2,600 on July 1, 2006. Waverly, New York Branch The Company leases approximately 12,450 square feet of office, and shop space at a rate of $4,500 per month plus utilities. The term of the lease extends through May 31, 2012 and does not contain and escalation clause. Albany, New York Branch The Company leases approximately 11,000 square feet of office and shop space at a current rate of $4,415 per month plus utilities. The term of the lease extends through October 31, 2007. Edison, New Jersey Branch The Company leases approximately 5,650 square feet of office and shop space at a rate of $3,884 per month plus utilities. The term of the lease extends through July 31, 2008 and does not contain an escalation clause. The lease contains an option for the Company to renew the lease for 36 additional months, to July 31, 2011, at the rate of $4,245 per month plus utilities from August 1, 2008 through July 31, 2009, $4,372 per month plus utilities from August 1, 2009 through July 31, 2010, and $4,503 per month plus utilities from August 1, 2010 through July 31, 2011. Plattsburgh, New York Branch The Company leases approximately 4,375 square feet of office and shop space at a rate of $2,000 per month plus utilities. The term of the lease extends through December 31, 2006 and does not contain an escalation clause. Cleveland, Ohio Branch The Company leases approximately 5,000 square feet of office and shop space at a rate of $2,500 per month plus utilities. The term of the lease extends through March 31, 2008 and does not include an escalation clause. 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. 8 ITEM 3. LEGAL PROCEEDINGS The Company has accrued a $450,000 liability at December 31, 2005. The liability has been recorded to cover potential legal costs and fees related to a claim against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual shareholders meeting on April 27, 2005. The shareholders voted on the ratification of Dannible & McKee, LLP as the Company's auditors, and the election of six directors. The following votes were cast for each: For Against Ratification of Dannible & McKee, LLP as the Company's auditors 6,110,749 -0- Election of Directors: Robert J. Berger Director 6,110,749 -0- Richard L. Elander Director 6,110,749 -0- Cornelius B. Murphy, Jr. Director 6,110,749 -0- Steven A. Sanders Director 6,110,749 -0- George W. Lee Director 6,110,749 -0- Christopher J. Polimino Director 6,110,749 -0- There were no other matters submitted to a vote of the Company's shareholders. 9 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 on the Over the Counter Bulletin Board under the symbol OTES.OB. 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, 2004 $0.51 $0.28 June 30, 2004 $0.75 $0.45 September 30, 2004 $0.75 $0.35 December 31, 2004 $1.01 $0.25 March 31, 2005 $0.75 $0.55 June 30, 2005 $0.75 $0.46 September 30, 2005 $0.75 $0.45 December 31, 2005 $0.45 $0.28 First quarter through March 20, 2006 $0.50 $0.36 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 20, 2006, there were approximately 199 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. Equity Compensation Plan Information Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining avail for future exercise of outstanding issuance under equity outstanding options, options, warrants compensation plans warrants and rights and rights (1) (excluding securities reflected in column (a)) (1) 1) (a) (b) (c) --------------- ---------------- -------------------------- Equity compensation plans approved by security holders 1,147,331 $0.18 95,002 Equity compensation plans not approved by security holders - - - ----------- --------- ----------- Total 1,147,331 $0.18 95,002 =========== ========= ============ (1) As of March 20, 2006. 10 ITEM 6. SELECTED FINANCIAL DATA Statement of Operations Data Year Ended December 31 2005 2004 2003 2002 2001 Project Billings $21,784,096 $18,170,103 $15,037,888 $15,093,052 $13,243,081 Net Income (loss) ($145,744) $200,086 $1,959,031 $553,666 $511,393 Net Income (loss) Per Share Basic ($.01) $.02 $.13 $.04 $.04 Diluted ($.01) $.02 $.12 $.04 $.04 Balance Sheet Data As of December 31 2005 2004 2003 2002 2001 Total Assets $13,185,755 $12,241,068 $9,124,305 $8,130,139 $5,671,179 Long-Term Obligations$6,024,691 $5,366,959 $4,156,356 $3,570,103 $2,365,615 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2005 the Company had cash and cash equivalents of $90,928 as compared to $101,738 at December 31, 2004. 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, 2005, the Company had working capital of $3,700,136 compared to working capital of $2,767,034 at December 31, 2004. The Company had a current ratio of approximately 1.86 to 1 at the end of 2005 compared to 1.59 to 1 at the end of 2004. Cash used in operating activities during 2005 was $568,200 compared to cash provided by operating activities of $476,268 during 2004. The decrease in cash provided by operating activities in 2005 was mostly attributable to a net increase in costs on uncompleted projects applicable to future billings, an increase in accounts receivable and a decrease in accounts payable. The Company's net cash used in investing activities of $757,676 during 2005 was attributable to the purchase of various field and office equipment. Cash provided by financing activities of $1,315,066 in 2005 was primarily due to the timing of pay downs and cash advances on the Company's line of credit, as was necessitated by the net cash used in operating and investing activities. As of February 13, 2006, the Company has a loan agreement that provides for borrowings up to $5,100,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The loan is payable on April 1, 2007, 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. In addition, the Company has entered into a loan agreement which provides for borrowings up to $400,000 to be used to provide equipment financing. As of December 31, 2005, borrowing against the prior revolving loan aggregated $4,000,000. During 2005, all principal payments on the Company's debt were made within payment terms. 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 new 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. 12 THE MASSENA PORT FACILITY The Massena Port Facility is a former oil tank farm that is located on the St. Lawrence River in Massena, NY. The property is improved with several buildings and a deep water docking facility for large ocean going ships. Currently, the Company uses the property for its Massena branch office headquarters and equipment storage. The property has been held for sale since 1996, during which time the carrying value has been reduced from $1,900,000 to $624,000, which approximates its fair value. Management's estimation of fair market value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions. On March 9, 2006 the Company entered into an option agreement ("the Agreement") with a prospective purchaser ("Purchaser)" that grants the Purchaser the exclusive option to purchase the land and building held for sale. The Agreement expires on June 30, 2006. In consideration for the Agreement, the Purchaser made a non-refundable payment to the Company in the amount of $7,900. If the Purchaser chooses to exercise the option to purchase the land and buildings, the purchase price shall be payable in cash in the amount of $850,000, due by August 31, 2006. Based on the Agreement, an impairment loss of $100,000 on the carrying value of the land and buildings held for sale was recorded at December 31, 2005 to adjust the carrying value to $850,000. CAPITAL RESTRUCTURING On December 30, 2003, the Company purchased and retired 2,811,070 shares of its common stock from M&T Bank for $.249 per share, or $700,000. On March 16, 2004, the Company purchased and retired 1,000,000 shares of its common stock from O'Brien & Gere Limited for $.25 per share, or $250,000. 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. EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004 the Financial Accounting Standards Board issued Financial Accounting Standard No. 123(R) "Share Based Payment". The standard will require the Company to recognize the fair value of stock options issued as compensation when granted. The Securities and Exchange Commission has also issued Staff Accounting Bulletin 107 "Share Based Payment" which provides the views of the SEC staff regarding aspects of adopting Statement 123(R). The Company plans on adopting the statement in the first quarter of 2006 using the modified prospective application method. To date the Company has not computed the effect of adopting Statement 123(R) on the financial statements. 