-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EV2qYrunEjQtPaGPcjzmpnZFQFVJFD9hNkU+pTuAp9MXOuKlrq8bq0xtrIHEf3an JGBEOKBQtVC0PILKa+fVHQ== 0000858748-07-000001.txt : 20070323 0000858748-07-000001.hdr.sgml : 20070323 20070323163941 ACCESSION NUMBER: 0000858748-07-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070323 DATE AS OF CHANGE: 20070323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OP TECH ENVIRONMENTAL SERVICES INC CENTRAL INDEX KEY: 0000858748 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 911528142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19761 FILM NUMBER: 07715634 BUSINESS ADDRESS: STREET 1: 6392 DEERE ROAD CITY: SYRACUSE STATE: NY ZIP: 13206 BUSINESS PHONE: 3154631643 MAIL ADDRESS: STREET 1: 6392 DEERE RD CITY: SYRACUSE STATE: NY ZIP: 13206 FORMER COMPANY: FORMER CONFORMED NAME: MASADA INDUSTRIAL SERVICES INC DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: MASADA CORP DATE OF NAME CHANGE: 19600201 10-K 1 text.txt OP-TECH ENVIRONMENTAL SERVICES 12/31/2006 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, 2006 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 fiscal quarter: $8,811,528 Indicate the number of shares outstanding of each of the Company's classes of common stock, as of March 5, 2007. Common stock, $.01 par value: 11,748,704 1 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. 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 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. The Company maintains several geologists on staff. 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 anks 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. 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 area that offers a high quality combination of environmental services at the most competitive prices. In addition, through its wide range of environmental services, good reputation, and competitive pricing, the Company hopes to maintain a competitive edge in the environmental services business. The Company operates field offices in Syracuse, Massena, Rochester, Albany, Plattsburgh, Waverly and Buffalo, New York, as well as Edison, New Jersey and Cleveland, Ohio. 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 2006, the Company performed services for approximately 900 clients. These projects were substantially all short-term (three months or less) in nature. The largest business segment for the each of the years ended December 31, 2006, 2005, and 2004 was Emergency Spill Response services. Emergency Spill Response accounted for 21%, 33% and 33% of the Company's revenues for the years ended December 31, 2006, 2005, and 2004, respectively. During 2006, the Company had project revenue of approximately $8,509,000 related to several contracts with the New York State Department of Environmental Conservation, which totaled approximately 24% of the Company's revenues. The spill response and remediation contracts with the New York State Department of Environmental Conservation expire in November 2008. The loss of this project revenue 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 $12 million. In addition, the Company also maintains workers compensation, comprehensive automobile, and Directors and Officers liability insurance. The Company's insurance coverage is consistent with the insurance requirements found in the environmental remediation industry. Employees The Company has entered into a contractual co-employment agreement with a third party provider. As of February 1, 2007, the Company had a total of approximately 180 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 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of 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. The borrowing limit on the working capital line of credit is $6,000,000 and the expiration date is July 1, 2008. The loss of the availability of this line of credit after July 1, 2008 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 24%, 28% and 33% of the Company's revenues for the years ended December 31, 2006, 2005 and 2004, respectively. The Company's Spill Response and Remediation contracts with the NYS DEC expire 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 The Company leases its corporate headquarters in Syracuse, NY and its branch office locations in Buffalo, Rochester, Waverly, Albany, and Plattsburgh, NY, Edison, NJ and Cleveland, OH. The Company leases an aggregate of approximately 74,100 square feet of office and shop space at those locations. The leases expire at various times through May 31, 2012. The current aggregate monthly lease payment is $32,489 plus utilities. The Company formerly owned a 13.93-acre parcel of land located in the Town of Massena, St. Lawrence County, New York. There are three support buildings on the premises which include office and shop space. The Company sold this parcel in November 2006 for $700,000. As part of the terms of the sale, the purchaser of the property agreed to allow the Company to continue to rent the premises for a period of nine months after the closing of the sale at a rental rate of $7,500 per month plus utilities. The term of this post possession period extends through July 31, 2007. The Company believes that it will be able to enter into a lease for suitable office and shop space in the Massena, NY area after the post possession period concludes. 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. 7 ITEM 3. LEGAL PROCEEDINGS The Company has an accrued liability of $400,000 at December 31, 2006. The liability has been recorded to cover potential legal costs and fees, and also any indemnity, settlement, or other payments necessary to dispose of a claim against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual shareholders meeting on May 4, 2006. The shareholders voted on the ratification of Dannible & McKee, LLP as the Company's auditors, and the election of seven directors. The following votes were cast for each: For Against Ratification of Dannible & McKee, LLP as the Company's auditors 6,141,349 -0- Election of Directors: Robert J. Berger Director 6,141,349 -0- Richard L. Elander Director 6,141,349 -0- Cornelius B. Murphy, Jr. Director 6,141,349 -0- Steven A. Sanders Director 6,141,349 -0- George W. Lee Director 6,141,349 -0- Richard Messina Director 6,141,349 -0- Richard Jacobson Director 6,141,349 -0- There were no other matters submitted to a vote of the Company's shareholders. 8 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. 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, 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 March 31, 2006 $0.50 $0.36 June 30, 2006 $0.50 $0.35 September 30, 2006 $0.85 $0.29 December 31, 2006 $0.75 $0.50 First quarter through March 5, 2007 $0.75 $0.75 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 5, 2007, there were approximately 197 holders of record of the Company's common stock. (c) The Company has never paid any dividends. 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 1,143,998 $0.18 95,002 Equity compensation plans not approved by security holders - - - ----------- --------- ----------- Total 1,143,998 $0.18 95,002 =========== ========= ============ (1) As of March 5, 2007. 9 ITEM 6. SELECTED FINANCIAL DATA Statement of Operations Data Year Ended December 31 2006 2005 2004 2003 2002 Project Billings $35,069,989 $21,784,096 $18,170,103 $15,037,888 $15,093,052 Net Income (loss) $354,669 ($145,744) $200,086 $1,959,031 $553,666 Net Income (loss) Per Share Basic .03 ($.01) $.02 $.13 $.04 Diluted .03 ($.01) $.02 $.12 $.04 In 2006 the Company recorded compensation expense of $68,613 in conjunction with the adoption of Financial Accounting Standards Board Statement No. 123R Share Based Payment. Balance Sheet Data As of December 31 2006 2005 2004 2003 2002 Total Assets $18,376,267 $13,185,755 $12,241,068 $9,124,305 $8,130,139 Long-Term Obligations $7,859,741 $6,024,691 $5,366,959 $4,156,356 $3,570,103 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2006 the Company had cash and cash equivalents of $30,981 as compared to $90,928 at December 31, 2005. 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, 2006, the Company had working capital of $6,904,241 compared to working capital of $3,927,136 at December 31, 2005. The Company had a current ratio of approximately 1.96 to 1 at the end of 2006 compared to 1.92 to 1 at the end of 2005. Cash used in operating activities during 2006 was $1,149,460 compared to $568,200 during 2005. The increase in cash used in operating activities in 2006 was mainly attributable to a net increase in accounts receivable due to an increase in project volume. The Company's net cash used in investing activities of $339,786 during 2006 was attributable to the purchase of various field and office equipment offset by proceeds from the sale of property. Cash provided by financing activities of $1,429,294 in 2006 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. The Company has a loan agreement that provides for borrowings up to $6,000,000 on a revolving basis, collateralized by all accounts receivable, inventory and equipment now owned or acquired later. The loan is payable on July 1, 2008, 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. As of December 31, 2006, borrowing against the revolving loan aggregated $5,731,548. During 2006, 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 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. 