13 CONTRACTUAL OBLIGATIONS The Company's estimated future payments as of December 31, 2005 related to its material debt and other certain contractual obligations and the timing of those payments are set forth below. Since many of these payment amounts are not fixed, the amounts in the table are solely estimates and the actual amounts may be different. Payments Due By Period: Contractual Less than 2 - 3 4 - 5 More than Obligations Total one year years years 5 years ---------- ---------- ---------- -------- --------- Long-term debt(1) $2,491,607 $466,906 $912,755 $755,233 $356,713 Note payable to bank under line of credit(2) 4,000,000 - 4,000,000 - - Interest Expense (3) 954,146 495,789 326,922 116,474 14,961 Operating leases(4) 1,060,885 388,153 445,357 150,875 76,500 ---------- --------- --------- -------- ------- Total $8,506,638 $1,350,848 $5,685,034 $1,022,582 $448,174 ========== ========== ========= ========= ======== 1. Long-term debt represents term loans payable that mature at various dates through December 2012. Long-term debt includes scheduled maturities but excludes interest payments. 2. Note payable to bank under line of credit includes the scheduled maturity on April 1, 2007, but excludes variable-rate interest payments. The scheduled maturity does not consider the Company's ability to draw or pay down the line of credit facility prior to the maturity date, or the possibility that the maturity date may be extended by negotiations with the lender. 3. Interest expense represents all interest that will become payable on the Company's fixed and floating rate long-term debt obligations. Interest expense assumes that the prime rate remains at the current rate of 7.5% and that the Company's working capital line of credit remains at $4,000,000 and is paid on its maturity date of April 1, 2007. 4. Operating leases represent office facilities and various field equipment leased under non- cancelable operating leases expiring at various dates through 2012. OFF BALANCE SHEET ARRANGEMENTS The Company has no off balance sheet arrangements at December 31, 2005 or December 31, 2004 that require disclosure under this item. 14 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. The Company maintains a valuation allowance on its deferred tax asset based on the amount of net operating losses that management believes it will 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. 15 2005 COMPARED TO 2004 Revenues During the year ended December 31, 2005, the Company's revenues increased 20% to $21,784,096 as compared to $18,170,103 for the year ended December 31, 2004. The increase in revenue is due to several factors. Revenues from New York State Department of Environmental Conservation ("NYSDEC") increased approximately $2,202,000. The increased revenue from NYSDEC is primarily due to one large remediation project in Buffalo, NY that earned approximately $2,377,000 in revenue. In addition, total revenue generated from smaller projects increased as well. Seven of the nine branch offices experienced higher revenue in 2005 than in 2004. Project Costs and Gross Margin Project costs for the year ended December 31, 2005 increased 20% to $15,955,533 from $13,334,686 for the year ended December 31, 2004. Project costs as a percentage of revenues was 73% for the years ended December 31, 2005 and 2004. The gross profit margin for the years ended December 31, 2005 and 2004 was 27%. Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $734,000 in 2005 and $838,000 in 2004. Selling, General, and Administrative Expenses During the year ended December 31, 2005, selling, general, and administrative ("SG&A") expenses increased 20% to $5,107,218 compared to $4,248,611 reported for the previous year. SG&A expenses were approximately 23% of project revenue for the years ended December 31, 2005 and December 31, 2004. When comparing 2005 to 2004, the overall increase in operating expenses is due to several factors: Business insurance increased 22% to $403,186. The increase in insurance expense is due to the continuing increase in premiums in the insurance market. Fuel expense increased 36% to $646,816. The increase in fuel expense is due to significantly higher fuel prices, additional pieces of equipment, and higher utilization of the Company's equipment. Occupancy expense increased 25% to $493,332. The increase in occupancy expense is attributable to new leases entered into for an additional space in Waverly, NY and a larger office in Edison, NJ. In addition, heating costs were significantly higher in 2005. Equipment repair and maintenance expense increased 49% to $539,211. The increase in equipment repairs and maintenance was due to the hiring of an additional mechanic, the increased size of the equipment fleet, the higher average age of the equipment fleet, and an increased effort to maintain the fleet in top working condition. Provision for Impairment of Land and Buildings Held for Sale At December 31, 2005 the Company recognized a provision for impairment of its land and buildings held for sale in the amount of $100,000 to adjust the carrying value of the land and building held for sale to $850,000. Litigation Defense Reserve The Company has recorded a $450,000 litigation defense reserve at December 31, 2005. The reserve has been recorded to cover potential legal expenses and fees related to a claim against the Company. 16 Operating Income As a result of the factors discussed above, for the year ended December 31, 2005, the Company reported operating income of $171,345 compared to $586,806 for the previous year. Interest Expense Interest expense increased 51% to $384,240 in 2005 compared to $253,854 in 2004. The increase in interest expense was primarily due to an increase in the rates paid on the Company's floating rate debt that is tied to changes in the prime rate. The prime rate increased from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. In addition, the average outstanding balance on the revolving loan and long-term debt increased when comparing the year ended December 31, 2005 with the same period in 2004. Net Loss Before Income Taxes Net loss before income taxes amounted to $242,744 in 2005 compared to net income before income taxes of $332,684 in 2004. Income Tax Benefit The Company recorded a net income tax benefit of $97,000 in 2005 compared to an income tax expense of $132,598 in 2004. Net Loss Net loss for the year ended December 31, 2005 was $145,744 or $.012 per share basic & diluted compared to net income of $200,086, or $.017 per share basic and $.016 diluted, for the year ended December 31, 2004. 17 2004 COMPARED TO 2003 Revenues During the year ended December 31, 2004, the Company's revenues increased 21% to $18,170,103 as compared to $15,037,888 for the year ended December 31, 2003. The increase in revenue is due to several factors. Revenues from New York State Department of Environmental Conservation ("NYSDEC") increased approximately $1,580,000. The increased revenue from NYSDEC is primarily due to a $1,200,000 soil excavation project in the Massena, NY area in the fourth quarter of 2004. Four other large projects in 2004, including a spill response project on the Erie Canal near Rochester, NY in December 2004, a spill response project on the Delaware River near Philadelphia, PA in December 2004, a spill response and remediation project on a road near Geneva, NY in June 2004, and a train derailment spill response and remediation project on a railroad near Ticonderoga, NY in March, 2004, aggregated revenue of approximately $2,465,000. The Company has historically performed several large spill response projects every year. These large spill response projects generate revenue of between $1,800,000 and $2,500,000 per year. In addition, the creation and development of the sales department in 2004 has led to significantly more opportunities and project billings throughout the Company. Project Costs and Gross Margin Project costs for the year ended December 31, 2004 increased 24% to $13,334,686 from $10,756,145 for the year ended December 31, 2003. Project costs as a percentage of revenues increased to 74% for the year ended December 31, 2004 compared to 72% for the same period in 2003. The gross profit margin for the year ended December 31, 2004 was 26% versus 28% for the year ended December 31, 2003. Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $838,000 in 2004 and $1,210,000 in 2003. The decrease in the gross margin is due to a higher volume of excavation projects in 2004, including the $1,200,000 soil excavation project for the NYSDEC mentioned above, compared to 2003. Excavation projects typically produce a lower gross margin as a result of 3rd party trucking and landfill expenses that are treated as a pass-through expense at a specified mark-up. Selling, General, and Administrative Expenses During the year ended December 31, 2004, selling, general, and administrative ("SG&A") expenses increased 18% to $4,248,611 compared to $3,606,012 reported for the previous year. SG&A expenses were approximately 24% of sales for each of the years ended December 31, 2004 and December 31, 2003. When comparing 2004 to 2003, the overall increase in operating expenses is due to several factors: Payroll expense increased 20% to $1,842,959. During the fourth quarter of 2003 and the first three quarters of 2004, new employees were added in the Cleveland, Edison, Albany, Syracuse and Massena branch offices. Each of these offices added new employees as a result of anticipation of increased sales volume and long-term growth plans. In addition, over the last 12 months four employees were added to the sales department. Business insurance increased 37% to $328,640. The increase in insurance expense is due to a single one-time loss resulting in a significant claim being paid out of the Company's general liability insurance policy. Fuel expense increased 64% to $477,426. The increase in fuel expense is due to significantly higher fuel prices, additional pieces of equipment, and higher utilization of the Company's equipment. Occupancy expense increased 18% to $395,532. The increase in occupancy expense is attributable to new leases entered into since the third quarter of 2003 for a new office in Cleveland, OH and larger offices in Edison, NJ, Plattsburgh, NY and Rochester, NY. 18 Operating Income As a result of the factors discussed above, for the year ended December 31, 2004, the Company reported operating income of $586,806 compared to $675,731 for the previous year. Interest Expense Interest expense increased 33% to $253,854 in 2004 compared to $190,707 in 2003. The increase in interest expense was primarily due to an increase in the rates paid on the Company's floating rate debt that is tied to changes in the prime rate. The prime rate increased from 4% at 12/31/03 to 5.25% at 12/31/04. In addition, the average outstanding balance on the revolving loan and long-term debt increased when comparing the year ended December 31, 2004 with the same period in 2003. Net Income Before Income Taxes Net income before income taxes amounted to $332,684 in 2004 compared to $481,369 in 2003. Income Tax Expense The Company recorded a net income tax expense of $132,598 compared to a net income tax benefit of $1,477,662 in 2003. Net Income Net income for the years ended December 31, 2004 and 2003 was $200,086 or $.02 per share basic & diluted, and $1,959,031, or $.13 per share basic and $.12 diluted, respectively. 19 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, 2005, including derivative and other rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $42,000 annually. The Company is aware that if the economy were to slow down, the Company's business could be affected by other companies closing operations or reducing production, which could reduce the amount of waste generated or industrial cleaning projects available. In order to try to mitigate this market risk, the Company continues to make every effort to secure more emergency spill response contracts and long-term environmental remediation and industrial cleaning projects. For more information regarding market risk, see the audited financial statements submitted under Item 15 of this report. ITEM 8. 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 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 20 ITEM 9a - CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. As of the end of the period covering this Form 10-K, we evaluated the effectiveness of the design and operation of our "disclosure controls and procedures". OP-TECH conducted this evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. (i) Definition of Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our periodic reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As defined by the SEC, such disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in such a manner as to allow timely disclosure decisions. (ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Controls. OP-TECH recognizes that a system of disclosure controls and procedures (as well as a system of internal controls), no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the system are met. Further, the design of such a system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented in a number of ways. Because of the inherent limitations in a cost-effective control system, system failures may occur and not be detected. However, the Chief Executive Officer and Chief Financial Officer believe that our system of disclosure controls and procedures provides reasonable assurance of achieving their objectives. (iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation of these controls and procedures, that our disclosure controls and procedures are effective in timely alerting them to material information relating to OP-TECH required to be included in OP-TECH's periodic SEC filings. (b) Changes in Internal Controls. There have been no changes in OP-TECH's internal controls over financial reporting during the last fiscal quarter of 2005 that has materially affected or is reasonably likely to affect the Company's internal control over financial reporting. ITEM 9b - OTHER INFORMATION None 21 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 April 27, 2005 for a term of one year. Each director has served continuously since he was first elected. The Board of Directors held five meetings during the last calendar year. All of the directors attended more than 75% of the total number of meetings held by the Board of Directors. Name, Age Principal Occupation Year First Elected Certain Other Information Robert J. Berger (59) 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. From August 1998 through 2004, he was an Adjunct Professor at LeMoyne College in Syracuse, New York. From August 1998 through June 2002, he served as Director of the Madden Institute of Business Education at LeMoyne College. Mr. Berger is also Chairman, President, and Chief Executive Officer of St. Lawrence Industrial Services, Inc. Richard L. Elander (64) Director 1991 Mr. Elander has served in his present position as a Director since November of 1991. Mr. Elander currently serves as the Commissioner of the Onondaga County Department of Water Environment Protection. Cornelius B. Murphy, Jr. (61) Director 1991 Dr. Murphy has served in his current position since December 1991. Dr. Murphy has been a director of O'Brien & Gere Limited since 1985. Dr. Murphy also served as President of O'Brien & Gere Limited from December 1997 to May 1999 and Chairman of the Board of O'Brien & Gere Engineers from January 1993 to December 1998. 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. 22 Steven A. Sanders (60) Director 1991 Mr. Sanders has served in his present position as a Director since December 1991. Since January 1, 2004, he has been of counsel to the law firm of Rubin, Bailin, Ortoli, Mayer & Baker, LLP. From January 1, 2001 to December 31, 2003, he was 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. Christopher J. Polimino (40) Director, President and CEO 2002 Mr. Polimino was named Chief Executive Officer in January 2001, and has been President of the Company since January 2000. He has been with the Company since December of 1994 and has previously served as Executive Vice President, General Manager, and Controller. George W. Lee (57) Director 2002 Mr. Lee was elected to the Board in December 2002. Mr. Lee co-founded Blasland, Bouck and Lee, Inc., an Engineering News Record top 100 worldwide engineering and scientific services company in 1984. He served in various capacities in this firm, including Executive VP, Director of Marketing and Director of Health and Safety from 1984 to 1994. Mr. Lee served on the Board of Directors of Blasland, Bouck and Lee, Inc. from 1984 to 2005. Since 1984 Mr. Lee has been active as a consultant to new business ventures involved in professional development and wastewater treatment. In October 2005 Mr. Lee joined Pyramid Brokerage of Central New York. Richard Messina (43) Director 2005 Mr. Messina was elected to the Board in November 2005. Mr. Messina founded The Benchmark Company, LLC, a securities broker-dealer, in 1988. Benchmark operates out of offices in New York, Boston and Denver and is primarily engaged in equity research, sales, and trading on behalf of institutional clients. Mr. Messina currently serves as Co-Chief Executive Officer of the firm. Richard Jacobson (42) Director 2006 Mr. Jacobson was elected to the Board in February 2006. Mr. Jacobson is currently a Senior Managing Director with Stern Capital. From 1999 to 2003 he was a Vice President and Managing Director in the merchant banking group of Indosuez Capital. From 1997 to 1999 he was a Vice President in the leveraged finance group of SG Cowen. From 1994 to 1997 he was an associate in the leveraged finance group of Chemical Securities, Inc. Mr. Jacobson began his career as an attorney for the law firm of Jacobs, Persinger and Parker. 23 AUDIT COMMITTEE In October of 2002, the Company's Board of Directors formed an Audit Committee (the "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 2 meetings during the year ended December 31, 2005. Its duties and responsibilities include the following: Provides oversight of the financial reporting process and management's responsibility for the integrity, accuracy and objectivity of financial reports, and accounting and financial reporting practices. Recommends to the Board the appointment of the Company's independent registered accounting firm. Provides oversight of the adequacy of the Company's system of internal controls. Provides oversight of management practices relating to ethical considerations and business conduct, including compliance with laws and regulations. The Committee has met and held discussions with the Chief Financial Officer and the Company's independent accountants, Dannible & McKee, LLP, regarding audit activities. Management has the primary responsibility for the Company's systems of internal controls and the overall financial reporting process. The independent accountants are responsible for performing an independent audit of the Company's consolidated financial statements in accordance with 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 2005, 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, 2005 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. 24 EXECUTIVE OFFICERS OF THE COMPANY Name Age Position Held Christopher J. Polimino 40 President and Chief Executive Officer Mr. Polimino was named Chief Executive Officer ("CEO") 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. Charles B. Morgan 52 Executive Vice President Mr. Morgan was named Chief Operating Officer ("COO") in August 2002. In October 2005 Mr. Morgan's title was changed to Executive Vice President. Prior to joining OP-TECH, Mr. Morgan served as a Vice President with the firm of Camp, Dresser and McKee, an Engineering News Record top 20, Boston, MA based consulting, engineering, construction and operating firm. Douglas R. Lee 35 Chief Financial Officer & Treasurer Mr. Lee was named Chief Financial Officer ("CFO") in August 2002 and Treasurer in December 2001, and has been Controller of the Company since March 2001. Mr. Lee is an inactive Certified Public Accountant in New York State. He previously worked as an Auditor for a public accounting firm from 1993 to 1999, and as Controller for a manufacturing and retail company from 1999 to February 2001. 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. 25 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth summary information concerning compensation paid or accrued by the Company for services rendered during the last three fiscal years by the Named Executive Officers. Summary Compensation Table Annual Compensation Long Term Compensation Awards Payments Name and Other Annual # of LTIP All Other Principal Position Year Salary Compensation Options Payouts Compensation ------------------ ---- ------ ------------ ------- ------- ------------ Christopher J. Polimino 2005 $185,000 -0- 60,000 -0- -0- CEO and President 2004 $175,000 -0- -0- -0- -0- 2003 $175,000 $10,000 100,000 -0- -0- Charles B. Morgan 2005 $145,000 -0- 50,000 -0- -0- COO 2004 $140,000 -0- -0- -0- -0- 2003 $115,000 $5,000 50,000 -0- -0- The Company has no formal deferred compensation or bonus plans. The Company has adopted an incentive compensation plan. Options / SARS Grants in last fiscal year Number of % of total Securities Options/SARS Grant underlying Granted to date Options/SARS Employees Exercise Expiration present Name Granted in fiscal year Price($/sh) Date value Christopher J. Polimino 60,000/369,000 16.3% $0.40 01/26/2015 $33,000 Charles B. Morgan 50,000/369,000 13.6% $0.40 01/26/2015 $27,500 Aggregated Option Exercises in Last Fiscal Year (Exercisable/Unexercisable) Number of securities Value of Unexercised Shares acquired underlying unexercised in-the money options Name on exercise Value realized options at year-end at year-end ----- -------------- -------------- ---------------------- -------------------- Christopher J -0- $0 91,666/93,334 $28,833/$12,067 Polimino Charles B. 16,666 $9,166 33,334/66,668 $11,167/$6,834 Morgan Compensation of Directors Directors of the Company are paid $1,000 for each meeting plus reimbursement for their actual expenses incurred in attending meetings. 26 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 20, 2006 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 20, 2006, 11,745,371 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% 121 Shirley Rd. Syracuse, NY 13224 Jurg Walker 1,000,000 8% 3 Avenue De La Costa Monaco 98000 Kevin Eldred 835,000 7% 1007 Overlook Terrace Cazenovia, NY 13035 (1) Based upon the sum of (a) 11,745,371 shares of common stock outstanding, (b) 709,349 outstanding, unexercised options to purchase shares pursuant to the 2002 Stock Option Plan, and (c) warrants to purchase 480,000 shares issued to Summit Capital Associates, Inc. (2) All shareholder's directly or beneficially own all shares except for Mr. Messina who owns 1,343,933 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. (4) Includes options to purchase 13,333 shares of Common Stock. 27 The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company's common stock at March 20, 2006 by each director and nominee for election as director and each elective officer. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to such shares of common stock. Name of Number of Shares of Common Beneficial Owner Stock Beneficially Owned (3) (4) Percentage of Class Richard Messina (1) 4,208,451 33% Robert J. Berger (1) 1,171,667 9% Richard L. Elander (1) 429,565 3% Steven A. Sanders (1) 45,352 <1% Cornelius B.Murphy, Jr. (1) 21,424 <1% Christopher J. Polimino (1) (2) 295,454 2% George W. Lee (1) 186,666 1% Richard Jacobson (1) -0- 0% Charles Morgan (2) 200,000 1% Douglas R. Lee (2) 140,000 <1% All Directors as a Group (8 persons) 6,358,579 49% (1) Director (2) Officer (3) Includes unexercised options to purchase shares of common stock: Mr. Berger 13,333 Mr. Elander 13,333 Mr. Sanders 13,333 Mr. Murphy 10,000 Mr. Polimino 185,000 Mr. GW Lee 16,667 Mr. Morgan 100,000 Mr. DR Lee 113,334 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Steven A. Sanders, a director of the Company, is of counsel to Rubin, Bailin, Ortoli, Mayer & Baker, 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 2005 was approximately $5,000. 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 $734,000 in 2005. 29 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: 2005 2004 Audit Fees $ 31,000 $ 28,000 Tax Fees $ 14,750 $ 10,200 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 2005 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. 