11 RESULTS OF OPERATIONS This financial review should be read in conjunction with the accompanying Consolidated Financial Statements and accompanying notes. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results may be affected by a number of factors, including the Company's ability to successfully increase market share in its existing service territory while expanding its services into other markets, realize benefits from cost reduction programs, and utilize its facilities and work force profitably in the face of intense price competition. EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2006 the Financial Accounting Standards Board issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes". The interpretation is required to be adopted in the first quarter of 2007. The Company does not anticipate any significant impact on its financial position, results of operations or cash flows as a result of the adoption of the interpretation. 12 CONTRACTUAL OBLIGATIONS The Company's estimated future payments as of December 31, 2006 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) $2,899,538 $771,345 $1,121,755 $880,760 $125,678 Note payable to bank under line of credit(2) 5,731,548 - 5,731,548 - - Interest Expense (3) 1,345,767 726,612 517,537 92,534 9,084 Operating leases(4) 1,542,263 510,063 619,864 389,836 22,500 ---------- --------- --------- -------- ------- Total $11,519,116 $2,008,020 $7,990,704 $1,363,130 $157,262 ========== ========== ========= ========= ======== 1. Long-term debt represents term loans payable that mature at various dates through August 2013. Long-term debt includes scheduled maturities but excludes interest payments. 2. Note payable to bank under line of credit includes the scheduled maturity on July 1, 2008, 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 8.25% and that the Company's working capital line of credit remains at $6,000,000 and is paid on its maturity date of July 1, 2008. 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, 2006 or December 31, 2005 that require disclosure under this item. 13 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management has identified the following critical accounting policies that affect the Company's more significant judgments and estimates used in the preparation of the Company's consolidated financial statements. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates those estimates, including those related to assets held for sale, valuation allowances on deferred tax assets, revenue recognition, allowance for doubtful accounts and contingencies and litigation. The Company states these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates. The Company believes that the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements: Contracts are predominately short-term in nature (less than three months) and revenue is recognized as costs are incurred. Project costs are generally billed in the month they are incurred and are shown as current assets. Revenues recognized in excess of amounts billed are recorded as an asset. In the event interim billings exceed costs and estimated profit, the net amount of deferred revenue is shown as a current liability. Estimated losses are recorded in full when identified. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by continually evaluating individual customer receivables, considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Additionally, management estimates a general allowance based on historical charge offs covering other amounts that may not be collectible. The Company maintains a valuation allowance on its deferred tax asset based on the amount of net operating losses that management believes it will not utilize prior to the expiration dates of these losses. Management determines the adequacy of this allowance by continually evaluating its ongoing profitability and its ability to generate taxable income in the future sufficient to utilize the net operating losses. If the profitability of the Company were to change, it could effect the amount of net operating losses that could be utilized and require an adjustment to the valuation allowance. The Company establishes accruals for loss contingencies related to litigation and claims. These estimates are prepared using information available to management at the time of the accrual and at each reporting period. Events and circumstances could change requiring management to revise or adjust amounts accrued for loss contingencies. 14 2006 COMPARED TO 2005 Revenues During the year ended December 31, 2006, the Company's revenues increased 61% to $35,069,989 as compared to $21,784,096 for the year ended December 31, 2005. When comparing 2006 to 2005, the overall increase in project revenue is due to an increase in the amount of larger projects performed by the Company. The Company has made a concerted and planned effort to bid on larger projects at a lower gross margin percentage in order to grow overall gross margin dollars. Project Costs and Gross Margin Project costs for the year ended December 31, 2006 increased 75% to $27,942,264 from $15,955,533 for the year ended December 31, 2005. Project costs as a percentage of revenues was 80% for the year ended December 31, 2006 compared to 73% for the year ended December 31, 2005. The gross profit margin for the year ended December 31, 2006 was 20% compared to 27% for the year ended December 31, 2005. Gross profit in dollars increased 22% to $7,127,725 from $5,828,563 in 2005. Project costs paid to St. Lawrence Industrial Services, Inc., a related party, amounted to approximately $1,074,000 in 2006 and $734,000 in 2005. The decrease in the gross margin percentage was planned and was due to the performance of several large projects that were bid at a lower gross margin percentage than was the Company's average prior to 2006 in order to increase the overall gross margin dollars. Selling, General, and Administrative Expenses During the year ended December 31, 2006, selling, general, and administrative ("SG&A") expenses increased 11% to $5,678,735 compared to $5,107,218 reported for the previous year exclusive of a $450,000 accrual for a litigation reserve in 2005. SG&A expenses as a percentage of revenue decreased to 16% for the year ended December 31, 2006 from 23% for the year ended December 31, 2005. When comparing 2006 to 2005, the overall increase in operating expenses is primarily due to inflationary increases in several areas including payroll expense, office expense and business insurance, as well as the recording of stock compensation expense. Provision for Impairment of Land and Buildings Held for Sale In September 2006 the Company recognized a provision for impairment of its land and buildings held for sale in the amount of $150,000 to adjust the carrying value of the land and building held for sale to its fair value. In 2005 an impairment provision of $100,000 was recorded. In November 2006, the Company sold the land and buildings for $700,000. Operating Income As a result of the factors discussed above, for the year ended December 31, 2006, the Company reported operating income of $1,298,990 compared to $171,345 for the previous year. Interest Expense Interest expense increased 60% to $615,361 in 2006 compared to $384,240 in 2005. The increase in interest expense was primarily due to an increase in the average outstanding balance on the revolving loan when comparing the year ended December 31, 2006 with the same period in 2005. The increase in interest expense is also 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 7.25% at December 31, 2005 to 8.25% at December 31, 2006. 15 Net Income Before Income Taxes Net income before income taxes amounted to $629,534 in 2006 compared to net loss before income taxes of $242,744 in 2005. Income Tax Benefit The Company recorded a net income tax expense of $274,865 in 2006 compared to an income tax benefit of $97,000 in 2005. Net Income Net Income for the year ended December 31, 2006 was $354,669 or $.03 per share basic & diluted compared to net loss of $145,744, or $.01 per share basic and diluted, for the year ended December 31, 2005. 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. 16 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. Accrued Litigation Reserve The Company recorded an accrued liability of $450,000 at December 31, 2005. The liability has been recorded to cover potential legal costs and fees, and also any indemnity, settlement, or other payments necessary to dispose of a claim against the Company. 