30 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page (a) Financial Statements (1) Report of Independent Accountants F-2 Consolidated Balance Sheets at December 31, 2005 and 2004 F-3 Consolidated Statement of Operations for the years ended December 31, 2005, 2004, and 2003 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004, and 2003 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 F-6 Notes to Consolidated Financial Statements F-7 (2) Schedule II, Valuation and Qualifying Accounts for the Years Ended 2005, 2004, and 2003 F-20 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 E-1 21 Subsidiaries of the Registrant E-2 31 Certifications E-3 32 Section 1350 Certifications E-5 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 and Chief Executive Officer March 28, 2006 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 28th day of March 2006. /s/ Robert J. Berger Director and Chairman of the Board Robert J. Berger /s/ Richard Messina Director 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 Director George W. Lee /s/ Christopher J. Polimino President, Chief Executive Officer and Director Christopher J. Polimino /s/ Charles B. Morgan Chief Operating Officer Charles B. Morgan /s/ Douglas R. Lee Chief Financial Officer and Treasurer Douglas R. Lee 32 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2005 and 2004 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, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OP-TECH Environmental Services, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. In connection with our audits of the financial statements referred to above, we audited the financial schedules listed under Item 15. In our opinion, these financial schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information stated therein. /s/ Dannible & McKee, LLP Syracuse, New York February 3, 2006 (except as to Note 9, which is as of February 13, 2006, and Note 7, which is as of March 9, 2006) F2 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2005 and 2004 2005 2004 Assets Current assets: Cash (Note 4) $90,928 $101,738 Accounts receivable, net (Notes 1 and 5) 5,812,977 5,632,209 Costs on uncompleted projects applicable to future billings 1,403,292 879,200 Inventory 231,088 227,463 Current portion of deferred tax asset 272,500 45,500 Prepaid expenses and other current assets, net 395,418 531,500 ----------- --------- Total current assets 8,206,203 7,417,610 Property and equipment, net (Note 6) 2,837,340 3,415,731 Land and Buildings held for sale (Note 7) 850,000 - Deferred tax asset (Note 11) 1,258,064 1,378,878 Other assets 34,148 28,849 ----------- ---------- Total Assets $13,185,755 $12,241,068 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $1,953,688 $2,533,373 Outstanding checks in excess of bank balance (Note 4) 357,249 - Billings in excess of costs and estimated profit on uncompleted contracts 600,705 1,096,475 Accrued expenses and other current liabilities 450,509 245,057 Accrued litigation defense reserve (Note 8) 450,000 - Current portion of long-term debt (Note 9) 466,916 775,671 ----------- --------- Total current liabilities 4,279,067 4,650,576 Long-term debt, net of current portion (Note 9) 2,024,691 2,210,913 Note payable to bank under line of credit (Note 9) 4,000,000 2,380,375 ----------- --------- Total liabilities 10,303,758 9,241,864 ----------- --------- Shareholders' equity: Common stock, par value $.01 per share; authorized 20,000,000 shares; 11,745,371 and 11,697,707 shares outstanding as of December 31, 2005 and 2004, respectively 117,454 116,976 Additional paid-in capital 6,855,901 6,842,942 Accumulated deficit (4,106,458) (3,960,714) Accumulated other comprehensive income 15,100 - ----------- ----------- Shareholders' equity, net 2,881,997 2,999,204 ----------- ----------- Total Liabilities and Shareholders' Equity $13,185,755 $12,241,068 =========== ============ The accompanying notes are an integral part of the consolidated financial statements. F3 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 Project billings and services $21,784,096 $18,170,103 $15,037,888 Project costs 15,955,533 13,334,686 10,756,145 ----------- ----------- ----------- Gross margin 5,828,563 4,835,417 4,281,743 Selling, general and administrative expenses 5,107,218 4,248,611 3,606,012 Litigation defense reserve (Note 8) 450,000 - - Provision for impairment of land and buildings held for sale 100,000 - - ---------- ----------- ----------- Operating income 171,345 586,806 675,731 ---------- ----------- ----------- Other income (expense): Interest expense (384,240) (253,854) (190,707) Other, net (29,849) (268) (3,655) ----------- ----------- ----------- (414,089) (254,122) (194,362) ----------- ----------- ----------- Net income (loss) before income taxes (242,744) 332,684 481,369 ----------- ----------- ----------- Income tax benefit (expense) (Note 11) Current (10,066) (13,598) (26,000) Deferred 107,066 (119,000) 1,503,662 ----------- ---------- ---------- 97,000 (132,598) 1,477,662 ----------- ---------- ---------- Net Income (Loss) $(145,744) $200,086 $1,959,031 =========== ========== ========== Earnings (Loss) per common share: Basic ($0.012) $0.017 $0.128 Diluted ($0.012) $0.016 $0.123 Weighted average shares outstanding: Basic 11,729,154 11,849,508 15,356,993 Diluted 11,729,154 12,351,091 15,863,420 The accompanying notes are an integral part of the consolidated financial statements. F4 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 2005, 2004 and 2003 Additional Common Common Paid-In Accumulated Shares Stock Capital Deficit Total ---------- ------ -------- ------------ -------- Balance at December 31, 2002 15,318,787 $153,188 $7,705,482$(6,119,831)$1,738,839 Issuance of 98,328 Shares 98,328 983 4,917 - 5,900 Purchase and Retirement of 2,811,070 Shares (2,811,070) (28,111) (671,889) - (700,000) Tax Benefit of the Exercise of Stock Options - - 15,338 - 15,338 Net Income - - - 1,959,031 1,959,031 ---------- ---------- -------- ---------- --------- Balance at December 31, 2003 12,606,045 126,060 7,053,848 (4,160,800) 3,019,108 Purchase and Retirement of 1,000,000 Shares (1,000,000) (10,000) (240,000) - (250,000) Issuance of 3,333 Shares 3,333 33 300 - 333 Issuance of 88,329 Shares 88,329 883 4,416 - 5,299 Tax Benefit of the Exercise Of Stock Options - - 24,378 - 24,378 Net Income - - - 200,086 200,086 ---------- ---------- -------- ---------- --------- Balance at December 31, 2004 11,697,707 116,976 6,842,942 (3,960,714) 2,999,204 Issuance of 47,664 Shares 47,664 478 5,773 - 6,251 Tax Benefit of the Exercise of Stock Options - - 7,186 - 7,186 Other Comprehensive Income: Change in Fair Value of Cash Flow Hedge net of tax effect of $10,000 - - - - 15,100 Net Loss - - - (145,744) (145,744) Total Comprehensive Loss (130,644) --------- ---------- ---------- ---------- ---------- Balance at December 31, 2005 11,745,371 $117,454 $6,855,901$(4,106,458)$2,881,997 =========== ======== ========== =========== ========= The accompanying notes are an integral part of the consolidated financial statements F-5 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 Operating activities: Net income $(145,744) $200,086 $1,959,031 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Bad debt expense 40,975 14,689 110,682 Depreciation and amortization 556,605 566,567 454,362 Loss on sale of equipment 27,644 9,964 47,790 Provision for impairment of land and buildings held for sale 100,000 - - Provision for deferred income taxes (109,000) 119,000 (1,503,662) (Increase) decrease in operating assets and increase (decrease) in operating liabilities: Accounts receivable (221,743) (2,260,103) 1,142,254 Costs on uncompleted projects applicable to future billings (524,092) (240,687) (239,625) Prepaid expenses, Inventory and other assets, net 127,158 140,688 (148,185) Billings and estimated profit in Excess of costs of uncompleted contracts (495,770) 380,124 148,928 Accrued litigation defense reserve 450,000 - - Accounts payable and other accrued expenses (374,233) 1,545,940 (946,622) --------- ---------- ----------- Net cash provided by (used in) operating activities (568,200) 476,268 1,024,953 --------- ---------- ----------- Investing activities: Proceeds from sale of equipment 113,000 - - Purchases of property and equipment (870,676) (582,586) (577,089) --------- ----------- ---------- Net cash used in investing activities (757,676) (582,586) (577,089) --------- ----------- ---------- Financing activities: Proceeds from issuance of common stock 6,251 5,632 5,900 Purchase of common stock - (250,000) (700,000) Outstanding checks in excess of bank balance 357,249 - (74,662) Loans from directors and officers - 295,000 - Repayments of loans to directors and officers - (22,500) - Proceeds from notes payable to banks and long-term borrowings, net of financing costs 8,133,127 9,941,564 8,944,678 Principal payments on current and long-term borrowings (7,181,561)(9,819,713)(8,565,707) ----------- ---------- ---------- Net cash provided by (used in) financing activities 1,315,066 149,983 (389,791) ----------- ---------- ---------- Increase (decrease) in cash and cash equivalents (10,810) 43,665 58,073 Cash and cash equivalents at beginning of year 101,738 58,073 - ----------- ---------- ---------- Cash and Cash Equivalents at End of Year $90,928 $101,738 $58,073 =========== ========== ========== Non-cash items: Equipment purchased through bank and other financing sources $198,182 $412,349 $207,282 Non-cash financing of insurance $- $403,902 $- The accompanying notes are an integral part of the consolidated financial statements F-6 OP-TECH Environmental Services, Inc. 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 cleaning and decontamination 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. On March 30, 2005 the Company entered into a joint venture agreement with an unrelated party to form J.O. Technologies. J.O. Technologies is a partnership that is owned 50% by the Company. As of December 31, 2005 J.O. Technologies was inactive. J.O. Technologies became active and earned revenue in January 2006. 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. 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. F7 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, 2005 and December 31, 2004 accounts receivable are approximately $1,916,000 and $701,000, respectively. Concentration of Business Risk - Significant Customers Sales to one customer, other than an affiliated party, amounted to approximately $6,047,000, $3,845,000, and $2,265,000 in 2005, 2004 and 2003, respectively. Accounts receivable at December 31, 2005 and 2004 include $1,955,000 and $1,690,000 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 charge offs covering other amounts that may not be collectible. Inventory Inventories, consisting of spill response and remediation supplies and materials, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of assets including those recorded under capital leases is provided for using the straight-line method over useful lives typically ranging from 3 to 15 years and 40 years for buildings. Land and Buildings Held for Sale Land and buildings held for sale is stated at the lower of carrying amount or estimated fair value less costs of disposal. See Note 7. 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 and a line of credit. The carrying value of the Company's financial instruments approximates their fair value at December 31, 2005 and 2004. 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. 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. F8 Income Taxes The Company provides for income taxes in accordance with the liability method as set forth in Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect in the years in which the differences are expected to reverse. Stock Based Compensation The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123 requires companies not using a fair value based method of accounting for stock options to provide pro forma disclosure of net income and earnings per share as if the fair value of accounting had been applied. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company's net income and earnings per share would have been reduced to pro forma amounts indicated in the following table. 2005 2004 2003 Net income (loss): As reported $(145,744) $200,086 $1,959,031 Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax effects 52,000 14,000 6,000 ---------- --------- ---------- Pro forma net income (loss) $(197,744) $186,086 $1,953,031 ========== ========= ========== Basic earnings (loss) per share: As reported $(0.012) $0.017 $0.013 Pro forma $(0.017) $0.016 $0.013 Diluted earnings (loss) per share As reported $(0.012) $0.016 $0.012 Pro forma $(0.017) $0.015 $0.012 The Company is required to adopt Financial Accounting Standard No. 123R, "Share Based Payment" (FAS 123R), effective January 1, 2006. The Company has not determined the effect that adopting FAS 123R will have on the financial statements. F9 Reclassification Certain selling, general and administrative costs have been reclassified to project costs in 2004 and 2003 to conform to the 2005 presentation. These amounts were $478,972 and $357,057 in 2004 and 2003, respectively. 2. Earnings per Share Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period, which were 11,729,154, 11,849,508, and 15,356,933 for the years ended December 31, 2005, 2004 and 2003, respectively. Diluted earnings per share includes the potentially dilutive effect of common stock issuable upon conversion of stock options or warrants. Warrants were issued to a financial advisor in May 2002 to purchase 480,000 shares of common stock at $0.066 per share, expiring in May 2007. On December 30, 2003, the Company purchased and retired 2,811,070 shares of its common stock from M&T Bank for $.249 per share, or $700,000. On March 16, 2004 the Company purchased and retired 1,000,000 shares of its common stock from O'Brien & Gere Limited for $.25 per share, or $250,000. 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 $734,000, $838,000, and $1,210,000 in 2005, 2004 and 2003, respectively. A director of the Company is of counsel to Rubin, Bailen, Ortoli, Mayer & Baker, LLP beginning in January 2004, and Spitzer & Feldman PC in 2003 and 2002. These firms provided professional services to the Company, and it is anticipated that Rubin, Bailen, Ortoli, Mayer & Baker, LLP will continue to do so. The cost for these services amounted to approximately $5,000, $3,000, and $8,000 in 2005, 2004 and 2003, 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 line of credit (Note 9) nightly. 5. Accounts Receivable Accounts receivable at December 31, 2005 and 2004 consists of: 2005 2004 Accounts Receivable, gross $5,917,140 $5,806,709 Allowance for uncollectible receivables (104,163) (174,500) ----------- ----------- Accounts Receivable, net $5,812,977 $5,632,209 =========== =========== All customer accounts receivable collateralize the Company's outstanding loans with its primary lender (see Note 9). F10 6. Property, Plant and Equipment Property, plant and equipment at December 31, 2005 and 2004 consist of: 2005 2004 Furniture and fixtures $21,758 $21,758 Buildings 255,658 973,190 Office machines 233,056 229,147 Field equipment 4,969,795 4,400,940 --------- --------- 5,480,267 5,625,035 Less: Accumulated depreciation (2,642,927)(2,209,304) ----------- ---------- $2,837,340 $3,415,731 ========== ========== Depreciation expense approximated $557,000, $567,000, and $434,000 for 2005, 2004 and 2003, respectively. 7. Land and Buildings Held for Sale The Company is pursuing the sale of approximately 14 acres of land, and buildings thereon, which it owns on the St. Lawrence River in Massena, NY. Management's estimation of fair value is based upon an evaluation of existing facts and circumstances, including current real estate market conditions, appraisals and other factors. On March 9, 2006 the Company entered into an option agreement ("the Agreement") with a prospective purchaser ("Purchaser)" that grants the Purchaser the exclusive option to purchase the land and building held for sale. The Agreement expires on June 30, 2006. In consideration for the Agreement, the Purchaser made a non-refundable payment to the Company in the amount of $7,900. If the Purchaser chooses to exercise the option to purchase the land and buildings, the purchase price shall be payable in cash in the amount of $850,000, due by August 31, 2006. Based on the Agreement, an impairment loss of $100,000 on the carrying value of the land and buildings held for sale was recorded at December 31, 2005 to adjust the carrying value to $850,000. F11 8. Accrued Litigation Defense Reserve The Company has accrued a $450,000 liability at December 31, 2005. The liability has been recorded to cover potential legal costs and fees related to a claim against the Company. 