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 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, 2006, including derivative and other rate sensitive instruments, a one percent change in interest rates would increase or decrease interest expense by approximately $66,000 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 18 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, President 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, President 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, President 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, President 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 2006 that has materially affected or is reasonably likely to affect the Company's internal control over financial reporting. ITEM 9b - OTHER INFORMATION None 19 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 May 4, 2006 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 (60) Director and Co-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 and as Co-Chairman of the Board since January 2007. 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 Messina (44) Director and Co-Chairman of the Board 2005 Mr. Messina was elected to the Board in November 2005 and elected Co-Chairman of the Board in January 2007. 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 Benchmark. 20 Cornelius B. Murphy, Jr. (62) 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. Richard L. Elander (65) 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. Steven A. Sanders (61) 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, 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. George W. Lee, Jr. (58) 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 as a commercial real estate sales agent. Richard Jacobson (43) 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. 21 INDEPENDENCE The Board recognizes the importance of director independence. Under the rules of the New York Stock Exchange, to be considered independent, the Board must determine that a director does not have a direct or indirect material relationship with the Company. Moreover, a director will not be independent if, within the preceding three (3) years: (i) the director was employed by the company or receives $25,000 per year in direct compensation from the company, other than director and committee fees or other forms of deferred compensation for prior service, (ii) the director was partner of or employed by the company's independent auditor, (iii) the director is part of an interlocking directorate in which an executive officer of the company serves on the compensation committee of another company that employs the director, (iv) the director is an executive officer or employee of another company that makes payments to, or receives payments from, the company for property or services in an amount which, in any single fiscal year, exceeds the greater of $100,000 or 2% of such other company's consolidated gross revenues, (v) or the immediate family member in any of the categories in (i) - (iv) above. The Board has determined that six (6) of the company's seven (7) directors are independent under these standards. As a result of Director Berger's ownership of St. Lawrence Industrial Services Corp., he is not considered to have independent status. Mr. Berger does serve on the Compensation committee based upon his prior business experience and the fact that he is a holder of almost ten percent (10%) of the outstanding shares of the company's stock. RELATED PARTY TRANSACTION REVIEW The Board has adopted a policy concerning the review, approval and monitoring of transactions involving the Company and "related persons" (directors and executive officers or their immediate family members, or shareholders owning five percent (5%) or greater of the Company's outstanding shares). The policy covers any transaction exceeding $1,000 in which the related person has a direct or indirect material interest. Related person transactions must be approved in advance by the Co-chairmen and reported to the Board at next meeting following the transaction. The policy is intended to restrict transactions to only those which are in the best interests of the Company. AUDIT COMMITTEE 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, 2006. 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. 22 The Committee recommended to the Board of Directors the appointment of Dannible & McKee, LLP as the Company's independent accountants for the year 2006, 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, 2006 for filing with the Securities and Exchange Commission. The Committee does not have a financial expert. Due to the small size of the Company and lack of financial complexity, the Committee does not anticipate adding a financial expert. REPORT OF AUDIT COMMITTEE The Audit Committee reviews the company's financial reporting process on behalf of the Board. Management has the primary responsibility for establishing and maintaining adequate internal financial controllership, for preparing the financial statements and for the public reporting process. Dannible & McKee, LLP, our company's independent auditor for 2006, is responsible for expressing an opinion on the conformity of the company's audited financial statements with generally accepted accounting principles. In this context, the committee has reviewed and discussed with management and Dannible & McKee, LLP the audited financial statements for the year ended December 31, 2006. The committee has discussed with Dannible & McKee, LLP the matters that are required to be discussed by Statement on auditing Standards No. 61 (Communication with Audit committees). Dannible & McKee, LLP has provided to the committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the committee has discussed with Dannible & McKee, LLP that firm's independence. The committee has concluded that Dannible & McKee, LLP's provision of audit and non-audit services to the company is compatible with Dannible & McKee, LLP's independence. Based on the considerations and discussions referred to above, the committee recommended to the Board of Directors that the audited financial statements for the year ended December 31, 2006 be included in the Annual Report on form 10-K for 2006. This report is provided by the following independent directors, who comprise the committee: Cornelius Murphy, PhD (Chairman) Richard Elander George Lee 23 EXECUTIVE OFFICERS OF THE COMPANY Name Age Position Held Charles B. Morgan 53 Chief Executive Officer. Mr. Morgan was named Chief Executive Officer ("CEO") in November 2006. He has Been with the Company since January of 2002 and has previously served as Executive Vice President and Chief Operating Officer Prior to joining 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. Christopher J. Polimino 41 President Mr. Polimino has been President of the Company since January 2000. He has been with the Company since December of 1994 and has previously served as Chief Executive Officer, Executive Vice President, General Manager, and Controller. Douglas R. Lee 36 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. 24 ITEM 11. EXECUTIVE COMPENSATION A. Introduction The executive officer compensation information in this section is presented in a new format this year as required by revised executive compensation disclosure rules adopted by the Securities and Exchange Commission ("SEC") in August 2006. The new format includes a Compensation Discussion and Analysis or "CD&A" section that explains the Company's executive officer compensation policy, the material elements of the compensation paid to the Company's executive officers under the policy and how the Company determined the amount paid. Several disclosure tables follow the CD&A. The first table, the Summary Compensation Table, provides a summary of the total compensation earned by the Company's principal executive officer, principal financial officer and the most highly compensated executive officers other than the principal executive officer and principal financial officer (the "named executives"). The tables following the Summary Compensation Table provide additional information about the elements of compensation presented in the Summary Compensation Table. B. Compensation Committee The Compensation Committee of the Board of Directors reviews and administers the Company's compensation policies and practices for the executive officers of the Company. The Compensation Committee is currently comprised of Dr. Murphy, Mr. Messina and Mr. Berger, all of whom are nonemployee directors. The Company's financial accounting group supports the Compensation Committee's work by providing information reports to the Compensation Committee when requested. The Committee's authority is not set out in a charter. The Committee has not delegated authority and has not