9. Long-Term Debt Obligations Long-term debt at December 31, 2005 and 2004 consists of: 2005 2004 Note payable to bank under line of credit. Due April 1, 2007. (a) $4,000,000 $2,380,375 ---------- ---------- Term Loan due in monthly installment payments of $24,848 plus interest at prime plus .75%, hedged by an interest rate swap (a) 1,777,149 2,087,240 Term Loan due in monthly installment payments of $2,935 plus interest at prime plus .75% (a) 246,571 - Notes payable to certain Directors and Officers, unsecured, due on March 31, 2005 plus interest at 8%. Paid on January 19, 2005. - 272,500 Insurance Financing Note, due in monthly installment payments of $50,033, plus interest at 7.51%, collateralized by the assignment of unearned premiums - 52,108 Equipment Notes, due in monthly installment payments Aggregating $12,538 and $11,212 at December 31, 2005 and 2004, including interest at rates ranging from 4.9% to 7.9%, collateralized by equipment with a carrying value of approximately $500,000 at December 31, 2005 and 2004. 456,877 463,822 Equipment Notes, due in monthly installment payments Aggregating $1,628 and $8,929 at December 31, 2005 and 2004, with 0% interest, collateralized by equipment with a carrying value of approximately $20,000 and $125,000 at December 31, 2005 and 2004, respectively. 11,010 110,914 ----------- ---------- 2,491,607 2,986,584 Less: Current portion (466,916) (775,671) ----------- ---------- $2,024,691 $2,210,913 =========== ========== F12 (a) The Company has entered into financing agreements (the "Agreements") with a lender ("Primary Lender"). At December 31, 2005 the Agreements included a Line of Credit note which provided for borrowings up to $4,000,000 to be used to provide working capital and expired on September 30, 2006, unless renewed by the lender. On February 13, 2006, the Line of Credit note was amended to increase the borrowing limit to $5,100,000 and extend the expiration date to April 1, 2007. Interest will be charged at a rate ranging from prime plus .50% to prime minus .50%, adjusted annually based upon the minimum fixed charge coverage ratio (EBITDA (earnings before interest expense, income tax expense, depreciation and amortization) minus dividends paid minus unfunded capital expenditures divided by current maturities of long-term debt and leases plus interest expense) as calculated in the previous year-end audited financial statements, as follows: Fixed Charge Coverage Ratio Interest Rate --------------------------- ------------- >/= 1.05 - 1.24 Prime + .50% >/= 1.25 - 1.39 Prime >/= 1.40 Prime - .50% The Agreements also include an Equipment Line of Credit agreement which provides for borrowings up to $400,000 to be used to provide equipment financing. Advances on the Equipment Line of Credit may be made until September 30, 2006 (the "Conversion Date"). Advances on the Equipment Line of Credit are limited to a maximum of 90% of the purchase price of titled vehicles and 80% of the purchase price of non-titled vehicles. Interest will be accrued and paid at a rate of prime plus .50% until the Conversion Date and at a rate of prime plus .75% after the conversion date. The outstanding principal balance on the Conversion Date shall be repaid in equal installments of principal and interest based upon a seven (7) year amortization period. 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%. At December 31, 2005 the Mark to Market valuation, representing the net present value of the expected cash flow from the Interest Rate Swap, is approximately $25,100. F13 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, 2005 as follows: Accounts Receivable, net of Allowance for Doubtful Accounts $5,812,977 Inventory 231,088 Equipment, net of Accumulated Depreciation 2,540,223 ---------- $8,584,288 ========== 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 certain of these covenants as of December 31, 2005. The Company has obtained a waiver of compliance with these covenants from the Primary Lender. Interest paid amounted to approximately $380,000, $254,000, and $190,000 in 2005, 2004 and 2003, 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: 2006 $466,906 2007 462,620 2008 450,135 2009 407,426 2010 347,807 Thereafter 356,713 -------- $2,491,607 ========== At December 31, 2005 the Company has outstanding commitments in the form of standby letters of credit in the amount of approximately $1,335,256 securing various agreements. F14 10. Operating Lease Obligations Office facilities and various field equipment are leased under noncancelable operating leases expiring at various dates through 2012. Rent expense incurred under operating leases amounted to approximately $694,000, $405,000, and $385,000 in 2005, 2004 and 2003, respectively. Future minimum lease payments under noncancelable operating leases are as follows: 2006 $388,153 2007 280,568 2008 164,789 2009 96,875 2010 54,000 Thereafter 76,500 -------- $1,060,885 ========== 11. Income Taxes The following summarizes the income tax (benefit) expense at December 31, 2005, 2004 and 2003: 2005 2004 2003 Current: Federal $- $- $- State 10,066 13,598 26,000 --------- ---------- --------- 10,066 13,598 26,000 Deferred (107,066) 119,000 (1,503,662) ----------- --------- ---------- $(97,000) $132,598 (1,477,662) ========== ========= ========== In 2003, the difference between the expected tax provision resulting from the application of the federal statutory income tax rate to pre-tax income is due principally to adjustment of the valuation allowance related to recognition of net operating loss carryforwards. In 2005 and 2004 the difference is due to nondeductible items, state taxes and graduated federal tax rates. The deferred tax expense recognized in 2005 and 2004 represents the effect of changes in temporary differences. At December 31, 2005, the Company has federal net operating loss ("NOL") carryforwards of approximately $5,000,000 for income tax purposes. The federal net operating loss carryforward expires at various times beginning in 2009 through the year ending December 31, 2019. Income taxes and franchise taxes paid were approximately $10,000, $12,000 and $13,000 in 2005, 2004 and 2003, respectively. F15 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. In the fourth quarter of 2003 the Company recognized a portion of the net operating loss carryforwards by reducing the valuation allowance recorded in prior years. The Company believes that it is more likely than not that the taxable income in future years will be sufficient to utilize a portion of these loss carryforwards. Minimum taxable income is anticipated to be approximately $300,000 per year to enable utilization of these losses. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2005 and 2004 are as follows: 2005 2004 Deferred tax liabilities: Depreciation $(226,457) $(246,516) Accrued expenses - (25,568) ---------- ---------- (226,457) (272,084) ---------- ---------- Deferred tax assets: Net operating loss carryforward 1,929,610 2,120,692 Accounts receivable reserve 40,624 75,770 Accrued expenses 247,787 - Impairment allowance 39,000 - ---------- ---------- 2,257,021 2,196,462 ---------- ---------- Net Deferred tax asset 2,030,564 1,924,378 Valuation allowance for deferred assets (500,000) (500,000) ---------- ---------- Net deferred tax asset, net of valuation allowance $1,530,564 $1,424,378 =========== =========== 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 $24,000, $18,000, and $17,000 in 2005, 2004 and 2003, respectively. The Company did not make discretionary contributions to the Retirement Plan in 2005, 2004 and 2003. F16 13. Stock Option Plan The 2002 Omnibus Plan ("Omnibus Plan") maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees. Awards granted under the Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options ("NQSO's) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company ("Common Stock"). Shares delivered upon exercise of the Awards, at the election of the