hired compensation consultants. C. Compensation Discussion and Analysis Compensation Philosophy The Compensation Committee has adopted an executive compensation policy that rewards executives if the Company achieves its operational, financial and strategic goals and for building shareholder value. The material elements of the total compensation which is considered for executives each year under the Company's policy are (i) base salary, (ii) annual cash bonus, (iii) stock- based awards, and (iv) retirement, health and welfare and other benefits. The Compensation Committee intends for the compensation earned by executive officers to be commensurate with performance and competitive with the compensation paid to executives at comparable companies. The Compensation Committee has not engaged in any benchmarking of total compensation or any material element thereof. The named executive officers do not play a role in the compensation setting process other than negotiating employment agreements on their own behalf. Base Salaries Base salaries provide a baseline level of compensation to executive officers. Base salaries are not linked to the performance of the Company, because they are intended to compensate executives for carrying out the day-to-day duties and responsibilities of their positions. The Compensation Committee reviews and adjusts base salary levels in January each year. During the review and adjustment process, the Compensation Committee considers: * individual performance; * the duties and responsibilities of each executive officer position; * the relationship of executive officer pay to the base salaries of other employees of the Company; and * whether the base salary levels are competitive when compared to compensation paid to executives at comparable companies. The Board of Directors increased the base salaries of all the named executives for 2006 by 3%. 25 Annual Cash Bonus Awards The Compensation Committee also considers bonus awards to the named executives at its January meeting each year. In general, the Committee does not award bonuses to executive officers under a pre-established plan or formula. Instead, the Committee makes bonus awards based on its review of the individual performance of the executives and the financial performance of the Company during the preceding year. The Committee believes that awarding bonuses in this manner keeps executives focused on making decisions that are in the long-term best interests of the Company and its shareholders and not for the purpose of achieving a pre-established performance level over a shorter term. At its January 2007 meeting, the Compensation Committee made cash bonus awards to the named executives for 2006 in the amounts shown in the Summary Compensation Table that follows this CD&A. Stock-Based Awards The Compensation Committee follows procedures that are substantially similar to the bonus award procedures for making stock-based awards to executive officers. The 2002 Omnibus Plan ("Omnibus Plan") maintained by the Company is intended to promote the growth and general prosperity of the Company by offering incentives to its key employees who are primarily responsible for the growth of the Company and to attract and retain qualified employees. Awards granted under the Plan may be (a) Stock Options which may be designated as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options ("NQSO's) not intended to so qualify; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; or (e) other forms of stock-based incentive awards. The shares of stock with respect to which the Awards may be granted shall be the common stock, par value at $0.01, of the Company ("Common Stock"). All stock-based awards are made under the Company's Omnibus Plan. The number of shares included in stock-based awards is not determined under a pre- established formula. Instead, as is the case with bonus awards, all stock- based awards are discretionary based on the Committee's review of the individual performance of the executives and the financial performance of the Company during the preceding year. Under the Omnibus Plan, on January 26, 2005 the Company granted 369,000 NQSO's, of which 160,000 were granted to named executives. Retirement and Other Benefits The Company sponsors the OP-TECH Environmental Services 401(k) Plan (the "Plan"), a tax-qualified Code Section 401(k) retirement savings plan, for the benefit of all of its employees, including the named executives. The Plan encourages saving for retirement by enabling participants to save on a pre-tax basis and by providing Company matching contributions equal to 25% of the first 6% that each employee contributes to the Savings Plan. None of the named executives receive perquisites whose aggregate value exceeds $10,000 annually. 26 Post Termination of Employment Benefits The Company has not entered into employment agreements with any executive officers that provide severance or other benefits following their resignation, termination, retirement, death or disability, except for agreements with Mr. Polimino and Mr. Lee that provide severance benefits in the event of a termination of their employment one year prior to or one year following a change of control of the Company, and an agreement with Mr. Morgan that provides severance benefits if seventy-five percent of the common stock or assets of the Company is sold. All named executives signed employment agreements (the "Agreements") on January 1, 2005. The Agreements were approved by the Board of Directors who were acting as the Compensation Committee prior to the formation of the Compensation Committee. The original term of the Agreements was through December 31, 2005, however the term was subsequently renewed through March 31, 2007. The Agreements stipulate that they shall be automatically renewed on a year-to-year basis unless either party elects not to renew the Agreement upon not less than thirty (30) days written notice to the other, given prior to the end of the renewal term. The Company elected not to renew the Agreements of all named executives by notice given on February 27, 2007. Therefore, the Agreements will terminate on March 31, 2007. Replacement Agreements which were approved by the compensation committee have been presented to all named executives. Mr. Morgan signed a Replacement Agreement (the "Replacement Agreement") on March 13, 2007. As of March 23, 2007, Mr. Polimino and Mr. Lee have not signed Replacement Agreements. The Agreements stipulate that if the named executive terminates his employment for Good Reason, as defined in the Agreements, or the Agreement is terminated by the Company prior to the expiration of the Employment Period or any renewal term for a reason other than cause, or if the Company elects not to renew the term of the Agreement at any renewal date and a change in control of the Company occurs within one year after the expiration of the employment period or any renewal term, then the Company shall pay Executive a severance in a lump sum on the fifth day following the date of termination or the first anniversary of the expiration of the term of the Agreement. The severance amount shall include the following: * Executive's full base salary through the date of termination at the rate in effect at the time the notice of termination was given. * In lieu of any further salary payments to Executive for periods subsequent to the date of termination, a lump sum cash payment amount that differs for each named executive. See table below under the heading "Gross Change of Control Benefit". * A lump sum cash payment equal to one times the amount of matching contribution paid by the Company for the 401(k) Plan for the benefit of the named executive during the calendar year immediately preceding the executive's date of termination. See table below under the heading "401(k) Matching Contribution". * All legal fees and expenses incurred by the executive as a result of such termination, including all such fees and expenses incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, provided that the Executive is the prevailing party in such proceedings. * The Company shall maintain in full force and effect, for the continued benefit of the named executive, all employee benefit plans and programs or arrangements in which Executive was entitled to participate immediately prior to the date of termination, until the earlier of three years after the date of termination or such time as executive secures new full time employment and comparable benefits pursuant to that employment have commenced. All of the agreements provide that if any benefits to be provided under the agreements would cause any payments or benefits to be considered "parachute payments" that would be nondeductible by the Company under Section 280G of the Code, the payments or benefits will be reduced to the maximum permissible deductible amount under Code Section 280G. Section 280G of the Code defines "parachute payments" as payments which (i) are compensatory in nature, (ii) are made to or for the benefit of a shareholder, officer or highly compensated individual, (iii) are contingent on a change in ownership or effective control (or change in ownership of a substantial portion of assets) of a corporation, and (iv) together with other parachute payments have an aggregate present value of at least 3 times the average annual compensation earned by the recipient of the payment over the 5 years preceding the date of the change in control. 