Board of Directors of the Company, may be stock that is authorized but previously unissued or stock reacquired by the Company, or both. The maximum number of shares with respect to which the Awards may be granted under the Plan shall not exceed 1,000,000 shares of Common Stock; provided, however, that such number of shares of Common Stock may also be subject to adjustment, from time to time, at the discretion of the Board of Directors of the Company. Under the Omnibus Plan, on May 21, 2002 the Company granted 335,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.06), and an NQSO's maximum term is 10 years. The NQSO's vest and are exercisable on a three-year vesting schedule. Under the Omnibus Plan, on February 24, 2003 the Company granted 10,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.10), and an NQSO's maximum term is 10 years. The NQSO's vest and are exercisable on a three-year vesting schedule. Under the Omnibus Plan, on November 19, 2003 the Company granted 327,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.15), and an NQSO's maximum term is 10 years. The NQSO's vest and are exercisable on a three-year vesting schedule. Under the Omnibus Plan, on January 26, 2005 the Company granted 369,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.40), and an NQSO's maximum term is 10 years. The NQSO's vest and are exercisable on a three-year vesting schedule. F17 A summary of the status of the Company's NQSO's granted under the Omnibus Plan as of December 31, 2005, 2004 and 2003, and changes during the years ending on those dates follows: Shares Exercise Price Outstanding at December 31, 2002 335,000 $0.06 Granted February 24, 2003 10,000 $0.10 Granted November 19, 2003 335,000 $0.15 Exercised (98,328) $0.06 Forfeited - - Expired - - --------- ------------ Outstanding at December 31, 2003 581,672 $0.06 - 0.15 --------- ------------ Exercised (88,329) $0.06 Exercised (3,333) $0.10 Forfeited (41,667) $0.06 - 0.15 Expired - - ---------- ------------ Outstanding at December 31, 2004 448,343 $0.06 - 0.15 ---------- ------------ Granted January 26, 2005 369,000 $0.40 Exercised (47,664) $0.06 - 0.15 Forfeited (61,335) $0.06 - 0.15 Forfeited (33,000) $0.40 Expired - $- ----------- ----------- Outstanding at December 31, 2005 675,344 $0.06 - 0.40 ----------- ------------ Exercisable at December 31, 2005 253,011 $0.06 - 0.15 ----------- ------------- 14. 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. F18 15. Two-Year Selected Quarterly Financial Data (Unaudited) Year Ended December 31, 2005 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 Sept 30 Dec 31 -------- ------- --------- --------- Project billings $4,865,202 $4,790,737 $6,249,747 $5,878,410 Gross margin 1,341,713 1,319,338 1,667,199 1,500,313 Net income (loss) (32,246) (9,608) 186,883 (290,773) Net income (loss) per share Basic $(0.00) ($0.00) $0.02 ($0.03) Dilutive $(0.00) ($0.00) $0.02 ($0.03) In the quarter ended December 31, 2005 the Company recorded an impairment loss of $100,000 on the carrying value of the land and buildings held for sale (Note 7) and accrued a $450,000 liability to cover potential legal costs and fees related to a claim against the Company (Note 8). Year Ended December 31, 2004 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 Sept 30 Dec 31 -------- ------- --------- --------- Project billings $3,262,062 $4,027,929 $5,008,986 $5,871,126 Gross margin 974,543 1,083,740 1,352,139 1,424,995 Net income (loss) (94,898) 23,747 142,689 128,548 Net income (loss) per share Basic $(0.00) $0.00 $0.01 $0.01 Dilutive $(0.00) $0.00 $0.01 $0.01 F19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Balance at Beginning End of Description of Period Additions Deductions Period ---------------------------------- --------- --------- ---------- ------- YEAR ENDED DECEMBER 31, 2005 Reserves deducted from assets to which they apply: Doubtful accounts receivable $174,500 $40,975 $111,312 (a)$104,163 Valuation allowance for deferred tax assets $500,000 $- $- $500,000 YEAR ENDED DECEMBER 31, 2004 Reserves deducted from assets to which they apply: Doubtful accounts receivable $187,000 $14,689 $27,189(a) $174,500 Valuation allowance for deferred tax assets $500,000 $- $- $500,000 YEAR ENDED DECEMBER 31, 2003 Reserves deducted from assets to which they apply: Doubtful accounts receivable $140,000 $110,682 $63,682 (a)$187,000 Valuation allowance for deferred tax assets $2,443,551 $- $1,943,551 $500,000 (a) Doubtful accounts written off and adjustments. F20 EXHIBIT 14 - CODE OF ETHICS FOR SENIOR OFFICERS The Company's CEO, COO and CFO hold important and elevated roles in corporate governance. They are uniquely capable and empowered to ensure that the shareholder's and Company's interests are protected and preserved. This Code of Ethics provides principles to which these officers are expected to adhere and which they are expected to advocate. This Code of Ethics has been approved by the Audit Committee. Any change to this Code of Ethics and any explicit or implicit waiver from it for these officers may be made only with the approval of the Audit Committee and will be appropriately disclosed in accordance with applicable law and regulations. Violations may subject these officers to disciplinary action including termination of employment. The CEO, COO and CFO will: 1. act with honesty and integrity, including ethically handling actual or apparent conflicts of interest between their personal, financial or commercial interests and their responsibility to the Company; 2. make full, fair, accurate, timely and understandable disclosure in all reports and documents that the Company files with or submits to shareholders, government authorities and stock exchanges or otherwise makes public; 3. act on good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing their independent judgment to be subordinated; 4. respect the confidentiality of information acquired in the course of their work except when authorized or otherwise legally obligated to disclose and not use such confidential information for personal advantage; 5. comply with all laws and regulations applicable to the Company's businesses and to the Company's relationship with its shareholders; 6. report known or suspected violations of this Code of Ethics to the Audit Committee, and 7. ensure that their actions comply not only with the letter but the spirit of this Code of Ethics and foster a culture in which compliance with the law and the Company's policies is at the core of the Company's activities. E-1 EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT The listing below includes the subsidiaries of OP-TECH Environmental Services, Inc. ("OP-TECH"). All subsidiaries are owned 100% by OP-TECH. OP-TECH does not have ownership interests in any special purpose entities that are not included in the consolidated financial statements. Both Subsidiaries are inactive as of December 31, 2005. 1. OP-TECH AVIX, Inc. (NY) 2. OP-TECH Environmental Services, Ltd. (Canada) E-2 EXHIBIT 31 - CERTIFICATIONS Certification of Chief Executive Officer I, Christopher J. Polimino, certify that: 1. I have reviewed this annual report on Form 10-K of OP-TECH Environmental Services, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15f and 15d - 15f) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 28, 2006 /s/ Christopher J. Polimino Christopher J. Polimino President and Chief Executive Officer E-3 Certification of Chief Financial Officer I, Douglas R. Lee, certify that: 1. I have reviewed this annual report on Form 10-K of OP-TECH Environmental Services, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15f and 15d - 15f) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 28, 2006 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer E-4 EXHIBIT 32 - SECTION 1350 CERTIFICATIONS Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Christopher J. Polimino, President and Chief Executive Officer of OP-TECH Environmental Services, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2006 /s/ Christopher J. Polimino Christopher J. Polimino President and Chief Executive Officer I, Douglas R. Lee, Chief Financial Officer and Treasurer of OP-TECH Environmental Services, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2006 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer E-5