27 The following table shows the cash amounts that would be payable to Mr. Polimino and Mr. Lee if replacement agreements are not agreed to and a change of control of the Company occurs on or before March 31, 2008. Gross Change of Control Benefit Payable under 401(k) Matching the Agreements Contribution Total Mr. Polimino $643,500 $2,868 $646,368 Mr. Lee $214,800 $1,464 $216,264 Proposed Replacement Agreements have been presented to Mr. Lee and Mr. Polimino. As of March 23, 2007 these proposed replacement agreements are being negotiated and have not been finalized, and there is no assurance as to whether the replacement agreements will be agreed to. Mr. Morgan signed a Replacement Agreement on March 13, 2007. The term of the Replacement Agreement runs through March 30, 2008. Under the Replacement Agreement, if seventy-five percent (75%) of the common stock or assets of the Company is sold, Mr. Morgan and Mr. Polimino, who has not signed this Replacement agreement as of March 23, 2007, shall be entitled to a sale fee. The sale fee shall be based on the total common stock value or total asset value in the case of an asset sale. The value, which shall be finally determined by the Board of Directors, shall not include debt, holdbacks, escrow funds, earn-outs or similar items. The sale fee will be determined on a sliding scale, and the amounts of portions of the sale fee to be distributed to any other Company employee will be at the discretion of Mr. Morgan and Mr. Polimino and subject to the final approval of the Board of Directors. The sale fee will make up the total compensation to all employees of the Company in the event of a sale of the Company. D. Conclusion The Compensation Committee has read the compensation discussion and analysis and has reviewed all components of the Chief named executives' compensation, including salary, bonus, long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value of all perquisites and other personal benefits. Based on this review, the Compensation Committee is of the view that the compensation payable under the Replacement Agreements with Messrs. Morgan, Polimino and Lee, in the aggregate, is reasonable and appropriate. As previously noted, Mr. Morgan has signed his Replacement Agreement while Messrs. Polimino and Lee have not signed their replacement Agreements. 28 E. Executive Officer Compensation Disclosure Tables Summary Compensation Table Name and Principal All Other Position(s) Year Salary Bonus Option Awards Compensation Total (a) (b) (c) (d) (f)(1) (i)(2) (j) Christopher J. Polimino 2006 $191,200 $17,500 $16,000 $2,868 $227,568 President 2005 $185,000 $ 0 $ 0 $2,775 $187,775 2004 $175,000 $ 0 $ 0 $2,625 $177,625 Charles B. Morgan 2006 $148,500 $17,500 $11,666 $2,228 $179,894 CEO 2005 $145,000 $ 0 $ 0 $2,175 $147,175 2004 $140,000 $ 0 $ 0 $2,100 $142,100 Douglas R. Lee 2006 $80,000 $10,000 $11,666 $1,200 $102,866 CFO & Treasurer 2005 $73,200 $ 0 $ 0 $1,098 $74,298 2004 $69,000 $ 0 $ 0 $1,035 $70,035 (1) See relevant SFAS No. 123R assumptions in Note 2 of the Consolidated Financial Statements. (2) Amounts represent the Company's matching contribution to the named executive's 401(k) account. The aggregate value of the perquisites do not exceed $10,000 for any of the named executives. Column g (Non-Equity Incentive Plan Compensation),column e (Stock Awards), and column h (Change in Pension Value and Nonqualified Deferred Compensation Earning are not applicable and are omitted. 29 Grants of Plan-Based Awards Table Grants of plan-based awards table is not included since the Company did not grant any plan-based awards in 2006. Outstanding Equity Awards at Fiscal Year-End Table Option Awards Number of Number of Securities Securities Underlying Underlying Unexercised Unexercised Options Option Options (#) Option Expiration Name (#) Exercisable Unexercisable Exercise Price Date (a) (b) (c) (e) (f) Mr. Polimino 25,000 0 $0.06 05/21/12 (1) 100,000 0 $0.15 11/19/13 (2) 20,000 40,000 $0.40 01/26/15 (3) Mr. Morgan 16,667 0 $0.06 05/21/12 (1) 33,333 0 $0.15 11/19/13 (2) 16,667 33,333 $0.40 01/26/15 (3) Mr. Lee 13,334 0 $0.06 05/21/12 (1) 50,000 0 $0.15 11/19/13 (2) 16,667 33,333 $0.40 01/26/15 (3) (1) Stock options vest at the rate of 33-1/3% per year with vesting dates of 5/21/03, 5/21/04 and 5/21/05. (2) Stock options vest at the rate of 33-1/3% per year with vesting dates of 11/19/04, 11/19/05 and 11/19/06. (3) Stock options vest at the rate of 33-1/3% per year with vesting dates of 1/26/06, 1/26/07 and 1/26/08. Columns d, i and j related to Equity Incentive Plan Awards and columns g and h Related to stock awards are not applicable and are omitted. Option Exercises and Stock Vested Table Option exercises and stock vested table is not included since no options were exercised in 2006. Pension Benefits Table Pension benefits table is not included since the Company does not maintain any qualified defined benefit plans or supplemental executive retirement plans. Non-Qualified Deferred Compensation Table Non-qualified deferred compensation table is not included since the Company does not maintain any plans on a non-qualified basis. 30 Director Compensation Table The following table summarizes the compensation paid to the Chairman and each nonemployee director for his or her service to the Board and its committees during 2006: Fees Earned or Paid in All Other Name Cash (1) Option Awards Compensation Total (a) (b) (d)(2) (g) (h) Robert J. Berger $4,000 $1,833 $0 $5,833 Richard Messina $ 0 $ 0 $0 $ 0 Richard L. Elander $5,000 $1,833 $0 $6,833 Cornelius B. Murphy, Jr. $5,000 $1,833 $0 $6,833 Steven A. Sanders $4,000 $1,833 $0 $5,833 George W. Lee $5,000 $2,166 $0 $7,166 Richard Jacobson $4,000 $ 0 $0 $4,000 (1) In 2006 Directors of the Company were paid $1,000 for each Board meeting attended and $500 for each sub-committee meeting attended. Richard Messina served as an unpaid Director in 2006. (2) See relevant SFAS No. 123R assumptions in Note 2 of the Consolidated Financial Statements. Column c (Stock Awards), column e (Non-Equity Incentive Plan Compensation), and column f (Change in Pension Value and Nonqualified Deferred Compensation Earnings) are not applicable and are omitted. Report of Compensation Committee The Compensation committee reviewed and discussed the compensation Discussion and Analysis with management of the company. Based on such review and discussion, the compensation Committee recommended to the Board of Directors that the Compensation discussion and Analysis be included in the company's Annual Report on Form 10-K for the last fiscal year for filing with the SEC. Richard Messina (Chairman) Robert Berger Cornelius Murphy, Jr. 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the company's common stock at February 1, 2007 by persons who, to the knowledge of the Board of Directors, beneficially own more than five percent of the outstanding shares of common stock of the Corporation. All voting power of the Corporation is vested in its common stock. As of the close of business on February 1, 2007, 11,748,704 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. 32 The following table sets forth certain information furnished to the Company regarding the beneficial ownership of the Company's common stock at February 1, 2007 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% George W. Lee (1) 186,666 1% Richard Jacobson (1) -0- 0% Christopher J. Polimino (2) 295,454 2% Charles Morgan (2) 200,000 1% Douglas R. Lee (2) 140,000 <1% All Directors as a Group (7 persons) 6,063,125 47% (1) Director (2) Officer (3) Includes unexercised options to purchase shares of common stock: Mr. Berger 13,333 Mr. Elander 10,000 Mr. Sanders 13,333 Mr. Murphy 10,000 Mr. Polimino 185,000 Mr. GW Lee 16,667 Mr. Morgan 100,000 Mr. DR Lee 113,334 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Steven A. Sanders, a director of the Company, is of counsel to Rubin, Bailin, Ortoli, LLP, which provides professional services to the Company, and it is anticipated that it will continue to do so. The cost of these services in 2006 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 $1,074,000 in 2006. 34 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: 2006 2005 Audit Fees $34,500 $31,000 Audit Related Fees $27,750 $ 0 Tax Fees $12,975 $14,750 Audit related fees represent additional internal control related procedures and inspection of documents as requested by the audit committee. 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 2006 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. 35 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, 2006 and 2005 F-3 Consolidated Statement of Operations for the years ended December 31, 2006, 2005, and 2004 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2005, and 2004 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004 F-6 Notes to Consolidated Financial Statements F-7 (2) Schedule II, Valuation and Qualifying Accounts for the Years Ended 2006, 2005, and 2004 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-6 36 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 March 23, 2007 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 5th day of March, 2007. /s/ Robert J. Berger Director and Co-Chairman of the Board Robert J. Berger /s/ Richard Messina Director and Co-Chairman of the Board Richard Messina /s/ Richard L. Elander Director Richard L. Elander /s/ Cornelius B. Murphy Director Cornelius B. Murphy /s/ Richard Jacobson Director Richard Jacobson /s/ Steven A. Sanders Director Steven A. Sanders /s/ George W. Lee Director George W. Lee /s/ Christopher J. Polimino President Christopher J. Polimino /s/ Charles B. Morgan Chief Executive Officer Charles B. Morgan /s/ Douglas R. Lee Chief Financial Officer and Treasurer Douglas R. Lee 37 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2006 and 2005 F1 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, 2006 and 2005, 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, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements the Company has adopted Financial Accounting Standards Board Statement No. 123(R) "Share Based Payment" (SFAS 123R) in 2006. 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 27, 2007 F2 OP-TECH Environmental Services, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2006 and 2005 2006 2005 Assets Current assets: Cash (Note 4) $30,981 $90,928 Accounts receivable, net (Notes 1 and 5) 10,008,186 5,812,977 Costs on uncompleted projects applicable to future billings 2,984,323 1,403,292 Inventory 378,439 231,088 Current portion of deferred tax asset 260,100 272,500 Prepaid expenses and other current assets, net 447,759 395,418 ---------- --------- Total current assets 14,109,788 8,206,203 Property and equipment, net (Note 6) 3,216,781 2,837,340 Land and Buildings held for sale (Note 7) - 850,000 Deferred tax asset (Note 11) 1,004,800 1,258,064 Other assets 44,898 34,148 ---------- ----------- Total Assets $18,376,267 $13,185,755 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $4,144,190 $1,953,688 Outstanding checks in excess of bank balance (Note 4) 149,741 357,249 Billings in excess of costs and estimated profit on uncompleted contracts 796,438 600,705 Accrued expenses and other current liabilities 943,833 450,509 Accrued litigation defense reserve (Note 8) 400,000 450,000 Current portion of long-term debt (Note 9) 771,345 466,916 ----------- --------- Total current liabilities 7,205,547 4,279,067 Long-term debt, net of current portion (Note 9) 2,128,193 2,024,691 Note payable to bank under line of credit (Note 9) 5,731,548 4,000,000 ---------- ---------- Total liabilities 15,065,288 10,303,758 ----------- --------- Shareholders' equity: Common stock, par value $.01 per share; authorized 20,000,000 shares; 11,748,704 and 11,745,371 shares outstanding as of December 31, 2006 and 2005, respectively 117,487 117,454 Additional paid-in capital 6,925,581 6,855,901 Accumulated deficit (3,751,789) (4,106,458) Accumulated other comprehensive income 19,700 15,100 ----------- ----------- Shareholders' equity, net 3,310,979 2,881,997 ----------- ----------- Total Liabilities and Shareholders' Equity $18,376,267 $13,185,755 =========== ============ 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, 2006, 2005 and 2004 2006 2005 2004 Project billings and services $35,069,989 $21,784,096 $18,170,103 Project costs 27,942,264 15,955,533 13,334,686 ----------- ----------- ----------- Gross margin 7,127,725 5,828,563 4,835,417 Selling, general and administrative expenses 5,678,735 5,107,218 4,248,611 Litigation reserve (Note 8) - 450,000 - Provision for impairment of land and buildings held for sale (Note 7) 150,000 100,000 - ---------- ----------- ----------- Operating income 1,298,990 171,345 586,806 ---------- ----------- ----------- Other income (expense): Interest expense (615,361) (384,240) (253,854) Other, net (54,095) (29,849) (268) ----------- ----------- ----------- (669,456) (414,089) (254,122) ----------- ----------- ----------- Net income (loss) before income taxes 629,534 (242,744) 332,684 ----------- ----------- ----------- Income tax benefit (expense) (Note 11) Current (9,201) (10,066) (13,598) Deferred (265,664) 107,066 (119,000) ----------- ---------- ---------- (274,865) 97,000 (132,598) ----------- ---------- ---------- Net Income (Loss) $354,669 $(145,744) $200,086 =========== ========== ========== Earnings (Loss) per common share: Basic $0.030 ($0.012) $0.017 Diluted $0.029 ($0.012) $0.016 Weighted average shares outstanding: Basic 11,746,476 11,729,154 11,849,508 Diluted 12,325,546 11,729,154 12,351,091 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, 2006, 2005 and 2004 Additional Common Common Paid-In Accumulated Shares Stock Capital Deficit Total ---------- ------ -------- ------------ -------- 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 Issuance of 3,333 Shares 3,333 33 167 - 200 Tax Benefit of the Exercise of Stock Options - - 900 - 900 Recognition of Stock Compensation Expense - - 68,613 - 68,613 Other Comprehensive Income: Change in Fair Value of Cash Flow Hedge net of tax effect of $2,960 - - - - 4,600 Net Income - - - 354,669 354,669 Total Comprehensive Income 359,269 --------- ---------- ---------- ---------- ---------- Balance at December 31, 2006 11,748,704 $117,487 $6,925,581 $(3,751,789)$3,310,979 ====================================================== 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, 2006, 2005 and 2004 2006 2005 2004 Operating activities: Net income $354,669 $(145,744) $200,086 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Bad debt expense 62,157 40,975 14,689 Depreciation and amortization 610,472 556,605 566,567 Loss on sale of property and equipment 49,873 27,644 9,964 Provision for impairment of land and buildings held for sale 150,000 100,000 - Provision for deferred income taxes 266,564 (109,000) 119,000 Provision for stock compensation expense 68,613 - - (Increase) decrease in operating assets and increase (decrease) in operating liabilities: Accounts receivable (4,257,366) (221,743) (2,260,103) Costs on uncompleted projects applicable to future billings (1,581,031) (524,092) (240,687) Prepaid expenses, Inventory and other assets, net 297,030 127,158 140,688 Billings and estimated profit in Excess of costs of uncompleted contracts 195,733 (495,770) 380,124 Accrued litigation defense reserve (50,000) 450,000 - Accounts payable and other accrued expenses 2,683,826 (374,233) 1,545,940 --------- ---------- ----------- Net cash provided by (used in) operating activities (1,149,460) (568,200) 476,268 --------- ---------- ----------- Investing activities: Proceeds from sale of equipment 692,208 113,000 - Purchases of property and equipment (1,031,994) (870,676) (582,586) --------- ----------- ---------- Net cash used in investing activities (339,786) (757,676) (582,586) --------- ----------- ---------- Financing activities: Proceeds from issuance of common stock 200 6,251 5,632 Purchase of common stock - - (250,000) Outstanding checks in excess of bank balance (207,508) 357,249 - 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 16,351,122 8,133,127 9,941,564 Principal payments on current and long-term borrowings (14,714,515)(7,181,561)(9,819,713) ----------- ---------- ---------- Net cash provided by (used in) financing activities 1,429,299 1,315,066 149,983 ----------- ---------- ---------- Increase (decrease) in cash and cash equivalents (59,947) (10,810) 43,665 Cash and cash equivalents at beginning of year 90,928 101,738 58,073 ----------- ---------- ---------- Cash and Cash Equivalents at End of Year $30,981 $90,928 $101,738 =========== ========== ========== Non-cash items: Equipment purchased through bank and other financing sources $ - $198,182 $412,349 Non-cash financing of insurance $507,472 $ - $403,902 The accompanying notes are an integral part of the consolidated financial statements F-6 OP-TECH Environmental Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation OP-TECH Environmental Services, Inc. and Subsidiaries (the "Company"), a Delaware corporation headquartered in Syracuse, New York, provides comprehensive environmental and industrial services predominately in New York, New England, Pennsylvania, New Jersey, and Ohio. The Company performs industrial cleaning of hazardous and non-hazardous materials and provides varying services relating to plant facility closure, including interior and exterior demolition and asbestos removal. In addition, the Company provides remediation services for sites contaminated by hazardous and non-hazardous materials and provides 24-hour emergency spill response services. The Company's revenues are derived from state agencies, industrial companies and municipalities facing complex environmental clean-up problems associated with hazardous and non-hazardous materials as required by various governmental agencies. The Company's services include assessing the regulatory, technical, and construction aspects of the environmental issue, and performing the necessary remediation activities. The Company seeks to provide its clients with remedial solutions which integrate the various aspects of a project and are well-documented, practical, cost effective, and acceptable to regulatory agencies and the public. OP-TECH AVIX, Inc. (AVIX) is a subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to pursue and engage in diversified lines of business. In The fourth quarter of 2004 this subsidiary became inactive and the Company is no longer pursuing the lines of business that AVIX performed. Therefore, separate segment information is no longer presented in the Financial Statements. OP-TECH Environmental Services, Ltd. is an inactive Canadian subsidiary of OP- TECH Environmental Services, Inc. J.O. Technologies is a partnership that is owned 50% by the Company. The partnership activities are not material to the operations of the Company. Principles of Consolidation The accompanying consolidated financial statements include the accounts of OP- TECH Environmental Services, Inc. and its two wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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, 2006 and December 31, 2005 accounts receivable are approximately $3,260,000 and $1,916,000, respectively. Concentration of Business Risk - Significant Customers Sales to one customer, other than an affiliated party, amounted to approximately $8,509,000, $6,047,000, and $3,845,000 in 2006, 2005 and 2004, respectively. Accounts receivable at December 31, 2006 and 2005 include $1,718,316 and $1,955,000 respectively, from this customer. Receivables and Credit Policies Accounts receivable are unsecured customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Interest is not accrued on past-due invoices. Accounts receivable are stated at the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer's remittance advice. The carrying amount of accounts receivable is reduced by a valuation allowance that represents management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Additionally, management estimates a general allowance based on historical chargeoffs covering other amounts that may not be collectible. Inventory 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. 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, 2006 and 2005. 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 Impact of Recently Issued Statements In July 2006 the Financial Accounting Standards Board issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes". The interpretation is required to be adopted in the first quarter of 2007. The Company does not anticipate any significant impact on its financial position, results of operations or cash flows as a result of adopting the interpretation. 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. 2. Stock Based Compensation and Earnings Per Share Effective January 1, 2006 the Company adopted Financial Accounting Standards Board Statement No. 123(R) "Share Based Payment". The Company has chosen to adopt this statement using the modified prospective application. Under this method the Company will recognize the fair value of unvested options granted in prior periods as compensation over the remaining vesting period or requisite service period using the straight line attribution method. The effect in 2006 of adopting the statement was to reduce income before taxes by $68,613, net income by $41,100, and basic and fully diluted earnings per share by $.004 and $.003, respectively. Prior to 2006 the Company applied APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly no compensation cost was recognized for the options issued. The following table sets forth the Company's net income and earnings per share had the provisions of Statement No. 123(R) been applied in the fiscal years ended December 31, 2005 and 2004. 2005 2004 Net income (loss): As reported $(145,744) $200,086 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 ---------- -------- Pro forma net income (loss) $(197,744) $186,086 ========== ======== Basic earnings (loss) per share: As reported $(0.012) $0.017 Pro forma $(0.017) $0.016 Diluted earnings (loss) per share As reported $(0.012) $0.016 Pro forma $(0.017) $0.015 F9 Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period, which were 11,746,476, 11,729,154, and 11,849,508 for the years ended December 31, 2006, 2005 and 2004, 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 2010. 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 $1,074,000, $734,000, and $838,000 in 2006, 2005 and 2004, respectively. A director of the Company is of counsel to Rubin, Bailen, Ortoli, Mayer & Baker, LLP, which provides professional services to the Company. The cost for these services amounted to approximately $5,000, $5,000, and $3,000 in 2006, 2005 and 2004, respectively. 4. Cash Using a zero balance account, the Company voluntarily applies all available cash in the Company's operating account to pay down the Company's note payable to bank under the line of credit (Note 9) nightly. From time to time cash balances held at the Financial Institution may exceed the Federal Deposit Insurance Corporation limit of $100,000. 5. Accounts Receivable Accounts receivable at December 31, 2006 and 2005 consists of: 2006 2005 Accounts Receivable, gross $10,122,510 $5,917,140 Allowance for uncollectible receivables (114,324) (104,163) ------------ ---------- Accounts Receivable, net $10,008,186 $5,812,977 =========== ========== 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, 2006 and 2005 consist of: 2006 2005 Furniture and fixtures $21,758 $21,758 Buildings 185,741 255,658 Office machines 233,056 233,056 Field equipment 5,987,377 4,969,795 --------- --------- 6,427,932 5,480,267 Less: Accumulated depreciation (3,211,151)(2,642,927) ----------- ---------- $3,216,781 $2,837,340 ========== ========== Depreciation expense approximated $610,000, $557,000, and $567,000 for 2006, 2005 and 2004, respectively. 7. Land and Buildings Held for Sale On November 17, 2006 The Company sold approximately 14 acres of land, and buildings thereon, which it owned on the St. Lawrence River in Massena, NY for $692,208 and recorded a loss on sale of property in the amount of $199,873, which included a $150,000 impairment loss recognized in the quarter ended September 30, 2006. An impairment loss of $100,000 was recognized in 2005. 8. Accrued Litigation Reserve The Company has accrued a $400,000 liability at December 31, 2006. The liability has been recorded to cover potential legal costs and fees, and also any indemnity, settlement, or other payments necessary to dispose of this claim against the Company. The reserve will be reduced by legal fees or other costs paid. F11 9. Long-Term Debt Obligations Long-term debt at December 31, 2006 and 2005 consists of: 2006 2005 Note payable to bank under line of credit. Due July 1, 2008. (a) $5,731,548 $4,000,000 ---------- ---------- Term Loan due in monthly installment payments of $24,848 plus interest at prime plus .75%, hedged by an interest rate swap (a) 1,471,673 1,777,149 Term Loan due in monthly installment payments Aggregating $13,223 and $3,044 at December 31, 2006 and 2005 plus interest at prime plus .75% (a) 908,205 246,571 Insurance Financing Note, due in monthly installment payments of $46,134, plus interest at 5.94%, collateralized by the assignment of unearned premiums 184,535 - Equipment Notes, due in monthly installment payments Aggregating $12,538 at December 31, 2006 and 2005, including interest at rates ranging from 4.9% to 7.9%, collateralized by equipment with a carrying value of approximately $400,000 and $500,000 at December 31, 2006 and 2005. 335,124 456,877 Equipment Notes, due in monthly installment payments Aggregating $1,628 at December 31, 2005 , with 0% interest, collateralized by equipment with a carrying value of approximately $20,000 at December 31, 2005 - 11,010 ----------- ---------- 2,899,537 2,491,607 Less: Current portion (771,345) (466,916) ----------- ---------- $2,128,193 $2,024,691 =========== ========== (a) The Company has entered into financing agreements (the "Agreements") with a lender ("Primary Lender"). As of December 31, 2006 the Agreements include a Line of Credit note which provided for borrowings up to $6,000,000 to be used to provide working capital and expires on July 1, 2008, unless renewed by the lender. Interest is 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 plus lease payments divided by current maturities of long-term debt and lease payments plus interest expense) as calculated in the previous year-end audited financial statements, as follows: F12 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 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, 2006 the Mark to Market valuation, representing the net present value of the expected cash flow from the Interest Rate Swap, is approximately $32,400. The Agreements also include Term Loan agreements, which are not hedged by Interest Rate Swap Transactions, which are due in monthly principal installment payments that aggregate $13,223 plus interest at prime plus .50 % 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, 2006 as follows: Accounts Receivable, net of Allowance for Doubtful Accounts $10,008,186 Inventory 378,439 Equipment, net of Accumulated Depreciation 2,976,175 ----------- $13,362,800 =========== The Agreements also include certain financial covenants including a minimum fixed charge coverage ratio, a tangible net worth ratio, a debt to net worth ratio, and a consecutive quarterly net loss provision; cross-collateralization provisions; and a material adverse change clause which permits the financial institution to call its obligation if the Company fails to comply with covenants, as defined, or in the event of a material adverse change in the Company's business. Management does not anticipate any adverse changes in the next twelve months, however, there can be no assurances. The Company was not in compliance with the debt to net worth ratio covenant as of December 31, 2006. The Company has obtained a waiver of compliance with this covenant from the Primary Lender. F13 Interest paid amounted to approximately $615,000, $380,000, and $254,000 in 2006, 2005 and 2004, 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: 2007 $771,345 2008 590,881 2009 530,874 2010 471,254 2011 409,506 Thereafter 125,678 -------- $2,899,538 ========== At December 31, 2006 the Company has outstanding commitments in the form of standby letters of credit in the amount of approximately $1,335,256 securing various agreements. 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 $725,000, $694,000, and $405,000 in 2006, 2005 and 2004, respectively. Future minimum lease payments under noncancelable operating leases are as follows: 2007 $510,063 2008 340,821 2009 279,043 2010 219,138 2011 170,698 Thereafter 22,500 -------- $1,542,263 ========== F14 11. Income Taxes The following summarizes the income tax (benefit) expense at December 31, 2006, 2005 and 2004: 2006 2005 2004 Current: Federal $- $- $- State 9,201 10,066 13,598 -------- --------- --------- 9,201 10,066 13,598 Deferred 265,664 (107,066) 119,000 --------- ----------- --------- 274,865 $(97,000) $132,598 ========= ========== ========= In 2006, 2005 and 2004 the difference between the expected tax provision resulting from the application of the federal statutory income tax rate to pre- tax income is due to nondeductible items, state taxes and graduated federal tax rates. The deferred tax expense recognized in 2006, 2005 and 2004 represents the effect of changes in temporary differences. At December 31, 2006, 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, 2026. 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 $375,000 per year to enable utilization of a portion of these loss carryforwards. Income taxes and franchise taxes paid were approximately $9,000, $10,000, and $12,000 in 2006, 2005 and 2004, respectively. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2006 and 2005 are as follows: 2006 2005 Deferred tax liabilities: Depreciation $(492,176) $(226,457) ---------- ---------- (492,176) (226,457) ---------- ---------- Deferred tax assets: Net operating loss carryforward 1,970,190 1,929,610 Accounts receivable reserve 44,586 40,624 Accrued expenses 242,300 247,787 Impairment allowance - 39,000 ---------- ---------- 2,257,076 2,257,021 ---------- ---------- Net Deferred tax asset 1,764,900 2,030,564 Valuation allowance for deferred assets (500,000) (500,000) ---------- ---------- Net deferred tax asset, net of valuation allowance $1,264,900 $1,530,564 =========== =========== F15 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 $27,000, $24,000, and $18,000 in 2006, 2005 and 2004, respectively. The Company did not make discretionary contributions to the Retirement Plan in 2006, 2005 and 2004. 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. Compensation cost subsequent to January 1, 2006 is measured based on the fair value of the options granted. No options were granted in 2006. 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 335,000 NQSO's. The exercise price of each NQSO equals the market price of the Company's stock on the date of grant ($0.15), 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. A summary of the status of the Company's NQSO's granted under the Omnibus Plan as of December 31, 2006, 2005 and 2004, and changes during the years ending on those dates follows: Shares Exercise Price 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 ----------- ------------ Exercised (3,333) $0.06 Forfeited - $ - Expired - $ - ---------- -------------- Outstanding at December 31, 2006 672,011 $0.06 - 0.40 ---------- -------------- Exercisable at December 31, 2006 451,011 $0.06 - 0.40 ---------- -------------- F17 Shares vesting under the plan had a fair value of $68,613, $73,144 and $19,896 in 2006, 2005 and 2004 respectively. The remaining weighted average contractual life of options outstanding is approximately 6.8 years. The remaining compensation costs related to non vested options is $57,300 and will be recognized in 2007. 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, 2006 Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 Sept 30 Dec 31 -------- ------- --------- --------- Project billings $7,851,240 $7,106,271 $8,235,199 $11,877,279 Gross margin 1,521,763 2,006,325 1,846,972 1,752,665 Net income (loss) 36,567 262,267 (38,232) 94,067 Net income (loss) per share Basic $0.00 $0.02 ($0.00) $0.01 Dilutive $0.00 $0.02 ($0.00) $0.01 In the quarter ended September 30, 2006 the Company recorded an impairment loss of $150,000 on the carrying value of the land and buildings held for sale (Note 7). 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). F19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Balance at Beginning End of Description of Period Additions Deductions Period - ---------------------------------- --------- --------- ---------- ------- YEAR ENDED DECEMBER 31, 2006 Reserves deducted from assets to which they apply: Doubtful accounts receivable $104,163 $62,157 $51,996 (a)$114,324 Valuation allowance for deferred tax assets $500,000 $- $- $500,000 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 (a) Doubtful accounts written off and adjustments. F20 EXHIBIT 14 - CODE OF ETHICS FOR SENIOR OFFICERS The Company's CEO, President 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, President 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, 2006. 1. OP-TECH AVIX, Inc. (NY) 2. OP-TECH Environmental Services, Ltd. (Canada) E-2 EXHIBIT 31 - CERTIFICATIONS Certification of President 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 officers 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 officers 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 23, 2007 /s/ Christopher J. Polimino Christopher J. Polimino President E-3 Certification of Chief Executive Officer I, Charles B. Morgan, 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 officers 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 officers 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 23, 2007 /s/ Charles B. Morgan Charles B. Morgan Chief Executive Officer E-4 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 officers 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 officers 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 23, 2007 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer E-5 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 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, 2006 (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 23, 2007 /s/ Christopher J. Polimino Christopher J. Polimino President Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Charles B. Morgan, 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, 2006 (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 23, 2007 /s/ Charles B. Morgan Charles B. Morgan President 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, 2006 (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 23, 2007 /s/ Douglas R. Lee Douglas R. Lee Chief Financial Officer and Treasurer E-5 -----END PRIVACY-ENHANCED MESSAGE-----